The five legal documents you need for your startup
Monday, October 13, 2014/
It is common for entrepreneurs to be “big thinkers”, optimistic and passionate people who have both the vision to set enormous objectives and the confidence to take the leap of faith that is the first step towards achieving them. Successfully taking that first giant step may require a huge amount of momentum, and often the legal details are brushed aside in the relentless push forward.
Eventually, however, every entrepreneur must take not only a leap of faith but also a leap of faith in others – investors, employees and perhaps also joint venture partners – and success is often determined by the individuals who an entrepreneur manages to gather around them. The danger, however, is that momentum may propel an entrepreneur to a point where key legal details have been overlooked. In the long run, those missed details may prove to be crucial.
Nowadays, thanks to advanced online automated legal document systems, putting in place the right legal regime for your startup no longer needs to eat significantly into your capital or curb your momentum. To smooth the process for you, we’ve compiled a list of the most important legal documents for your business: these are core documents that every entrepreneur should put in place to protect both themselves and their business.
1. Shareholders’ agreement
Key questions: Who are the equity stakeholders? What are their voting rights? How will important business decisions be approved?
As soon as your startup has more than one owner, you need one of these, and this may turn out to be the most important contract you ever enter into. A proper shareholders’ agreement will govern how important business decisions are made, how the company will raise further capital in the future and how the investors will ultimately exit – all crucial matters about which there should be clear agreement in advance.
Of particular importance will be pre-emption rights on new issues of securities, which help to prevent the investors from being diluted by future capital raisings, as well as pre-emption rights on transfers of securities to give the investors some certainty about the particular individuals with whom they are going into business. Tag-along and drag-along rights can also prove to be crucial when one or more of the owners are seeking an exit.
Creating a shareholders’ agreement for your startup will force you and your co-investors to sit down together and address these vital points up front.
2. Company secretarial documents
Key questions: Who are the directors and have they been properly appointed? Do all investors have proper evidence of their shareholdings? Are all of the company’s records in order?
Nobody likes paperwork, but certain legal record-keeping requirements are mandated for all companies by the Corporations Act 2001 (Cth). Failure to comply with those requirements can lead to ASIC (Australian Securities and Investments Commission) fines, as well as potential disputes amongst the investors. All too often, startup founders are not aware of these legal obligations and the company’s fundamental documents are thrown together with little thought, if at all. This may cause serious issues down the track.
Also bear in mind that, when the time comes for the business to raise further funding, potential investors will undertake due diligence and ask to inspect the books of the company. Presenting them with a company register that is a shambles is not a good look, so doing your legal housekeeping now will prove to be worthwhile.
Important company secretarial documents include share certificates evidencing the shareholdings, application forms and transfer forms (as applicable) and board resolutions approving all issues and transfer of shares.
3. Confidentiality agreement/non-disclosure agreement (NDA)
Key questions: What information is sensitive to the business? To whom will that information need to be disclosed? How will the confidentiality of that valuable information be protected?
You may be able to pique the interest of potential investors, joint venture partners and customers without giving away too much of your startup’s confidential information, but their questions will inevitably become more probing and, sooner or later, you will need to delve into details that may be sensitive to your business.
As the saying goes, “I’d rather shake hands with an honest person than sign a contract with a crook.” Trust is important in every relationship, including business relationships, but prudent business practice means putting in place the customary legal protections of a properly drafted confidential agreement (otherwise referred to as a “non-disclosure agreement” or “NDA”) before disclosing your startup’s valuable confidential information.
Requiring a confidentiality agreement before engaging in confidential discussions will not only help to protect you legally but may also help you to present as a prudent and professional businessperson to potential investors, joint venture partners and customers.
4. Employment contract
Hiring your first employees will be one of the most exciting and significant steps for your startup. Choosing the right individuals to employ is, of course, most important, but all too often new companies bring in employees without putting a proper employment contract in place. That can lead to big problems for the business down the track.
In particular, it is absolutely vital that employees within the business are not able to lay claim personally to any of the company’s valuable intellectual property. Confidentiality provisions will also be extremely important, as you will be exposing the inner workings of your business to your employees.
Also consider putting in place reasonable non-solicitation and non-compete provisions for staff who will have access to the company’s proprietary know-how and key suppliers/customers.
Navigating through the minefield that is Australian employment law is a daunting task for any entrepreneur. A proper employment contract should, however, be viewed as essential for every employee.
5. Family trust deed
To succeed, an entrepreneur must plan to succeed. You have started your business because you believe that it can make profits, pay dividends and grow your capital faster than the other opportunities you have in front of you. Planning for that success means putting in place a legal structure upfront that will maximise your flexibility in terms of tax and protect your assets.
Proper tax structuring always requires personalised advice, as the optimal tax structure for you will depend upon your individual circumstances, so you should consider seeking advice from a tax accountant or lawyer before setting up the legal structure for your business.
For example, it is common for entrepreneurs and investors to hold their shares through a family trust – the trustee of the family trust (which is commonly a separate company incorporated specially for that purpose) holds the investment in its capacity as the trustee of the family trust. The family trust itself is created through a document known as a “Family Trust Deed” or “Discretionary Trust Deed”.
Establishing a solid legal foundation for your startup needn’t curb your momentum or corrode your startup capital. Using high-tech online document automation systems, you can set up all of the crucial legal documents for your business in minutes, and for a fraction of the legal fees that you may expect to pay a lawyer.
So plug the holes in your startup’s legal foundations today: entrepreneurs are people of action, and there’s no longer any excuse for overlooking these important legal points.