Starting up and growing a business is an incredibly exciting time. You’re passionate about your product or service and can’t wait to bring it to market. You’re super-busy, with a hundred and one demands on your time. Everyone wants a piece of you. Amid all this noise and positivity, pivoting to consider potential risks can be tough. And let’s face it, risk-management isn’t the most exciting of topics. But think of it as insurance. Just as you wouldn’t buy a new house or car without having a policy, taking legal advice early can help protect your valuable investment and ward off potential difficulties. One of the biggest mistakes entrepreneurs can make is not understanding how to use the law to protect their interests.
We’ve put together a collection of nine types of legal documents that are essential to business success and that will help you stay on top of your game as a start-up that’s focussed on growth.
Articles of Association
Your Articles of Association are public documents. Every company has to have one by law.
They tell third parties how your company is run and how it makes decisions. Most companies that are bought ‘off-the ’shelf’ from an agent or broker will have a set of standard Articles. You may need to adapt these as your company grows and you take on more shareholders or investors.
As you get bigger, your needs tend to become more complex. You’re borrowing money. You’re thinking of acquiring another company. Your investors want a bigger stake. You want to incentivise staff by offering them share options. You may like to offer different types of shareholder different rights (to veto your business decisions, to participate in the company’s profits, or on liquidation for example) by dividing your shares into ‘classes’. If this is so, the Articles will need to be amended to describe the classes of shares issued, and a shareholders’ agreement set up that dovetails with the articles.
Founders agreement/Partnership agreement
Unless you’re running your business alone, there will be several of you bringing your expertise to the party, your co-founders (if you’ve set up a company), or your partners if you’re a partnership.
A founders’ agreement or a partnership agreement is a private document between the founders of a business that describes, at a strategic level, what the business has been set up to do. It may also describe the duties of each team member, how shares will eventually be owned, what happens if someone wants to leave, how to deal with disputes, and whether you’re restricted if you want to set up separate and competing businesses.
A founders’ agreement is an informal document that’s not legally binding, but that sets the scene for a shareholders’ agreement in the future. A partnership agreement is legally binding once it’s been signed.
If you’re setting up a legal partnership, a partnership agreement is essential. A founders agreement in contrast is optional, but we highly recommend entering into one to protect your business from damaging disputes between founders later on and to provide clarity on key issues.
While you may think you’re in complete harmony with your colleagues, communication issues and differences that emerge can be highly damaging. Having a founders’ agreement will demonstrate to potential investors that you’re serious about your business, that the co-founders have clear agreement and a vision for the future, and that you will do what’s necessary to make the business a success.
Intellectual property and assignments
Intellectual property is likely to be one of your most valuable assets, and essential to your business. It may well lie at the heart of your company’s valuation.
Knowing who owns your business's intellectual property rights (IPR) is essential. If you’ve already taken on employees, then you’ll own the IPR in anything they’ve created for you, unless this was before your company being formed. But if any intellectual property like logos, trade marks, software, patents, content, or technology has been created other than by an employee, or by someone before the time they became an employee, then you’ll need the IPR assigned to your company.
An intellectual property assignment is a legally-binding document that transfers ownership in intellectual property from one person to another. It’s essential to have all of the IPR you need to operate, either by way of an IP assignment or by licensing.
In short, anyone who’s provided you with IPR so you can launch or in the course of your business (whether that’s designing a logo, writing a piece of code, or designing a product) must transfer rights to your company.
Any third-party work you use in connection with your start-up needs to be properly licensed before you can use it. You are responsible for any content uploaded to your site, so if IPR forms a part of your offering, you must seek expert advice.
If you don’t have ownership of IPR, then you may get into trouble if you want to sell your business later on, as any potential buyer will want to see clear rights to use the IP that’s fundamental to your business.
NDAs and confidentiality agreements
When doing business, you’ll often want to share confidential information with someone else. An NDA or confidentiality agreement is a legally-binding document that requires that person to keep any confidential information you share with them secret, and not disclose it to anyone else or steal it to use for themselves.
NDAs typically contain the following provisions:
- Who the parties are.
- What information is deemed to be confidential.
- What is not deemed confidential (information that’s already out there in the public domain for example).
- How long the agreement will last.
Having an NDA protects your business from competitors or other third parties like ex-employees or partners using information to your disadvantage.
Here are some situations where an NDA is a good idea:
- Where you are bringing on board a new partner, investor, or agent.
- Where you have someone interested in buying your business and they want to do some research or due diligence.
- So that your employees can do their job efficiently.
- Where you want to demonstrate your offering or product to a potential buyer.
- When you’re engaging an advisor or a contractor who may have access to your information or systems.
Some funders or investors won’t sign NDAs, so you’ll need to be careful what you disclose to them.
Contracts with customers and suppliers
A contract is an agreement where one or more people agree to do something for another in return for payment or equivalent. A contract doesn’t have to be in writing, providing all the essential elements are there and the parties clearly intend their agreement to be binding.
For this reason, it’s very risky for a business to contract to do or receive anything of value or if there’s any risk involved unless this is in writing. While the law provides some protection to both sides if things go wrong, no serious business will rely just on implied terms if the stakes are high.
If the contract is run-of-the-mill, you may be able to find a simple agreement online that you can adapt to suit your needs, whether you’re the buyer or the seller, for example the purchase of low-value items of stationery or the one-off sale of an old item of equipment that you no longer need.
But if the stakes are high, you’ll want to engage a commercial lawyer to draw up supplier contracts for you, so that the terms are skewed to your advantage. Equally, your solicitor will be able to provide you with a set of terms and conditions of business for you to use with your customers, bearing in mind your specific needs.
And as your business scales and grows, both the range of potential contracts and the risks involved get higher, so it becomes more and more important to have a lawyer on board.
Shareholder and investor agreements
If you’ve taken our advice and have a founders’ agreement, you’ll be in excellent shape when you take your start-up to the next stage – setting up a shareholders’ agreement.
A shareholders’ agreement is a contract between a company’s shareholders (and often the company itself). These are some of the reasons your start-up may want to have one (or your shareholders may demand one as you grow):
- Shareholders who are not directors may want a say in decision making. They may be investors and want to protect their interests. You may want to limit this as far as possible.
- Very small companies, for example those with only two shareholders who are also directors, may want to make sure decisions are only taken by unanimous vote and decide in advance what happens if not. Without a shareholders’ agreement, if the shareholders/directors disagree and hold 50/50 shares, the company is ‘deadlocked’ and can’t make a decision and this can be costly and disruptive.
- Minority shareholders who, ordinarily, would not have much (or any) say in the way the company is run may want the right to veto certain decisions of the board (for example, major changes of business direction, company mergers or acquisitions or sale of company property) and you may want to limit this.
- You may want to control the way (and the price) shares can be issued, sold, or transferred by your shareholders.
- You’ll want to make sure the company’s information is kept confidential and restrict leavers’ ability to set up competing businesses.
A shareholders’ agreement is a vital document as soon as you have more than a few shareholders, especially if you are anticipating further rounds of investment. You’ll want to describe shareholders' rights to vote for example, and you’ll want to protect you and your co-founders’ shares in the company against too much dilution. A shareholders’ agreement, if well drafted, is essential protection for your company, your shareholders, and yourself.
Directors’ service agreements
Your directors may be employees, but you will need to have directors’ service agreements with them as the ‘normal’ contract of employment doesn’t cover the specific duties of directors. As they are the most senior employees and likely to be paid more with more responsibilities, a special contract is needed.
For example, you need to specify in your directors’ service agreements:
- How long the agreement will last. Directors’ service agreements are often for a fixed term in line with the Articles.
- What benefits and bonuses they’ll get.
- If they’re entitled to shares, and the terms.
- What the scope of their duties is, and if there are any limits on their decision-making.
- If you want to prevent them setting up in competition after they leave, and the limits of this.
- Notice, and whether they get garden leave.
All these terms are essential for senior staff and give both your directors and the company certainty about the terms of the appointment.
The main types of employment status are employee, worker and freelance, and your rights and obligations concerning each type vary enormously.
An employee is someone who spends most of their time working for you, is under your control (you tell them what to do and provide their equipment) and you set their hours of work.
At a bare minimum, and by law, you have to provide your employees with a ‘written statement of employment particulars’ – that means a summary of the main terms of employment, like pay and hours.
However, as a good employer, it’s in your interest to provide more than this bare minimum to protect both you and the company.
An employment contract begins when a person accepts a job offer or starts work. Even if you don’t have a written contract, the law will imply certain terms into your contracts such as that the employee be paid the minimum wage, and that they are respectful to you and your customers.
However, to be clear with staff, here’s the kind of thing you want in your employment contract to prevent misunderstandings:
- How you expect employees to behave and what rules they should follow.
- Any special rules that apply in your sector (Christmas leave for example).
- What might constitute ‘gross misconduct’ entitling you to terminate the employment without notice.
- If you’d want to restrict their ability to compete or work for a competitor after they leave.
Employee share incentive schemes
As a start-up, you may be short of cash, yet you’d like a way to incentivise your employees. Offering a share ownership plan can be a great way of boosting your remuneration package without parting with cash. Share ownership plans offer staff shares or share options and can come with many tax benefits for you and your team.
Here are the most common forms of plan:
- Share option schemes. Employees are given the option to purchase shares in the business for which they work, at a price set at the time the option is granted. Even if the share price increases after that date, the employee has the right to buy at the price originally agreed.
- Share gifting schemes. Workers are gifted shares, that are normally held on trust for a while.
- Share purchase schemes. Shares are offered for sale to employees, usually at a favourable price.
Here’s why, as a start-up or growing business, a share ownership plan is a great idea:
- Research has shown that they have a positive effect on company performance and productivity.
- Employees who own shares feel more connected to the business, their job satisfaction improves, and a focus on the company’s success becomes a shared objective with management.
- Employees feel more loyal, and this improves retention and morale.
- Workers develop a longer-term view on company performance and shift their perspective to a holistic one involving the whole company team. Absenteeism can also decrease.
- Share plans are a popular and attractive addition to a benefits package when recruiting, and a tax-efficient way to reward employees.
For a more detailed synopsis of the various type of tax-advantaged scheme available, read our guide on employee share schemes and how they work.
A word of caution – while Google can be your friend, we advise you against using standard types of legal documents you can find online. Often these are not appropriate to you, either because they’re designed to work in a different country, or because they won’t suit your particular legal situation. A bad legal document can sometimes be worse than no legal document at all.