How to get ready for a funding round: 6 steps for founders
Life as a startup founder can feel like you’re on an unstoppable treadmill. But no matter how many things build up on yo...
Legal docs are difficult, and as a founder, it can be stressful trying to understand which docs you really need when you start growing your business. We’re on a mission to make your legal admin easier so in this post, we outline the six essential legal documents that startups in Singapore and Hong Kong need to help you hit the ground running.
The 6 essential legal documents for startups:
For companies that are just getting started: This 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, it’s sensible to sign a Founder Service Agreement with the company. A Founder Service Agreement includes terms about the founders’ obligations, director duties and equity vesting. It also contains sections that you’d find in an employment agreement – such as salary, annual leave entitlement, sick leave and other absences.
The Founder Service Agreement also protects the company’s interests, because it clearly states what expectations the founder is required to meet and sets out the circumstances in which a founder can be removed.
Arguably the most important thing a Founder 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 vest each month, until all your shares are fully vested and you own them with no conditions attached.
A vesting schedule should also set out the circumstances in which founders lose the shares that have been vested, for example if they are terminated by the company for cause.
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 would mean your company is uninvestable because there’s much less equity to offer new investors.
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 of their contribution.
When you first start building your business, there can be a lot of people working on your product and other intellectual property. These might be co-founders, team members, advisors, contractors and even friends and family.
Intellectual property covers ideas and information generated by the human mind. For your business that might mean documents, designs, copyrights, patents, names – really anything that emerges from the creative process.
The IP that contributors create, even if it’s clearly for your business, doesn’t automatically belong to you 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.
When you’re just starting up, hiring often isn’t a possibility. As you start to scale, it’s important that everyone who is working as an employee has a proper Employment Agreement in place.
Employment contracts protect your company by clearly defining both your roles and responsibilities and your employee’s. It isn’t optional – to comply with employment laws, you need to have Employment Agreements with your employees.
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, you might not have a huge budget for salaries. Topping up your total remuneration package with options can be a good way to attract talent to your business. An option gives 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 your employees’ and your company’s interests.
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 vest each month until all of the options are fully vested and your employee owns them with no conditions attached to them.
Having the right people around you is crucial. Protect your relationship with a formal mentor, advisor or coach with an Advisor Agreement.
Getting specialist advice from an industry or business expert can be invaluable when setting up your company. Depending on who is advising you, you might agree to pay them in cash, equity or a combination of the two. It’s important to formalise the agreement between you and your advisor to protect both your interests.
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 vest each month, until all of the options are fully vested and your advisor owns the shares with no conditions attached to them.
For freelancers, consultants and contractors, ie anyone external to your business who is not 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 are not 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 – for example, people not on the payroll and to whom you don’t pay mandatory provident fund system (MPF) in Hong Kong or the central provident fund scheme (CPF) in Singapore.
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 do not 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 minimum wage (in Hong Kong), MPF or CPF and provide other employee-related benefits.
An agreement protecting 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. They are common in sectors where a disproportionately large part of the value of the company comes from their intellectual property, like life sciences.
To get started, log into SeedLegals then go to Agreements. It’s fast and incredibly simple. If you need any help, chat online with our experts. When your document is ready, send it via SeedLegals to be signed online. Best of all, we store your documents securely for as long as you need, so you can access them again anytime. And if you need to create a new agreement, you can replicate the terms you’ve used before – you don’t have to start from scratch.
If you have any questions, or still not sure on the best way to go, we’re here to help. Get in touch with our team who will guide you and help you get started.
*Disclaimer: The information contained in this article does not constitute and should not be treated as legal, tax, accounting, or financial advice.