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Four Key Agreements for Early Stage Startups

Launching a startup is a process that is inherently filled with passionate yet uncertain efforts. You are working on your big idea at a feverish pace and sacrificing time and money in its pursuit and yet there could be a million things that could go wrong and bring the entire enterprise down.

Many factors in starting-up a business from scratch - designing right the business model, finding product-market fit and nailing execution – often require intensive, iterative processes of trial and error to get right. Managing uncertainty in these areas is core to your role as an entrepreneur!

Other aspects of building your new business, however, should not be trial and error. Failure to maintain legal hygiene is a clear example of this – and it is in fact one of the main reasons for early-stage start-up failure. After heroic efforts to get your business up and running, it’s devastating to see your start-up compromised by poor legal hygiene.

Legal matters are not always top of mind for most entrepreneurs starting-up. They are rarely the core competency of any of the founders. Unfortunately, there has not been an affordable and effective solution to get the right legal documentation in place – until now. Lexknight’s automated contracts platform designed for start-ups makes creating & e-signing the tailored legal agreements you need easier, smarter, faster and more affordable than ever.

Simply by ensuring that you put solid, legal-binding contracts in place as you enter into commercial relationships and transactions in your company’s day-to-day, you could prevent your dream business enterprise from crumbling down like a failed experiment! And that is even before you have scored the initial round of funding!

Starting a business of your own can be incredibly exciting; you have this amazing idea and a unique dream. Your founding members can be your close friends and even family members, however, in business one needs to be prepared for the worst. Without the right legal documents, you might find yourself in a pickle that obviously wouldn’t be in the company’s best interest.

So if you are an early-stage startup, still at the brainstorming and idea exchange stage, here are three key agreements/ documents that you must have to avoid landing in a soup!

#1 Pre-Incorporation Founder Agreement

As you plan to kick-start a business with a couple of your peers, a founder’s agreement (or more specifically a pre-incorporation founder agreement) is absolutely essential. This kind of agreement helps you outline each owner’s rights and responsibilities which is a pivotal step for avoiding conflicts among co-founders.

The Pre-Incorporation Founder Agreement provided by LexKnights is designed for entrepreneurs who are working together to develop and validate a business idea in the earliest stages, before incorporating a company to avoid gaps and conflicts later down the line.

It is important that you have clarity in this agreement as to what each co-founder is bringing in and drawing out of the business to make it viable and successful. This agreement sets the record straight on key questions such as what will be the roles and responsibilities of each owner in the business, who will provide the initial capital needed to get started, and what will be a fair equity split among the co-founders.

The agreement also addresses what should happen in the event of a breakdown in the co-founders’ relationship before their business can materialize. A clear contract in place can help in reaching an agreement as to how the work-product can be used in such a situation. Further, the contract spells out clear rules for resignations, removals and allow you to establish vesting restrictions to avoid departing co-founders from free-riding.

Finally, the agreement paves the way for proper governance of the prospective new business, not only reflecting an agreement as to voting rights in accordance to ownership and committing the founders to put proper constitutional, employment and other legal agreements in place upon incorporation, but also making it clear that all intellectual property as a result of the foundes’ efforts must be assigned to the company. This is crucial to ensure the smooth running of the future company, as well as to withstand the scrutiny of venture capital funds and other early stage investors when the time comes to go fundraising.

#2 Freelancing Agreement

Early-stage startups are usually pressed for funds which makes it hard for them to hire an expansive team. As a result, these scaling startups are required to hire freelancers or even part-time staff to get work done without experiencing the hassle of recruitment.

Hiring a freelancer may seem like a straightforward engagement. However, establishing a relationship with a freelancer with a few email exchanges and a simple handshake is frequently a recipe for disaster.

In the absence of a carefully prepared legally binding contract clearly setting out expectations and the terms and conditions of the deal, needless confusion, lack of accountability and conflicts can often arise, distracting management, causing delays in product releases and placing the intellectual property of the company at risk.

In a freelancer contractor agreement, it is ideal to set clear outcomes and deadlines and clearly set out remuneration models based on tangible outcomes. Intellectual property generated by the freelancer should always be properly transferred to the company paying for the output, except in very exceptional circumstances. Furthermore, contracts should specifically mention non-disclosure obligations and use restrictions if any sensitive information is required to be passed on to the freelance contractor to protect the company’s business interest.

Finally, care must be taken to ensure that the freelancer does not become an employee of the company in the eyes of the law, triggering a host of unintended obligations on the parties, by clearly setting out the working arrangement for the freelancer in accordance with regulations.

#3 Letter of Intent

Before capital is committed to developing a new product, whether by investors in the start-up or by the founders themselves, all stakeholders will want to seek evidence that there is product-market fit.

In most cases, it is very difficult to get committed pre-orders from customers before the product has been developed. Instead start-ups often seek to obtain letters of intent to purchase from prospective customers to prove early traction to investors during fundraising.

A letter of intent (LOI) is a professional document that is issued by a potential customer to the start-up that indicates interest to acquire the product/service post-launch. It outlines the terms of the deal that may be struck at a later date. Although not legally binding, pre-launch startups that are looking for backers and investors can find LOI particularly useful as it outlines the tangible interest of potential customers.

Lexknights’ automated LOI allows users to clearly set out how the start-up’s value proposition supports the business of the customer, clearly articulating product-market fit. At the same time a letter of intent protects the sensitive information given to prospective clients as a sneak peek into the product and provides an optional exclusivity period at the will of the parties.

While the main purpose of a letter of intent is for the seller to share it with potential backers to raise the required resources to make the business reality, they are not needed to be legally binding commitments, with the exception of the above-mentioned non-disclosure and (optional) exclusivity terms.

#4 Non-Disclosure Agreement

A Non-Disclosure Agreement is a contract between two parties that wish to share confidential information for a set purpose but wish to do so with restrictions on information handling and access by third parties.

Having a non-disclosure agreement in place keeps your sensitive business information protected in initial discussions with your potential business partners, employees, customers and investors.

Especially in this nascent stage, where all your energies are centered around growth, you need every bit of protection to ensure no one else can implement your idea before you do!

An NDA must be designed to prevent disclosure of information to third parties and holds recipients responsible for any breaches. Further, the use of NDA is precisely limited to the purpose for which information is shared and preserve its confidentiality as disclosure might lead to damages. A non-disclosure agreement is only as good as the protection it provides to your confidential information.

Build a Strong Legal Documentation Framework with LexKnights

Remember, that when it comes to building a startup, time is the most precious resource that you have. Founders must prioritize putting up agreements in place to secure their company’s future.

LexKnights is changing the way companies apply legal documentation. With automated contracts and productized solutions, we offer seamless guidance to help your startup gain solid ground in the market. To know more visit us LexKnights and create legally binding contracts in a matter of minutes.