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If your startup doesn’t have these 7 essential documents in place, now’s the time to do it.
1. Founders Pledge
2. Founders Service Agreement
3. IP Assignment
4. Employment Agreement with vesting
5. Advisor Agreement
6. Consultancy Agreement
7. Non Disclosure Agreement
Easily create, sign and download them now on SeedLegals 7-day free trial.
For idea-stage companies: This document protects the founders and the company if things go wrong, which happens more often than you think!
Starting a business is an exciting time, you have a great idea and a vision to change the world. You might even be in business with your friends or family but it’s still important to ensure that you plan for the worse while still hoping for the best.
Without the right documents in place, you can end up with a founder that you can’t remove – even when they are not acting in the company’s best interest.
The provisions outline you and your co-founders’ duties as directors and a founders of the company, outlining reasons for the potential termination of founders, what to do in the event of a director leaving the company as well as other clauses protecting the company’s property and interests.
The founders pledge is quite lightweight so when you start getting beyond just the idea stage and start moving towards that first rounding round, you should consider the more serious Founders Service Agreement which has a much greater number of provisions. Still not sure? Here’s more info whether you need a Founder Service Agreement or Founders Pledge.
For companies looking to raise funding: This agreement sets out how you and any co-founders, will work to build your business and what to do in the event of a dispute.
Once you’re about to do your first funding round or you’ve begun to pay yourself a salary from your startup, you should upgrade your Founders’ Pledge to a Founders’ Service Agreement.
It is basically a hybrid of the founders pledge and an employment agreement that you might be familiar with. It has many of the same provisions relating to the duties of a founder such as grounds for potential termination and protecting the company’s interests, but it also has sections that you would find in an employment agreement – such as your salary, your holiday entitlement and other absences.
Probably the most important thing to note, however, is that it can established a vesting schedule for your shares as a founder. In essence, this ties the amount of shares that you eventually own to the amount of time that you work for the company. For example, if you had 30% of the share capital with a 30 month vesting period, you would vest 1% of the shares each month, until all of your shares are fully vested and there are no longer any conditions attached to them.
While vesting might appear against your interests as a founder, it’s in essence protecting founders against each other. If you don’t have vesting provisions, you might end up with a situation where a co-founder leaves and has a large amount of equity. This essentially renders your company uninvestable as their just isn’t enough equity to go around, and keep founders, employees and investors aligned.
Make sure you have an IP assignment with everyone who’s worked on your product or idea without a formal contract in place – this ensures your company owns their contribution, and not them.
When you first start building your business, there’s often a lot of people working on your product and other intellectual property. These might be potential cofounders or team members, advisors or even contractors that you hire (for example contractors for your website).
The IP that they create, even if it’s clearly for your business, doesn’t necessarily belong to you unless you have an IP assignment in place. There are many examples of founders not having their IP protected, causing an expensive dispute which can make you all but uninvestable.
An IP assignment ensures that any work they do for the benefit of your company, even if it was before your company was officially incorporated, belongs to your company. There is sometimes payment as part of this, which normally is either a nominal figure or what was initially agreed e.g. the contractor price for your website.
Ideally, you should make sure you have an IP assignment in place with everyone who has worked on your product, even if you don’t consider their contribution to be material to avoid any potential disputes in the future.
When you’re starting up, hiring often isn’t a possibility. At best you might have some contractor agreements in place for people working ad hoc on your venture that aren’t part of the co-founding team.
As you start to scale up, it’s important to ensure that everyone who is working as an employee, has a proper employment agreement in place. This is for two reasons: 1) It gives you a degree of protection and clearly defines both your roles and responsibilities and 2) HMRC is cracking down on “bogus self employment” as they call it, which could incur you a fine and/or additional tax liability.
An employment agreement designed for startups covers everything you might expect, e.g. salary, holiday and job roles and responsibilities. But an important additional feature for startups is the ability to assign share options to your employees as part of their contract.
Often early stage startups don’t have a huge budget for salaries, so part of your employee’s remuneration is in the form of options. An option is a right to buy shares in your company at a price fixed now, with a view to the future when (hopefully) the share price is higher, making a profit and aligning them to your startup’s value.
It also outlines the vesting for these options too. Vesting ties the amount of options that your employee earns to the amount of time that they continue to work for the company. For example, if they had 3% of the share capital with a 30 month vesting period, they would vest 0.1% of the shares each month, until all of the options are fully vested and there are no longer any conditions attached to them.
Create an Employment Agreement.
If you have a formal mentor, advisor or coach
In startups having the right people around you and advice is crucial. When you want to engage more formally with your advisors it’s important to have an agreement in place.
Depending on the type of person you are engaging with, the remuneration might be in the form of equity, cash or a combination of the two but it is most commonly equity.
Our agreements outline what your expectations are of the advisor in terms of their role, for example, to help with networking and introductions as well as their responsibilities to you – such as an agreement to treat any information they acquire in the role as confidential.
It also covers what to do in the event they leave or are terminated from post and (if they are remunerated with equity) their vesting for their equity. (Read more about how much equity you should give your advisor based on data from hundreds of UK startups).
Vesting ties the amount of options that your advisor earns to the amount of time that they continue to work for the company. For example, if they had 3% of the share capital with a 30 month vesting period, they would vest 0.1% of the shares each month, until all of the options are fully vested and there are no longer any conditions attached to them.
An agreement between your company and anyone working for it as a contractor and not a full-time company employee.
Consultancy agreements are used to engage people (contractors) working on your company who are not part of the executive team, long term advisors or employees. They are mostly used for shorter term engagements of a few months and they are not treated as employees, they don’t go on the payroll and you do not pay National Insurance.
Our agreement outlines their roles and responsibilities, their invoicing and payment terms and assigns any intellectual property they create while they are working for you to you.
It’s important that you do not treat contractors in the same way as employees, such as for example having fixed times at an office, as otherwise they may legally be classified as employees of your business and you will become liable to pay National Insurance and provide other employee related benefits.
An agreement between the company and anyone not currently otherwise engaged by the company (for example, an employee) which requires them not to circulate any confidential information they might receive.
If you plan to discuss confidential information with potential advisors, partners or potential employees you might wish them to sign a non disclosure agreement (NDA).
An NDA is an commitment that the person receiving sensitive information about your business during discussions to not disclose that information to anyone else. They are particularly used in sectors such as life sciences where a disproportionately large part of the value of the company is in their intellectual property.
In practice, NDAs are for the most part unenforceable and many potential advisors or investors will not sign them for various reasons.
Usually, you have much more to gain by openly sharing your idea with people than trying to protect it. It’s execution that matters, not ideas.