Many a time, entrepreneurs, in their rush to see their ideas take form, miss out on getting their legal affairs in order. Look at it as a necessary evil, if you will, but there are certain agreements that an entrepreneur simply must not ignore.
1) Founder Agreements
Depending on the choice of entity, and without prejudice to the camaderie among the founders, it is essential to execute a founder’s agreement. If the chosen form of the entity is a partnership, ensure that your partnership agreement is in place. This contract sets out in clear terms the understanding that the partners must have in order to run the desired business. Typically the clauses include the capital invested by the founders, owner of the intellectual property and whether it may be licensed, terms relating to issue of shares at a later point in time, exit clauses, and other specifics that can clear any potential ambiguity. While it’s all good to say that an oral agreement is more than enough and business is based on mutual trust, some entrepreneurs have learnt the importance of this document the hard way. It is not unheard of that companies close operations and write away an idea forever because of founder disputes on IP or because of differences on how an exit opportunity must be valued.
2) Charter Documents
Charter documents include the Memorandum of Association (MoA) and the Articles of Association (AoA) that contain the basic information regarding the Company. The MoA contains information relating to incorporation details, share capital, members’ liability, etc. The AoA contains the regulations governing the management of the Company like information regarding general meetings, Board of Directors, proceedings by the Board and details on voting rights. .
3) Trademark License Agreements
Such an agreement is necessary for a company and its founders so that the company owns a trademark (or has filed an application with the trademark registry). This contract sets down the rightful owner of the IP, his protected rights and the rights that will be offered to the user of the brand. An agreement of this kind is useful for start-up companies dealing with products and services (restaurants, food business, clothes, etc) as they look to build a brand. In some cases, an entrepreneur may opt for the franchisee route to market his products or services in which case the considerations are different from vanilla company brand owners..
4) Employment Agreement
It is necessary to establish the rights and obligations of employees and this can have varied benefits. If the company is working in an area that uses heavy IP or human resources, it is crucial to include IP protection clauses, non-compete and non-solicit clauses in the employment agreements. At a later date, it assists an entrepreneur in that he is not entangled in an IP theft or competitors poaching his talent. Note, even if the founder is appointed as a managing director (MD), it is good to have an agreement in place. The new Companies Act provides that the terms and conditions of appointing an MD must be stated in the board /shareholder resolution itself. Compliances with newer laws such as prevention of sexual harassment at the work place, trading in securities, prevention of corrupt practices and so on make this exercise of compliance a good corporate habit.
5) Share Subscription
This agreement sets out the details regarding the ownership of shares, and the resulting representation rights of each of the shareholders along with the terms and conditions in the event of a future exit or sale of shares. This lists out the conditions required in the event of termination, the obligations of an investors and other shareholders at the time of raising a round of capital and at the time of exit during a capital event. ,.It is the document that binds all activities inter-se shareholders and governs the shareholder rights in a play of capital. The practices and considerations in negotiating and finalizing this document is an art as well as a craft that is becoming very sophisticated and requires due consideration from the Founders .
The author is a Consultant at J. Sagar Associates. Views expressed here are personal.
About the Author
Harini Subramani works with the corporate commercial team at J.Sagar Associates in Chennai, and has assisted in strategic and private equity acquisitions. She also helps startup companies and emerging entrepreneurs address legal concerns. Harini also co-authors a blog www.indialawforindiastartups.wordpress.com along with Aarthi Sivanandh, a partner at J. Sagar Associates
Prior to joining the legal profession, she was a journalist and wrote for the Mint, and the Wall Street Journal, among others, on mergers and acquisitions.