Legal Contracts That Every Startup Must Have

Written by Elizabeth Layeni

August 4, 2021

Contracts are an essential part of everyday business. Contracts are basically agreements that govern the relationship between two or more persons. We enter into agreements when we decide to patronize services or products. There is an agreement among parties when we consent to abide by certain rules when making use of services/products. While it is important that businesses have structures in place that help them achieve their mission and visions, It is equally important that they spell out their duties, and liabilities, if any, to avoid dealing with legal issues in the near future.

We have outlined a number of essential contracts that businesses should have in their arsenal to avoid dealing with foreseeable/avoidable legal battles. This list is by no means exhaustive:

  1. Non-Disclosure Agreement (NDA)

An NDA, also known as a confidentiality agreement, is a contract between parties that outlines confidential information that one of the parties or both parties wishes to share with the other or themselves for certain purposes but wants to restrict such confidential information from being shared with other people. Among other things, the contract goes further to state the permissible circumstances under which such confidential information may be disclosed. It also states the penalties that would apply in situations where the contract is breached. More often than not, the contract imposes an obligation(s) on the receiving party of the confidential information to take measures to ensure that the confidentiality of the information is preserved. The contract would also spell out what material/information that is not of a confidential nature.

The importance of an NDA for any business cannot be overstated. Before any commercial/business conversations take place between your business and an outsider, it is imperative to have an NDA signed. It protects the interest of the disclosing party to the agreement, such as his ideas and intellectual property. The confidential information of a business is what keeps a business unique and competitive. Parties can also feel a level of confidence that any confidential information shared is protected. It instills a level of trust and confidence between parties and aids with negotiations.

  1. Employee’s Agreement

Upon employment, an employee is usually mandated to sign a contract of employment. This is usually referred to as an Employment contract. An employment contract is an agreement between employer and employee. It specifies an employment term, the compensation and benefits, and a non-compete clause. It also incorporates the terms and conditions of employment. When you employ a person, there are certain legal obligations expected of an employer. One of your first duties as a new employer is to ensure you comply with employment contract law. An employment contract is often a way that outlines how you intend to meet and satisfy the legal obligations expected of you as an employer. Having an Employee’s Agreement as a business owner helps to fulfil legal requirements imposed on employers. By outlining the conditions that may lead to the termination of employment, a contract of employment helps businesses to avoid frivolous actions that may arise from the termination of employment.

  1. Proprietary Rights Protection Agreement

Your business ideas, copyrights, patents, software and financial information are your crown jewels. They make your business valuable and lead to the general profitability of your business. This information can easily be copied or used by someone else if you do not keep them confidential.It’s often the value of a business’s Intellectual Property (IP) portfolio that investors and venture capital firms are evaluating.This factor (the business’s IO portfolio) helps attract investment from venture capitalists and other capital sources. Having said this, the need to protect a business’s ideas and proprietary rights is second to none. A business should by all means reasonably ensure that its proprietary rights are protected. A proprietary rights protection agreement is an agreement concerning confidentiality and appropriate handling of the employer’s commercially valuable information, compliance with relevant security rules and policies, and protection of the employer’s intellectual property assets.They help to protect the employer’s intellectual property assets

  1. Shareholder’s/Founder’s Agreement

It is very common that a business may not be founded by just one person. To avoid any form of conflict that could arise among the founding parties, it is advised that businesses have a comprehensive Founder’s agreement. This agreement defines the relationship of the founders, states the conflict-resolution clause, and elucidates the rights, roles, responsibilities, and obligations of each founder.

The Shareholder’s agreement on the other hand is used for when the business decides to allow private equity/investment into its affairs. It is more of an agreement between shareholders in a company. It regulates the relationship between shareholders of the business and the business itself. It also determines the rights of shareholders and defines when they can exercise those rights. Those rights can include shareholders’ right to transfer shares, right of first refusal, redemption upon death or disability, The Agreement may also include situations when the business may exercise a buyback option of the shares allotted, and define how important decisions will be made in the business. This agreement helps to ensure there is a common understanding of shareholders’ expectations of the business.

Both agreements help to ensure that the parties have a similar understanding of what their expectations should be, and above all, when there’s a conflict or a budding conflict, recourse can be made to the terms of the agreements.

With the excitement that comes with founding a company and solving problems for users, it is easy for founders to forgo the place of a founder’s agreement until things begin to go South. Having a co-founders agreement does not mean there is an anticipation of a conflict, it just helps to regulate what should happen in the co-founder relationship.

Businesses should prioritize having these aforementioned contracts executed in order to avoid legal battles in the future and to secure the business’s future.

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