In this newsletter we examine the initial agreements that a start up and its founders should have.
- FOUNDERS AGREEMENT
Any start up with more than one founder should have a founders’ agreement. A founder’s agreement is a contract executed between all the co-founders of the company. The founder’s agreement should be entered into between the founders and the company as well. A founder’s agreement should contain the following terms:
- Management and Responsibilities-The Agreement should clearly specify the roles and responsibilities of each of the co-founders of the company. The founder’s agreement must clearly provide the understanding amongst the co-founders with respect to their terms of engagement and designation.
- Board rights – The Agreement should specify that each founder has a right to be appointed as a director of the board of the company. It is important to appoint an odd number of founder so that in the event of a deadlock it is possible to reach a decision by majority vote.
- Transfer of Shares-The founder’s agreement must have provisions pertaining to the rights and restrictions of the founders to transfer their shares in the company. The Agreement must provide for mechanism to deal with a situation where the co-founder wants to exit the company by selling his shares.The founder’s agreement must provide for Right Of First Refusal (“ROFR”) e. the right of the other founder to first purchase the shares of the transferring founder. It would be advisable to pre-agree on the price or the price determination mechanism in the event of sale by a founder of his shares.
- Exit Provisions– It is important to include provisions to deal with a situation where any founder is guilty of wilful negligence or of gross misconduct. In these circumstances, there should be a mechanism in place whereby the shareholding held by such founder is bought out bythe other founders at the lowest possible price.
- Confidentiality of all confidential information pertaining to the Company: The founders by the very nature of their association with the company would have access to confidential information about the company some of which may constitute trade secrets. The founders should be contractually restricted from disclosing any confidential information obtained by such co-founder during the course ofthe association with the company as the same may cause irreparable harm to the business of the company.
- Intellectual Property(“IP”) Assignment provisions: Generally, ideas, inventions and other intellectual property developed by a person remains the property of that person.The IP owned or developed by the founder should not remain the property of the founder and should be transferred to the company. Therefore, all IP belonging or created by the founders should be assigned to the companyand the founder’s agreement must contain provisions stating that the intellectual property rights of the founders must be assigned to the company.This is also important if the valuation of the company is affected by the intellectual property owned by the company.
- EMPLOYMENT/CONSULTANT AGREEMENTS
The employment or consultant agreements sets out the terms of the employment between the company and employee and it is particularly important for start ups dealing with proprietary technology. Apart from other terms of the employment, the employment or consultant agreement should contain the following terms:
- Work for hire and IP Ownership provisions: A “work for hire is a work created by an employee as part of the employment with the start upcompany. The employment or consultant agreement must provide provisions stating that all work created, inventions and intellectual property rights (patents, trademarks and rights created by the employee or consultant during the term of the employment shall belong solely to the Company. The agreement must also provide for an IP assignment clause whereby the employee or consultant shall assign all companyrelated intellectual propertyto the company.
- Confidentiality: A start upcompany would have processes, systems, know how, information or other proprietary information and would want to keep them confidential. To ensure that such information is kept confidential, a confidentiality clause must be included in an employment or consultant agreement.A confidentiality clause in an employment or consultant agreement imposes an obligation on the employee or consultant not to disclose proprietary or other information of the company that the employee is likely to be exposed to during the course of the employment. This obligation can be continued even if the employment or consultant agreement has come to an end.
Article by Mini Ramani