1. Founders Pledge
For idea-stage companies: The Founders Pledge 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 worst while still hoping for the best.
Without the right documents in place, you could end up with a founder that you can’t remove – even when they’re not acting in the company’s best interests.
The provisions in a Founders Pledge outline the duties of you and your co-founders as directors and founders of the company. It also sets out why and when a founder can be terminated and what to do if a director leaves 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 begin moving towards that first rounding round, you should consider the more serious Founders Service Agreement which contains more provisions. Still not sure? We’ve explained how to set the terms for your Founders Pledge or Founder Service Agreement on SeedLegals in this article.
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2. Founders Service Agreement
For companies that are just getting started: The Founders Service Agreement sets out how you and any co-founders will work to build your business and what will happen if there’s a dispute.
When 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.
The Founders Service Agreement is basically a combination of the Founders Pledge and an Employment Agreement. Like the Founders Pledge, it includes terms about your duties and obligations as a founder and the grounds on which you could be removed to protect the company’s interests. But it also has sections that you’d find in an Employment Agreement – such as salary, holiday entitlement and time off.
Arguably the most important thing a Founders Service Agreement does is establish the vesting schedule for your shares as a founder. The vesting schedule ties the amount of shares you will eventually own to the amount of time you work for the company. For example, if you had 30% of the share capital with 30-month vesting, 1% of the shares would vest each month, until all your shares are fully vested and you own them outright.
It might seem against your interests to agree to wait to get your full share allocation – but vesting is an effective way to protect the company in case there’s a dispute between founders. Without vesting provisions, you could end up in a situation where a co-founder leaves with a large amount of equity. This could leave your company less attractive to investors.
Other problems can arise if a leaver is a large shareholder with voting rights, since they may be able to block key company decisions. Plus, a leaver would benefit from the upside of an exit for their full share allocation, even though they are no longer contributing towards building the company. Founder vesting strikes a fairer balance between your performance and/or time committed to the business, and the value realisation of your shares.
Gearing up for a funding round? Get your Founders Service Agreement sorted in minutes on SeedLegals.
3. Intellectual Property (IP) Assignment Agreement
Make sure you have an IP Assignment Agreement with everyone who’s worked on your product or idea without a formal contract in place – this gives your company full ownership over their contribution.
When you first start building your business, there can be a lot of people working on your product and other intellectual property, such as your website, design and logos. These might be co-founders, team members, advisors, contractors and even friends and family.
The IP that contributors create, even if it’s clearly for your business, doesn’t necessarily belong to the business unless you have an IP Assignment Agreement in place. Founders who don’t protect their IP risk an expensive dispute which can make the company less attractive to investors.
An IP Assignment Agreement ensures that any work done for your company, even if it takes place before the company was officially incorporated, legally belongs to your company. Sometimes you’ll pay for the work, usually a nominal fee or the price you’ve already agreed, such as an agency’s fee for creating your website.
Ideally, you should make sure you have an IP Assignment Agreement in place with everyone who has worked on your product or for your company, even if you don’t consider their contribution to be significant. This can help you avoid disputes in the future.
Protect your business with our quick, customisable IP Assignment Agreement templates.
4. Non-Disclosure Agreement
A Non-Disclosure Agreement protects sensitive and confidential information from entering the public domain.
If you plan to discuss confidential information with people not currently engaged by the company, for example advisors, partners or potential employees, you should ask them to sign a Non-Disclosure Agreement (NDA).
An NDA is a commitment that the person receiving sensitive information about your business during discussions will not disclose that information to anyone else or use the information for their own benefit. NDAs are common in sectors where a disproportionately large part of the value of the company comes from their intellectual property.
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5. Employment Agreement (with vesting provisions)
When you’re just starting up, hiring might not seem like a possibility and you might be tempted to just engage contractors to work on an ad hoc basis on your venture. As you start to scale, it’s important that everyone working as an employee has a proper Employment Agreement in place.
Employment Agreements are crucial for two reasons: 1) They protect your company by clearly defining both your roles and responsibilities and your employee’s and 2) HMRC takes a dim view of what they call “bogus self employment”, and you could end up with a fine and/or additional tax liability.
The Employment Agreement you use for your startup should cover everything you’d expect, such as salary, holiday, job roles and responsibilities. Many startups also grant share options to employees as part of their contract.
As an early-stage startup, if you don’t have a huge budget for salaries, you could consider topping up the total remuneration package with options, as a good way to attract talent to your business. Share options schemes give your employee the right to buy shares in your company later at a fixed price, with the hope that they can directly profit as your startup’s value grows and the share price increases. This can be a good way to motivate your employees, since it joins together the interests of your employee and your company.
The Employment Agreement also outlines the vesting schedule for these options. The vesting schedule ties the amount of options that your employee earns to the amount of time that they work for the company. For example, if they had 3% of the share capital with 30-month vesting, 0.1% of the shares would vest each month until all of the options are fully vested and your employee owns them with no conditions attached to them.
If you’re employing someone on a more casual basis, a Zero Hours Contract could be a good alternative to a more formal employment contract. They’re only suitable in certain circumstances, for example if you need to fill a short-term gap. If you’re not sure whether you need an Employee Agreement or a Zero Hours Contract, hit the chat button to ask our experts.
For fast, efficient onboarding, create Employment Agreements on SeedLegals. When new staff join, you can re-use the same terms, or set new ones.
6. Advisor Agreement
Having the right people around you is crucial. Protect your relationship with a mentor, advisor or coach with an Advisor Agreement.
When you set up your company, it can be invaluable to get specialist advice from an industry or business expert.
How you pay your advisor depends on who is advising you and what they’re contributing. You might agree to pay them in cash, equity or a combination of the two – giving equity is most common. You can find out more about how much equity you should give your advisor using our analysis of data from hundreds of UK startups.
An Advisor Agreement outlines what you expect from your advisor, for example, whether you want them to help you with networking opportunities or strategic advice. More importantly, you want to define their responsibilities to you, such as keeping company information confidential.
An Advisor Agreement also covers what happens if they leave or are terminated from the post and the vesting schedule for their equity, if relevant.
Vesting ties the amount of options that your advisor earns to the amount of time that they work for the company. For example, if they had 3% of the share capital with 30-month vesting, 0.1% of the shares would vest each month, until all of the options are fully vested and your advisor owns the shares with no conditions attached to them.
Quickly create an Advisor Agreement with a 7-day free trial.
7. Consultancy Agreements
Consultancy Agreements are for freelancers, consultants and contractors – that is, anyone external to your business who isn’t your employee. If you need a contract for someone on your payroll, use an Employment Agreement instead.
Consultancy Agreements cover people working for your company who aren’t part of the executive team, long-term advisors or employees. Consultancy Agreements are designed for shorter term engagements of a few months and for people who aren’t considered employees: people not on your payroll and for whom you don’t pay National Insurance.
The agreement outlines their roles and responsibilities, invoicing and payment terms. Take care to include an IP assignment clause to retain the IP rights of anything they produce while working for you.
It’s important that you don’t impose the same expectations you have of your employees on contractors, such as fixed times at an office. This is because they could then be legally considered as employees of your business and you’d be liable to pay National Insurance and provide other employee-related benefits.
Use our template to create and customise a Consultancy Agreement for your self-employed staff.
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