No startup is an island. To succeed you’re going to have to form relationships with lots of other people and businesses: co-founders, investors, employees, vendors, customers, etc. To reduce risk and uncertainty, many of those relationships should be formalized with contracts. Here’s a short guide to the types of contracts your startup needs during the different business stages.
Getting Started
These are contracts your startup needs in order to come into existence as a company and make sure the company has the rights it needs to provide a product or service.
Founders Agreement – cover issues like ownership, responsibility, decision-making, and operating procedures
Assignments of IP – Co-founders assign their relevant intellectual property rights to the company. Learn more about protecting your IP here.
Getting Funded
These are contracts your startup is likely to use in the process of getting funded.
Finder Agreements – You agree to pay a finder for getting you money for your company. We discuss some of the issues and risks here.
Investment Agreements – These are agreements between a company and an investor in which the investor gets a certain share of ownership in the company in exchange for money.
Investment Term Sheets – statements of the terms under which an investor would invest in your business. We discuss five ways to reduce your risk here.
NDAs – Startup founders often want potential investors to sign NDAs before they share their brilliant business ideas. However, as we discuss here, many investors won’t sign NDAs. Also, as we talk about here, ideas are hard to protect – and the idea is only about 1% of a company’s value. The real value is in the execution of the idea, the skills of the team, etc.
Renting Space
At some point, most startups will need their own commercial space. Running a business from your home can violate the terms of your residential lease and/or local zoning ordinances.
Commercial Leases – We talk about some of the risk factors here.
Hiring People
To succeed, your startup will probably need to grow beyond the original group of founders.
Employment Agreements – these state the terms of employment, such as salary, benefits, vacation time, stock options, etc.
Assignments of IP – These may be part of employment agreements or stand-alone agreements. Issues include whether the employer owns inventions and business ideas that the employee comes up with, as we discuss here.
NDAs – Again, these can be part of a general employment agreement or a separate document. NDAs sometimes include non-competes, which aren’t enforceable in all states. We talk about non-competes here.
Getting and Providing Services
All startups need to obtain certain services. Some startups also provide services.
Services Agreements (Development Services, Consulting Services) – You use these for getting vendors to provide you with services (such as app development, launch party catering, or office cleaning) or to provide services to others.
Statements of Work (SoWs) – These detail the nature of the services and deliverables, and are usually part of a services agreement.
Getting Stuff to Customers
Whether you’re selling widgets or licensing software, your startup needs to get your products to customers. Some startups are able to do this directly, but many use third party help.
Distribution Agreements – These are usually between a manufacturer or vendor and distributor. Some key terms are the duration of the agreement, whether it’s exclusive, and the territory covered.
Reseller Agreements – These are agreements with companies that buy products and generally “add value” (for example, by combining a product with other products or services) before reselling it.
Licensing Stuff
Whether access to your software or service is free or paid, you want to control how others use your IP rights.
End User License Agreements (EULAs) – These are usually non-negotiated shrink-wrap or browse-wrap agreements. They govern how users can use the software. They generally limit the licensor’s liability and prohibit things like reverse engineering. You can read about some ridiculous clauses here.
Software Licenses – Although a EULA is also a software license, when people talk about software licenses they’re often talking about something that’s more elaborate and negotiated than a EULA click-wrap. For example, with big deals, big clients, and custom software there’s more likely to be a negotiated agreement.
Evaluation Agreements (Trial License, Test License) – These let potential buyers check out products (such as software) before buying them or paying for a license.
How do you know if the contract is any good?
Before you decide that your contract is a-ok and you get your pen to sign, make sure you know what you’re signing! Thousands of people per year sign contracts they don’t read properly or understand in depth, putting themselves, their businesses and their families at risk.
There’s a new online contract review service, which, with one simple upload, provides you a full analysis and report about any unusual or missing clauses, while translating all the legalese into simple English. Make sure you check your contract at blog.lawgeex.com before you sign any contract.
The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice.
