You and a few friends have decided to start a business. Each one of you plays a pivotal role in getting that idea to market. You and your now co-founders work tirelessly, and despite your lack of sleep, lost weekends and other setbacks, you can’t imagine doing anything else. The pace has been grueling, but the team has breathed life into that idea, and it is finally ready walk out into the world to be embraced. Roll out the red carpet. THE COMPANY HAS ARRIVED. But, has it?
Like most parents who would not send their children outside without any clothes, you probably want to make sure you are not sending your company, brand and products out naked into the marketplace. You need to get some guidelines and protections in place to protect the company and all the hard work that everyone has put in. As an added bonus, these guidelines and protections will also be a good starting point to position your company for future investors or to be acquired. The following are key documents that most start-ups should have in place.
1. Formation Document
Do the founders want to start this business as a corporation or as a limited liability company? Here is a good starting point to help the founders consider what structure best suits the company. The rest of this list will assume that the founders picked a corporation, but each of the documents below, with some variation, will still apply to a limited liability company.
The founders need to establish who runs the company and how; who is authorized to act on behalf of the company; and other rights of shareholders, management and founders.
3. Shareholders Agreement or Founder Share Restriction Agreement
This agreement between the shareholders of the company will establish the rights of each shareholder and his or her relationship with other shareholders, such as the right to transfer his or her shares, any rights of first refusal, the right of the company to redeem equity upon death or disability, etc. In lieu of a Shareholders Agreement, the company and each founder individually may enter into a Founder Share Restriction Agreement that sets forth vesting on the founder’s shares and also addresses what happens if a founder leaves the company, dies, or becomes permanently disabled. Under certain circumstances, the founders might want to consider a Buy-Sell Agreement as well as a possible solution to deadlock on governance and operational issues; more information on Buy-Sell Agreements can be found here.
4. Capitalization Table
There is not enough that can be said about having an up-to-date capitalization table. It not only helps the founders to see who owns the company but is also one of the first documents a potential investor or buyer will want to see. In addition to tracking shares that have been issued, the capitalization table should list holders of options and warrants as well as note any convertible debt. More information can be found here.
5. Technology/Invention Assignment Agreement
If one of the founders leaves, are you sure he or she won’t demand that the company stop using the founder’s intellectual property? Having all the founders assign their rights to the company to all that has been invented or created will help minimize the possibility any infringement claims in the future as well as add important assets and value to the company.
6. Proprietary Information and Invention Assignment Agreement
Similar to the Technology/Invention Assignment Agreement, if the company has employees or contractors developing technology, products, process or other forms of intellectual property, the company will want its employees and contractors to assign and transfer any rights to those developments to the company (or evidence the intellectual property was created as “work for hire”) and to keep its confidential information confidential.
7. Standard Form Contract
If the company is dealing with customers or clients, it should have a great standard form of contract (or several more depending on the business) that is favorable to the company. That is not to say that customers will not try to negotiate that contract, but by having a starting place, the company will know where it can be flexible and where it needs to stand its ground.