Startup Legal Business Documents: Formation Documents for Early Stage Companies

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Before approaching investors, many early stage companies get legal advice on several issues; especially those which can impact the long-term health and stability of the business. The most critical legal business documents for both potential investors and new hires are those that secure intellectual property; Founder’s Agreements and shareholder and investor agreements, including equity ownership; technology licensing and data privacy policies, and hiring documents.

Founder’s Agreements

In addition to the structure of the business, a founder’s agreement is a business document detailing specific areas of responsibility, obligation, and liability for the founding leadership of a company. Issues related to equity ownership, vesting of founder’s shares, and rights to buy back company stock if unvested and a founder leaves are critical to detail with clarity. In addition, issues related to ownership and use of intellectual property by founding leadership is clarified and detailed for a number of specific situations, including leaving the company for cause.

Intellectual Property

Intellectual property (IP) is part of the intangible assets of a business; securing rights to intellectual property through the proper federal filings must be done in the early days of a company. Of specific concern is rights to use and ownership over patents. In many cases, technology is being licensed rather than developed in-house. This practice needs a business document called a technology license agreement. This is especially critical for technology essential for product development or as part of the DNA of a new product. New technology licensing may be controlled by regulatory agencies if it was developed outside the US.

Hiring Documents

For all members of a company, including leadership, protection of intellectual property should be spelled out in hiring documents. The legal environment for non-disclosure agreements and non-compete clauses is changing as more cases are brought through the courts; some states have enacted specific guidelines for these two hiring documents. What is valid across the board: these business documents protecting IP need to exist for both employees and independent contractors; that non-competition and non-disclosure agreements will be ruled invalid if they’re too broad, and cover more of an industry than appropriate. At this time, a company cannot impel an employee or contractor to not work in an industry to protect IP. That prohibition is too broad. These business documents need to apply to the specific IP only and not the industry.

In addition, hiring policies should spell out in detail how the company is managing issues like workplace diversity and inclusion; also specific hiring policies that meet labor and civil rights standards in this country.

Business Structures

Documents that detail business structures should also address shareholder and investor agreements, and equity ownership agreements if they are being offered to early leadership of the company or contractors for work performed. Equity ownership is a popular addition to compensation packages for cash-poor startups who still have great future potential. But safety measures over these shares need to include information on vesting and a first option for refusal or automatic buy-back if the shares come up for sale.

Data Privacy

Data privacy and cybersecurity is becoming more important to investors, regulatory agencies, and the general public. As new laws go into effect regarding acquisition and storage of personal data, businesses must comply with current laws, and prepare for changes in those laws as requirements for data privacy and protection become more stringent. A data privacy policy can be included in business documents such as Terms of Service and Bylaws, but it may be prudent to develop a separate data privacy and protection policy early, as well as a policy detailing practices for cybersecurity that meet current standards for regulatory agencies.

In addition to data privacy and cybersecurity, many industries have a regulatory watchdog or agency that provides guidance and oversight. If the business includes regulatory oversight, any business documents detailing standards compliance should be included in early stage documents.

Formation documents are critical to the long-term health of a company, and will prove especially important when beginning investor rounds. As industry becomes more specialized, generic business documents meant for any business do not meet the needs of many companies working in emerging technologies or those who are under the guidance of regulatory agencies. It is critical for everyone from leadership to new hires for the legal structures of early formation companies to be written with knowledge and clarity. Consider consulting a legal team that is experienced in all aspects of early stage company formation.

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