As a startup founder, you probably started your business by making a robust strategy, securing funds, following every legal step, and developing a marketing plan. However, there are some vital legal documents that most entrepreneurs overlook in the early stages of their business.
Examples include engagement letters, non-disclosure agreements, etc. Without these, your business cannot succeed, and you won’t be able to protect your assets.
Did you know that 331,000 new businesses were formed within the first quarter of 2023? Unfortunately, most of these startups will fail because of a variety of legal issues. These include the inability to protect intellectual property, not complying with tax laws, having bad negotiation skills while signing contracts, and not understanding employment laws.
All these prove that your business must follow some stringent written rules to succeed in this competitive market. Therefore, your startup must have binding legal agreements with the client, the owners, and employees. These can help safeguard your startup’s finances and streamline operations.
In this blog, we will discuss three legal agreements that startups should immediately create.
#1. Engagement Letter: An Agreement With Clients
According to Investopedia, your startup will need an engagement letter if you want to build a trustworthy relationship with your clientele. It’s basically a written agreement describing the business relationship between your startup and clients. In this letter, you can detail the agreement’s scope, associated costs, and contract terms before any business deal.
You will need an engagement letter before securing a client because it sets expectations for both parties. Usually, this agreement is less formal and doesn’t have any contractual legal jargon. That means it will accurately describe the terms and conditions, task deadlines, overall compensation, and the services offered.
The critical elements you need in an engagement letter include the client’s name, scope of services, organizational responsibilities, and deliverables. You also need to include client responsibilities, engagement timing, termination of terms, and billing details.
A Software Solution That Can Help
Doing all these manually without technical help can be tough. That’s why you should invest in engagement letter software that offers customizable templates for this legal document. Business owners in different industries, especially accounting, can use this tool to manage risks and offer clarity to their clients.
The software can make it easy to create this legally binding document and strengthen the relationship between you and your clients. With it, you can minimize risks and clarify the scope of your work.
According to Mango Practice Management, this tool can help startups prevent conflicts and misunderstandings by defining service expectations and potential limitations. With this, you can enhance your organization’s efficiency, professional excellence, and client satisfaction with clarity, commitment, and confidence.
#2. Founders’/Shareholders’ Agreement: A Legal Binding Between Company Owners
Without a founders’/shareholders’ agreement, your startup is bound to fail due to miscommunication and misunderstanding. It includes the documented rights, liabilities, and responsibilities of each shareholder or founder towards the startup.
This legal document offers an agreed-upon set of guidelines that unify and align with your business plan and startup’s future. With this, you can protect your company’s interests, ensure success, and avoid legal problems on an administrative level.
According to the Harvard Business Review, most businesses fail due to interpersonal tensions within the founding team. Yes, disagreements are surely inevitable. But you must find ways to mitigate any conflict using the guidelines shared in the founders’/shareholders’ agreement.
The Main Components of This Agreement
You should add the following clauses to your founders’/shareholders’ agreement:
- The startup’s management structure, including shareholders’ and founders’ information
- Any restrictions you want to put on the share acquisitions and possible transfers in the future
- Whether or not the existing shares can be transferred and how an owner or shareholder can exit the company
- How no director or founder should have any contact with a competitor of the startup
#3. Non-disclosure Agreements (NDAs): An Agreement to Safeguard Your Intellectual Property
An NDA is the first line of defense for your startup. This legally binding contract ensures that employees and clients don’t disclose confidential information to your competitors. In 2023, many tech firms used NDAs to muzzle out any whistleblowers from their companies.
Yes, an NDA will safeguard your business’s operations and protect your reputation. This agreement is usually signed between two parties, namely your company and employees at every level. An NDA can also be signed between your company and your client.
For instance, when you agree to share sensitive business information, your employees are legally prohibited from sharing that with anyone outside of work. Similarly, if you share project details with a client, they cannot use that information without consent.
When Do You Need an NDA?
Your startup should have a unilateral, bilateral, or multilateral NDA based on your business requirements. These can safeguard your intellectual property. Moreover, you’ll need an NDA only when:
- You are about to share important company details with clients or employees.
- You want to protect your marketing, investment, and financial information.
- Your company needs new employees and interns to access confidential data.
- You want to demonstrate the product’s functionalities to buyers and present a new business concept to investors.
Remember to consult with an attorney before preparing a non-disclosure agreement document. Usually, an NDA should specify the names of the parties involved, employee contracts, etc. Moreover, it should properly define the confidential information and detail the terms of this agreement.
In conclusion, you should take calculated risks to help your startup succeed in a competitive environment. To do that, you need proper legal documents. These include NDAs, engagement letters, and founders’/shareholders’ agreements.
Yes, getting the clients, owners, and employees to sign these legal bindings can help you save time and money in the long run. It will also establish a robust legal foundation for your startup.
