Startups are young companies that have come up with the advancement of a new or unique service or product. Today’s world witnesses the coming up of many new startups that run everything from innovation and designing, product manufacture and delivery of services, running the business and making it profitable. Doing so, they enter many contracts with employees, vendors, business partners and customers. Thus, contracts play a major role in the startup world. These contracts need to be such that they enable the startups to control costs, maximise their outputs and minimise risk. Proper communication and adaptation to situations are also essential for successful contracts. There are many types/ provisions of contracts that startups must enter. These include:
These contracts decide the proper structure of contracts and thus figuring out these contracts help the startup owners to protect themselves from high taxes due to becoming the wrong kind of legal entity. Sole proprietorships attract huge taxes, while those with multiple shareholders or those with an LLP status save many taxes.
It is also important for co-founders to be inappropriate agreements so that they do not get involved in disputes themselves. It is important to decide the following:
- Who gets what percentage of the company
- Roles and Responsibilities of the Founders
- Buying back of Shares
- Salaries of Founders
- Decision-Making Procedure
- Time Period and Rules for Removal of Founders
- Sale of Businesses etc.
Contracts with employees/ independent Contractors:
These contracts must expressly outline the whole extent of the job to be done, as well as any applicable compensation and benefits. These agreements need to be very specific about what each party expects. These details must be included in the written agreement:
- Terms of employment (e.g., compensation, role & responsibilities, working hours, and grounds for termination);
- IP ownership of work;
- Commitments and Expectations;
- Share vesting;
- Reporting Structure;
- Company Policies (e.g., vacation days, paid time off structure, dress code).
These agreements ensure that the ideas of startups do not get leaked. This Confidentiality Agreement prevents the loss of ideas to competitors, or others who might use this information to harm the startups. NDAs protect vital information relating to the company and documents shared with employees, investors, board members, suppliers, etc. Some salient features of this agreement include:
- What information is confidential;
- Who owns the information;
- How the disclosed information is to be handled;
- Time Period of the Confidentiality;
- Damages and consequences of breach.
These are some of the basic contracts that startup companies need for functioning. The role of these contracts is to protect both the parties involved. Having written contracts increase enforceability. This also ensures that work proceeds as it is agreed and ensures legal boundaries for all the parties to respect the rights and privileges of the other parties involved. These contracts also specify the timeline and payment schedule for the work to be performed in detail. Having contracts in place based on proper legal advice shall minimise ambiguity and make the process simpler and hassle-free.
However, startup companies do not always consider this need as these young companies always have many other jobs to fulfil. It is important to increase awareness concerning the importance of contracts and how counselling from lawyers can enable them to avoid their mistakes, and to save their money. Legal Counsellors also help startup owners to understand the legal obligations they need to undertake and help them avoid hefty fines and disputes. Proper legal agreements and fulfilment of obligations also attract good investors to a business. It makes the work of startups streamlined and organised and can prove to be a very big reason for their success.
Thus, it can be concluded that Contracts play an integral role in the Startup World. Many contracts are essential to the working of Startups. Legal Counselling is a must in this regard as it helps companies in entering clear, well-thought-of, hassle-free, and well-organised contracts. It protects them from heft lawsuits and protects the rights of both sides effectively. It ensures that the intent behind the contract is materialised and the work of the startup is run smoothly.