An entrepreneur’s plate is almost always heaped with things to do, fires to put out and races to run. In such a scenario, most of them tend to delegate all legal aspects to an external agency. But it can backfire and many a smart entrepreneur has paid the price of committing a legal faux pas.
YourStory brings you a special post by our CFO, Rohan Arinaya, which will help you get better acquainted with some of the important legal documents that entrepreneurs will run into during their startup journey.
1. Non Disclosure Agreement or Confidentiality Agreement – A Non Disclosure Agreement (NDA) is entered into between two parties, prior to sharing classified information with the objective of identifying what constitutes confidential information and maintaining its confidentiality. Typically, NDAs are executed by companies/ individuals who are contemplating doing business together. For instance, a company in the process of inducting an investor will sign an NDA with the potential investor prior to sharing information about themselves.
2. Licensing Agreement – A licensing agreement is entered into by two parties – one maintaining possession/ control over an asset and the other desiring to use the asset. The agreement grants permission to one party (licensee) to use the asset in a particular manner for a specified period of time. A franchisee agreement is a common example of a licensing agreement where the franchisor permits the franchisee to use the brand name of the franchise.
3. Share Purchase Agreement (SPA) – A Share Purchase Agreement is entered into at a time when you induct an investor/ partner in your company. This document provides the basic terms of the purchase and sale of shares. The share purchase agreement specifies the number of shares and the consideration for which the shares are being exchanged. The SPA also lists out the conditions required to be fulfilled to consummate the sale (Conditions Precedent) and Representations and Warranties that both the company and the entrepreneurs make to the buyer/ investor and vice versa.
4. Shareholders’ Agreement (SHA) – The purpose of a shareholders’ agreement is to describe the modus operandi of a company and specify the rights and obligations of shareholders. Amongst other specifications, the SHA specifies the rights of shareholders like right of first refusal, pricing mechanism, voting arrangements, privileges and protection of shareholders. At the time of investment into a company, the investors will definitely execute a SPA (Share Purchase Agreement mentioned earlier). A SHA is executed when an investor does not acquire 100% of the company.
5. Non-Compete Agreement (NCA) – A Non-Compete Agreement is a prohibitive agreement wherein one party agrees not to enter into or engage or commence any activity, trade, vocation or profession which is in direct competition with the other party. We see a lot of employers insisting on a NCA to be executed with their employees these days. The legal validity of a NCA varies as per jurisdiction. In certain jurisdictions, the NCA is invalidated if the term exceeds 10 years whereas in California non-compete clauses can only be entered into by equity stakeholders of a company.
About the guest author:
Rohan Arinaya, Chief Finance Officer of YourStory, is a chartered accountant. He also heads Merican Consultants, a team of professionals specialising in the field of financial, tax and payroll advisory services.