Seven Contracts Every Startup Should Be Aware Of

Posted on 7th June 2023

Starting a business is a challenging and exciting process, with founders expected to have a thorough understanding of numerous different legal processes. Startup founders need to be familiar with the different types of contracts they require to ensure their business runs smoothly, as well as the paperwork to protect their interests and those of their stakeholders.

Commenting on this, Hamid Bagherzadeh, Legal expert and Co-Founder of LegaMart said: “Startups require legal contracts to set up regulations and guidelines within their business. By having contracts in place, startups can reduce their risk and protect their business since these written agreements hold significant legal ramifications.”

Outlining the seven essential contracts startups need to be aware of, Hamid explains:

1. Founders/Co-founders Agreement

For startups with both a co-founder and a business founder, the founder/co-founder agreement is the most important contract as it outlines the rights and responsibilities of each founder. This includes ownership stakes, management roles, and decision-making processes.

The founder/co-founder agreement also outlines how the company will be funded, and how disputes will be resolved, which are essential to avoid future conflicts.

The agreement includes the following major clauses:

Purpose of the Agreement
Company Formation
Roles and Responsibilities
Equity Split
Intellectual Property
Confidentiality
Termination
Dispute Resolution
Amendments
Entire Agreement
Signatures

2. Non-Disclosure Agreement

Also known as a confidentiality agreement, a non-disclosure agreement requires one party to keep certain information shared by the other party confidential. These agreements set out to protect confidential information, outline the obligations of the parties, and specify the duration of the agreement.

Non-disclosure agreements are commonly used to protect trade secrets, IP ownership, business plans, and other sensitive information.

The agreement includes the following major clauses:

Definition of Confidential Information
Exclusions from Confidentiality Obligations
Non-Disclosure Obligation
Duration of Non-disclosure Obligation
Return or Destruction of Confidential Information
Remedies
Governing Law
Entire Agreement
Assignment

3. Term Sheet

A term sheet is a non-binding agreement that sets the framework for negotiating a more detailed investment agreement, outlining the key terms of a proposed investment.

The important features of a term sheet include outlining the key terms of investment, the amount of investment, and a framework for negotiating a more detailed agreement. A term sheet is crucial when negotiating investment since this contract sets the foundation to ensure all parties are on the same page.

The agreement includes the following major clauses:

Company Information
Investment Overview
Capitalisation
Stock Option Pool
Preferred Stock
Board of Directors
Management
Use of Proceeds
Closing Conditions
Covenants

4. Employee Stock option Plan (ESOP)

An employee stock option plan (ESOP) provides founding teams and their employees with the opportunity to acquire ownership of the company. Through the grant of stock options, startups have the opportunity to attract and retain top talent by offering equity in their company.

Startups can offer an ESOP to their employees as part of their employment agreement, and this agreement is governed by the employment law of each respective country.

The agreement includes the following major clauses:

Definition of Terms
Purpose
Eligibility
Grant of Options
Exercise of Options
Transferability
Termination of Employment
Adjustments
Compliance with Law
Amendment
Governing Law
Notices

5. Service Agreement

A service agreement clarifies the terms and conditions of the services to be provided between a company and an independent contractor or service provider. Having a service agreement in place can aid startups in protecting their interests, reducing the risk of misunderstandings and disputes.

These agreements are an effective way to set clear terms with providers, building stronger relationships but also providing the legal basis for dispute resolution.

Typically, a service agreement will include the following clauses:

Scope of Work
Duration
Payment Terms
Confidentiality
Termination
Liability
Dispute Resolution
Intellectual Property Rights
Amendments
Governing Law

6. Licensing Agreement

Licensing agreements allow startups to monetise their technology, products or services by granting a licence to another party to use them in exchange for a fee. This money can be utilised to fund further growth and development, providing the startup with a steady source of revenue.

The agreement includes the following major clauses:

Scope of Work
Duration of Agreement
Payment and Royalty Terms
Restrictions on Use
Conditions for Termination
Obligations of the Licensee

7. Supplier Agreement

A supplier agreement is crucial for startups since it establishes the terms and conditions of the relationship between the start-up and its suppliers. The agreement helps in ensuring startups receive consistent and high-quality supplies and provides a framework for a smooth transaction.

By introducing supplier agreements early on, start-ups can ensure timely delivery, payment, and quality control standards. They can also ensure their reputation is protected by ensuring that the products or services which are provided meet their necessary standards.

The agreement includes the following major clauses:

Scope of agreement
Terms of delivery/payment
Quality control standards
Conditions for termination
Obligations of supplier

Finally, Hamid adds “When entering into any business agreement, we would advise startups to seek the counsel of an established business litigation attorney.

“Contracts frequently include perplexing legal jargon that business owners are unfamiliar with, and it is crucial for successful entrepreneurs to take the time to understand agreements before entering into new partnerships.”