Essential Legals for Start-ups
Starting up a business requires a lot of planning, good business acumen and adequate legal protection of your investment. Proper legal and financial advice must always be obtained from your professional advisor. This list serves only as a guide only and should not be taken as a legal advice. This is to assist and equip you to be mindful of some of the key issues that may affect your start-up business and how to protect your investment.
Often in the midst of planning, entrepreneurs may sometimes overlook key valuable aspects of their business structure and set-up. This may be due to lack of knowledge, lack of funds, or other matters take priority over these issues. However with any business, the key priority should always be to build and maintain a valuable entity. Therefore, your start-up should have the following or similar documents:
1.Incorporation
Decide on your business structure and choose a company name. Complete Form 201 Application for registration as an Australian Company with the appropriate fees and have your start-up incorporated (you will get an ACN). You will need to obtain consents from members, directors and secretary of the company before you file your application (you do not need to lodge this with your application). The important part here is your company’s share structure details, usually the amount of shares issued and the value per share. Why incorporate? So that you create the entity that will hold the intellectual property (IP) your team is developing. Additionally, it’s difficult to carry out big corporate manoeuvres like issuing stock options and raising capital without incorporating. (see your professional advisor and they will help you register your company with ASIC)
2.Constitution
Determine if you will operate the company under the replaceable rules or a constitution or a combination of both. These rules are for internally managing your company, they are governed by the provisions of the Corporations Act 2001 as replaceable rules or alternatively, if you want have your own management rules then you need to have a Constitution prepared. This usually covers matters like Who gets to vote? How are board resolutions passed? How are officers elected? How the accounts are to be operated? How are co-founders treated? How shares are sold and bought in the company? The number of directors and shareholders the company has? etc The constitution determines the corporate governance of your start-up, as they are the rules and regulations for the corporation’s internal administration and management. Start-ups often fail to draft constitution, and rely on trust between other members and directors. Avoid being one of these start-ups, unless you are 100% certain that your start-up will never have any corporate governance issues.
3.Shareholders Agreement
The Shareholders Agreement governs the relationship between the shareholders of the company. This usually covers issues like a shareholder’s right to transfer his or her shares, rights of first refusal, tag or drag rights, pre-emptive rights, redemptions upon insolvency, death or disability, etc. This is another often overlooked start-up document which can be invaluable in the event a co-founder leaves your start-up.
4.Share Subscription Agreement
A share subscription agreement is made between each shareholder and the company, this document regulates the transfer and sale of the company’s shares to the shareholder. It determines the number of shares to be purchased, at which price per share, and how the payments are to be made (cash, IP, convertible notes, share options or another form or combination of consideration). A shareholder will typically make investment representations in the share subscription agreement, for instance that he or she is acquiring the shares for investment purposes only and not for distribution.
Share subscription agreements usually come in two forms: Non-restricted and Restricted. Non-restricted share subscriptions are the normal share subscription agreements, where the shareholder pays for their allocated shares and they own it straight away. Restricted share subscriptions agreements are used when a co-founders share will vest over time. Usually having a vesting schedule where the founders get shares of the common stock overtime rather than all at the beginning. (Company’s adopt this strategy usually when they plan to be eventually acquired or seek venture funding)
5.IP Assignment Agreement
There are two components to an IP assignment agreement:
- a) Pre-incorporation
The IP assignment agreement is made between the shareholder and the company, where the shareholder assigns (sells, transfers, conveys, etc.) intellectual property to the company. A typical IP assignment agreement will list the technology to be assigned to the company on a schedule to the agreement, with the shareholder representing he or she is the sole owner of the technology (IP). Additionally, the shareholder will agree to execute all necessary documents to effectuate the IP transfer (e.g. documents with IP Australia or if US, then the USPTO).
The IP assignment agreement is usually referred to in the share subscription agreement, as an IP transfer to the company as consideration (full or partial) for the share purchased by the shareholder. This component deals with technology that was created by the IP owner beforethe owner became a shareholder of the company (for example, IP created by the co- founders before incorporating the company).
- b) Post-incorporation
The second part deals with assigning the technology/invention (IP) created by the founders post-incorporation over to the company. The shareholder acknowledges under this component that all IP developed solely or jointly with the other co-founders is the property of the company and not the property of the individual shareholder. Generally, under this part of the IP Assignment Agreement, you can list all “prior inventions” that relate to the start-up’s business in which you as the shareholder wish to retain ownership. Other sections or clauses typically found with IP assignment agreement are: confidential information clauses, at-will employment clauses, and dispute resolution etc.
6.Employment Agreement
An employment letter or agreement is made between the shareholder and company. Many start-ups overlook this document, but it can be useful to put the terms of each co-founder’s employment in writing. It can help set the tone and manage expectations of each co-founder.
Conclusion
These 5 essential legal documents, together or individually, won’t make your start-up valuable, it is your team which creates the value in your venture. But these documents will help ensure your technology start-up retains its value and that your team’s hard work is protected and you get the most return on your investment.
