Written by Luke Musto, Associate
Our firm has worked with a number of tech startups over the years, and one of the most common mistakes we see is that the founders fail to establish a strong legal structure for their new venture straight off the bat. There can be a number of reasons for this. Some startups may be unwilling or unable to allocate capital towards legal fees. In other cases, startups may prefer to focus on the vision for their company and not appreciate or understand the value and importance of having the legal side of things in order.
By having a strong legal basis in place from the very start, founders can avoid the potential for costly legal dispute further down the road, protecting both the business and themselves in a personal capacity. In today’s article, we will discuss some of the key legal documents that tech startup founders should ensure that they have in place.
1. Articles of Incorporation and Shareholders’ Agreements
While there are different business structure options for startups, in most cases startups will decide to incorporate a company. If there are other shareholders involved, a shareholders’ agreement is crucial. In general, the agreement will set out the shareholders’ rights and obligations; regulate the sale of shares in the company; describe how the company is going to be run; provide an element of protection for minority shareholders and the company; and define how important decisions are to be made. We have seen it occur on numerous occasions the scenario where a business is formed and the shareholders’ agreement is put off until the business is making money, something that completely changes the dynamics of negotiating an agreement between the parties and generally making it more uncomfortable than needed. By dealing with these questions at the start, this will avoid potential disputes and awkward conversation, particularly if your startup enjoys success.
2. Contracts with Clients
3. Employment Agreements
Once your startup begins to grow to the point that you need to start hiring employees, you will need to have a well-drafted employment agreement ready to implement. This will set out the role and responsibilities of your new employee(s), remuneration and benefits, IP rights, leave entitlements, and termination of the employment, among other things.
Australian employment legislation can be a little confusing for the uninitiated (and particularly for foreign startups), with the application of industry awards, the National Employment Standards, and the interplay between these legislative instruments and the employment contracts themselves. For this reason, it is critical that your employment agreement complies with Australian legislation, and that it is prepared by a lawyer.
4. IP Assignment Agreement
While IP is critical to any startup’s value, this is even truer for tech companies. In many cases, tech startup founders will have personally owned their IP in the early stages of their business. In such cases, it is important to subsequently assign the IP to the same entity that investors are investing in. To do this, an IP agreement to transfer ownership of the IP to the company is necessary.
In addition, depending on your startup’s circumstances, additional IP agreements may be required. This may include an IP assignment agreement if you use external developers, or the incorporation of a holding company to hold the assets of the operating entity.
5. Non-Disclosure Agreement
An NDA is a simple document (in terms of drafting and implementation) that offers a lot of protection and benefits. This will ensure you keep your trade secrets safe from competitors and other third parties, be it potential business partners, customers or external developers. In simple terms, an NDA ensures that your confidential information remains that way.
Taking the time and spending the funds to prepare and implement a tech startup’s legal documentation can seem like a daunting task and one that many people will put off for as long as possible. However, it doesn’t have to be, and well-drafted documents should be seen as an essential investment that will protect your business (and you personally) from the growing risks and liabilities that come with any startup. If you are unsure of what documents you may need, or where to begin, get in touch with our experienced team today to learn how we can assist technology companies.
Harris Gomez Group opened its doors in 1997 as an Australian legal and commercial firm. In 2001, we expanded our practice to the international market with the establishment of our office in Santiago, Chile. This international expansion meant we could provide an essential bridge for Australian companies with interests and activities in Latin America, and in so doing, became the first Australian law firm with an office in Latin America.
We provide innovative technology and resources businesses with legal and commercial expertise to realise their global potential. Our goal is to see innovative businesses establish and thrive in the global market. We are proud members of Austmine.
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