For me, and I think many other founders, getting the legal components sorted is not exactly the most exciting part of a business. However, it is one of the most important.
Getting your legal requirements in place early will prevent many later stage issues, many of which are often traced back to a lack of oversight early on. Here are some of the things I have learned along the way.
Verbal contracts can be legally binding if one party is certain as to what was agreed. This is an important thing to learn, especially for those who are overly optimistic about opportunities.
Make sure you write ‘subject to contract’ on your negotiation-type documents to show something isn't binding.
Intellectual Property must be locked down. And it can only be locked down in writing! Be very careful when others are producing IP for you. Ensure you have a written contract stating who owns whatever is being produced. This sounds obvious, but I’ve seen many situations in the past where people and relationships become confused when things aren’t documented.
Everyone you pay must have a contract, whether they’re an employee, contractor or intern. However, unfair dismissal rights normally only kick in after 2-years as an employee.
Asking for NDA can be a sign of lack of trust. Only if a trade secret can this be approached.
Founder agreements are a good idea when certain circumstances exist like family or friends working together etc. These agreements will be superseded by your Share Holders Agreements.
It’s important to remember that Investors have normally done this before (and probably more than you have). They will often want to negotiate before the lawyers get involved. Therefore you need to understand some standard terms:
Subscription and shareholders agreements details what investors are paying for
Articles of association is the company constitution
DDQ is the abbreviation for Due Diligence Questionnaire
Letter of intent & Heads of Agreement set out the summary terms (your term sheet). You should point out its subject to English law & subject to confidentiality
Employee Share Options
Share options are often an important tool, but you have to be very careful of who has the right to buy. Ensure your agreement states what they have to do to gain access to the options and what happens when they don’t meet those goals. Agree on the % given and when it applies. E.g. 5% now or forever?
Of course, I’m not a legal expert, this is based on my experience. You’ll need to get legal advice to ensure you’re fully protected. Ask your network for recommendations on a law firm to fit your needs.
Please get in touch if you have any questions from this or my other articles and I will do my best to help!
Happy business growing!