Introduction
Our first virtual hello (‘our’ meaning you, the reader of this insight, and I, the author) is attributable to the fact that nearly a decade ago, the startup culture we know today was in its infancy—it was quite literally a STARTUP. This EUREKA moment was initially due to the engineers realising that stable income bores them, and thereafter, the volatile world of business became their new calling. With the sound of drumrolls (& teams call(s), of course), you entered the startup multiverse with (or without) money, business knowledge and sheer determination to become a unicorn.
However, like all others, you were caught unaware of the law, only to find that almost the whole commercial ecosystem is not run on a code but through ‘codes’. In the dynamic commercial ecosystem, an intimidating alternative to the phrase ‘world of business’, startups ought to engage in definitive agreements with various stakeholders. Such agreements are, in most instances, binding under law.
Engaging into such contractual agreements is necessary for businesses, especially startups, that engage and interact with diverse stakeholders during the course of conducting business, e.g., for Zomato to function smoothly, it must be entered into an agreement(s) with their (i) promoters, (ii) employees, (iii) restaurant partners, etc., wherein their duty has been clearly delineated to run the business smoothly. However, India's business and entrepreneurial landscape is quite varied and divergent; it lacks uniformity and structure, making it a path difficult to traverse, especially for first-generation entrepreneurs with little or no prior business experience. Such a scenario thus necessitates entrepreneurs to understand contractual laws and obligations, even if they are at a fundamental/cursory level.
Navigating through this sea of legal and contractual obligations may particularly be difficult for the founders, owing to their limited legal assistance, scarcity of funds, genuineness of information, and increasing competition. The founders, already burdened with managing relationships with multiple stakeholders, including investors, employees, vendors, customers, government bodies, and other third parties, are also expected to understand the legal nitty-gritty.
This insight, thus, navigates through contractual law and liabilities to elucidate the meaning and objectives of agreements commonly entered into by startups while also explaining the precautions that you, the founder of a future unicorn, must undertake while entering into agreements with stakeholders, thus ensuring that our hellos! are only virtual, and you, to say the least, master the art of identifying agreements that could potentially cause a ‘system outrage’ in the startup.
Understanding the Basics of the Indian Contract Act, 1872 (‘Contract Act’)
The Contract Act is the backbone of commercial law in India. It guides the formation, execution, and enforcement of contracts while providing a statutory framework to ensure that the rights and obligations arising out of contract(s) entered into by the parties are honoured, thus fostering a conducive and reliable environment for business growth and development.
This section provides the new designated entrepreneur with a brief overview of contract law, which would be enough to the extent of scarring away/identifying dupe offers until the ‘force of law’ arrives: -
a) Essentials of a Valid Contract: An agreement made with the free consent of parties, which is enforceable by law and entered into by persons who are competent to enter into a contract, is a valid contract. The essential elements of a valid contract are:
Offer and Acceptance: The terms and subsequent acceptance of the offer are clearly mentioned.
Free Consent: The consent has been obtained freely sans coercion, undue influence, fraud, misrepresentation, or mistake.
Competence: The parties contracting should be mature, of sound mind, and not disqualified under the law.
Lawful Consideration and Object: The contract's purpose and consideration must be legal and not against public policy.
Certainty and Possibility of Performance: The terms of the contract must be unambiguous, and the act must be possible to perform.
b) Invalid Contracts: A contract is invalid under the following circumstances:
Agreements entered into with minors or persons of unsound mind.
Agreements made under coercion, undue influence, fraud, misrepresentation, or mistake.
Agreements wherein either the consideration is unlawful or it has been made to further unlawful purposes.
c) Specific Relief Act, 1963
The provisions of the Special Relief Act provide remedies to enforce the performance of contractual obligations in case there has been a breach of contract by either of the parties. However, relief under the said act can only be sought in case (i) the actual damage cannot be ascertained and/or (ii) monetary compensation is not an adequate relief.
I. Contract‘ing’- Why Important
Entering a contract during a commercial transaction is essential for the following reasons:
Clear demarcation of rights, liabilities and duties - A legally valid contract ought to be unambiguous, meaning that each party's rights, liabilities, and duties must be explicitly mentioned. Such detailed delineation of duties and responsibilities enhances organisational operation by minimising conflicts and confusion, e.g., in case of a dispute between the founders and the investors, the parties to a contract can instantly refer to the agreement and clarify their respective obligations, thereby potentially resolving the conflict amongst themselves. However, suppose such a dispute is prolonged, and the settlement needs to be negotiated by a third party. In that case, the agreement can be used to establish the intention of the parties, along with the mode and manner of negotiating.
Legal enforceability - The rights and duties enshrined in a contract are legally enforceable and binding upon the parties, who have voluntarily agreed to its terms. Thus, Legal enforceability imposes a statutory obligation, ensuring that parties are morally and legally bound by the contract. This means that once a contract is signed, neither party can unilaterally withdraw from their obligations unless an unforeseen event occurs, e.g., the Founders of a company can initiate legal action against an employee who failed to adhere to the terms of the NDA.
To run business operations smoothly - Running a business is a multi-faceted task. In one instance, multiple key players can be involved in a single business transaction, especially in a startup. Distinctive agreement for each stakeholder/transaction helps prevent overlap of instructions, work, and/or duties. The work of a startup may be divided between the CFO, CEO, and/or CTO. The founder shall have separate agreements with all of them, and their distinctive roles, responsibilities, duties, and liability shall be clearly defined. Once work has been clearly bifurcated, businesses operate in an unhinged manner, and any confusion that might arise with one of the units does not impact the functioning of the others per se.
To seek legal recourse - In the event of a breach, having a legally valid and enforceable contract simplifies the process of seeking legal recourse. A well-drafted contract provides a clear foundation for enforcing statutory rights and remedies. It often includes provisions for methods of legal recourse, such as mediation or arbitration, and typically contains a 'Dispute Resolution' clause. This clause specifies the mode of resolution, the jurisdiction, and the adjudicating body or individual, preventing future confusion. Contractual clarity, thus, streamlines the resolution process, ensuring that the disputes, if any, are addressed efficiently and effectively without gravely impacting business operations.
II. Essential Contracts for Startups
The only familiarity you, the startup owner, might have experienced while transitioning from the world of coding to the world of commerciality is complexity. Entanglement with a coding complexity would, at worst, cost you your job. Still, a commercial entanglement would compel you to de-code the law after your reputation, business, and money; all would be at stake only because of the presence (absence) of a single word or phrase you were unaware existed. The USP of commercial law is its complexity. The intricate interpretation of legal words and various permutations would make an English laureate run for their money, let alone an entrepreneur.
Managing and running a startup becomes inherently difficult, firstly because various stakeholders are entrusted with mutually exclusive but critical business tasks and secondly because the legal understanding required to run a startup is fairly limited. Thus, to effectively navigate this intricate landscape, startups enter into a range of essential contracts with investors, employees, vendors, customers, government bodies, etc. These contracts become the backbone of a startup's operations if drafted well, protecting it from futile and often life-threatening disputes.
The crucial agreements that the startups should necessarily enter into while conducting business have been diagrammatically represented herein below:
We shall now briefly discuss each of the essential agreements that startups usually enter into while conducting business.
(i) Founders Agreement
The founders agreement can be considered as a startup’s Javascript. It is a critical document laying the foundation for the company's future. This agreement defines and bifurcates each founder's roles, responsibilities, and rights, thereby minimising conflict(s) and establishing a clear goal for each founder. This agreement can save the startup from derailment if drafted conclusively and coherently. The answers to key issues pertaining to equity distribution, decision-making authority, voting rights, exit strategies, etc., are all contained in the founder's agreement, thus making it the bible of the startup.
Considerations to be kept in mind while drafting a founders agreement
While drafting a founders agreement, several important considerations must be taken into account to ensure that the document is comprehensive, legally coherent, and addresses the specific needs of the startup. The same are being discussed herein below:
Distribution of Equity: the agreement should clearly define how equity is distributable between the founders, including initial ownership percentages, vesting schedules, and the impact of future investments on equity stakes.
Roles and Responsibilities: Each founder's roles and responsibilities should be exhaustive and detailed to prevent work and dual reporting overlap. Future expectations and accountability should also be clearly enlisted in this clause.
Decision-Making Processes: The agreement should outline the due process of decision-making, wherein questions pertaining to who makes the decision, what issues would need a specific quorum, what constitutes a quorum, etc., should be clearly answered through the agreement.
Compensation and Benefits: The agreement should provide for each founder's compensation structure, clearly enlisting details regarding their salaries, bonuses, and other benefits.
Exit Strategies: The agreement should clearly entail the terms under which a founder can leave the startup. Further, details pertaining to how a founder shall exercise his/her right to equity subsequent to their existence should also be provided for. The agreement should also take into consideration unforeseeable contingencies such as the founder's death or partial/complete disability and how they are to be dealt with.
A well-drafted founders agreement not only safeguards the interests of each founder but also lays the groundwork for a sturdy and stable business with an iron-core foundation. As such, startups should prioritise the creation of a comprehensive, impenetrable founders agreement at the very commencement of their startup journey to ensure that the goals of all the founders are aligned to further the interests of the business.
(ii) Group Agreement
It is common for a startup to have holding/parent companies (‘Hold co.’) within their home country and in foreign countries. In such a scenario, startups enter into group agreements, which structure and guide the relationship and interaction amongst the affiliated entities. Group agreements ensure that all parties operate in a unified manner and act upon a common set of principles and guidelines for running the business. Group agreements help delineate the rights and responsibilities of each entity. It is essential to enter into such an agreement to mitigate risks, prevent potential conflicts, and streamline the business in an equitable manner.
Important Considerations While Drafting a Group Agreement
The considerations to be kept in mind while drafting group agreement are discussed herein below:
Scope and Objectives: The nature of the relationship between the entities, i.e., the subsidiary(s) and the Hold co., should be clearly outlined, and the specific areas of cooperation should be enlisted. The purpose and objective of the corporate structuring should be detailed in a comprehensive manner to avoid conflict of power and interest.
Roles and Responsibilities: The group agreement should clarify the roles, responsibilities, purpose of creation, and obligations of each entity/ Hold co. involved with the startup.
Governance/hierarchy Structure: information pertaining to the decision-making processes, voting rights, and the role of governing bodies such as boards or committees should be clearly communicated. The proper chain of command, if any, should be explained to avoid confusion and collision of interest. Each subsidiary's limit and extent of responsibilities should also be clearly enlisted.
Financial Arrangements: The group agreement should clearly outline details regarding profit-sharing, cost-sharing, and funding mechanisms to ensure transparency and fairness in financial dealings within the group. Further, provisions regarding treatment and allocation of additional funds, if any, should also be provided.
A well-drafted group agreement solidifies collaboration and coordination among affiliated entities. It also mitigates the possibility of a startup’s business being caught in economic and/or intellectual crossfire, allowing the founders to focus on running and developing the business. A well-organized/defined corporate structure ensures success and stability.
(iii) Investor Agreements:
Money is essential to convert an idea into a business opportunity. In the present context, investors often ‘winged’ entrepreneurial ideas to become startups (hence the name ‘angel investor’). In the startup ecosystem, securing investment is a critical milestone that can single-handedly influence the growth of the business. However, considering securing investment is an uphill task, formalising such a relationship between the investor and the founder/startup ought to be foolproof. During investment, investors enter into several agreements. However, the most important one, i.e., shareholders agreement (‘SHA’), is discussed herein below:
SHA
The SHA formalise the relationship between the startup and its investors. It provides a structured framework enumerating the terms of investment, rights, responsibilities and obligations of the shareholders, the control and governance that a shareholder has over the startup, inter alia, several other considerations mentioned herein below:
Important Considerations While Drafting SHA
The considerations to be kept in mind while drafting a SHA are discussed herein below
Structure of Equity and Ownership: The equity distribution and ownership structure should be clearly defined in the agreement, and specifications pertaining to the type and number of shares being issued, the percentage of ownership, and the standing of the investor in future funding rounds should also be mentioned.
Valuation and Investment Amount: Though the startup's valuation and the investment sought by it are prima facie determined through term sheets, a non-binding/guide agreement that precedes the signing of the SHA, the company's valuation and the total amount of investment should be reiterated in the SHA. This section should also mention the method used to determine the startup’s valuation and the agreed-upon investment terms.
Governance and Control: The governance structure, including board representation, voting rights, and the level of control that the investors would have over key business decisions, should be clearly enumerated, ensuring that both parties clearly understand their roles.
Rights and Protections for Investors: Provisions such as anti-dilution clauses, preemptive rights, non-compete clauses, tag-along or drag-along rights, etc., that protect the rights of the investors should be included to safeguard their ownership stakes and win over their trust.
Exit Strategy: Define the exit strategy for investors, including timelines, conditions for exits, and the process for selling shares. This section should also address potential exit scenarios, such as the startup being merged, acquired, or listed as a public company.
Dividends and Distributions: Specify the terms for dividends and profit distributions, if applicable. This includes the frequency, calculation method, and conditions under which dividends will be paid to the investors.
The primary purpose of an SHA is to establish a transparent, mutually beneficial relationship between startups and their investors. This is achieved by comprehensively addressing the aspects pertaining to equity distribution, governance, investor rights, exit strategies, etc., which would thus instil a secure feeling amongst the investors and the founders about their investment and business, respectively.
(iv) Employee Agreements
Employee agreements are crucial in the startup ecosystem, especially considering the convoluted and complex responsibilities that employees are tasked with during their tenure and even thereafter in some instances. There are several types of Employee agreements; however, the two most important ones are discussed below:
Employee Agreement
The agreement defines the relationship between startups and their employees. The expectations, duties, and responsibilities must be clearly enshrined, and the employees are to be sensitised to the business operation of the startup to apprise them of the essential policies and compliances. These agreements not only safeguard the interests of the startup but also provide clarity and security for employees, fostering a conducive work environment.
Important Considerations While Drafting an Employee Agreement
The considerations to be kept in mind while drafting a SHA are discussed herein below:
Roles and Responsibility: The terms and conditions of employment, including job roles, responsibilities, reporting structures, performance expectations, minimum engagement period, etc., should be clearly listed in the employee agreement to maintain transparency and avoid expectation mismatch.
Employee Compensation and Benefits: The employment agreement should detail an employee’s compensation, including the base salary, bonuses, ESOP allotment and vesting, and details of any other benefits that the startup will provide to the employee.
Ownership of Intellectual Property: This is an important clause, especially for startups heavily based on research and development, e.g., tech and medical startups. The startup owns the IP created by employees during their employment. Clarification regarding ownership of such IP rights should be provided for in the employment agreement itself.
Procedure for Termination and Exit: The agreement should clearly enumerate the procedure for termination, including the notice period, severance packages, and grounds for termination. The agreement should also include details pertaining to non-engagement with competitor companies, non-disclosure of critical trade information, transfer of company property, etc.
Employees form the core of any organisation, and such a core must be impenetrable. Careful and meticulous drafting of employee agreements not only safeguards the startup's interests but also enshrines the feeling of oneness and trust amongst employees, thus allowing them to navigate through the startup journey in a more comprehensive and considerate manner, treating the startup as their own.
Employee Stock Option Plan (‘ESOP’) Agreement
Startups can attract and retain highly skilled and competent employees even during their initial low-income and no-profit days through the lucrative ESOP scheme. Through the ESOP Scheme, employees are offered an ownership stake in the company, which aligns them with the company's interests and entices them to enter a long-term association with the startup.
Important Considerations While Drafting an ESOP Agreement
The considerations to be kept in mind while drafting an ESOP Agreement are being discussed herein below:
Eligibility and Grant of ESOPs: The agreement should clearly define the eligibility criteria for employees to participate in the ESOP scheme. The specific conditions under which ESOPs will be granted/vested, including work tenure, employee performance, period of engagement, etc., should also be clearly defined to ensure transparency and fairness in the ESOP allocation process.
Grant/Vesting Schedule and Period: The agreement should outline how and when the ESOPs will be (i) granted and (ii)vested in favour of the employee and the vesting period for ESOPs. Further, situations which can lead to the cancellation of ESOPs by the startup should also be enumerated while drafting the agreement.
Exercise Price and Period: The agreement should determine the exercise price at which employees can exercise the ESOPs and receive the shares for the said ESOPs. Additionally, the exercise period is also to be determined during which employees can exercise their options and any conditions that must be met before they can do so
Exit and Liquidity Provisions: The agreement should clearly provide details regarding the treatment of ESOPs if the startup is acquired, going public, or merging.
Termination of Employment: To avoid disputes, the treatment of unvested and vested ESOPs in the event of an employee resigning or being terminated should be clearly outlined.
(v) Government Agreements
Startups may enter into agreements with the government to get access to funding, resources, and/or business opportunities, making the business grow. Apart from the financial and operational benefits, government collaboration/support enhances the reliability and credibility of the startup in the marketplace. However, considering that the government and its policies are dynamic, the government agreements must be vetted with a futuristic perspective to ensure that changes in government policy do not gravely impact the business.
Important Considerations While Drafting Government Agreements
The considerations to be kept in mind while drafting an agreement with the government are being discussed herein below:
Clearly Define Deliverables: The scope of work, deliverables, timelines, and performance metrics should be clearly defined in the agreement. Since proposing amendments and alterations is difficult in agreements signed with the government, the responsibilities should be exhaustively covered in writing.
Remuneration and Payments: The financial terms of the agreement, including the total remuneration payable, timeline and mode of payment, and redressal mechanism. In cases where payment is delayed, conditions precedent to receiving payment, such as maintaining an account in a specified bank or furnishing necessary documents and information, should be clearly stated in the agreement. Further, while receiving or making payments, the startup's cash/income cycle should be kept in mind to prevent defaulting on payment and avoid a cash crunch.
IP Rights: The ownership rights arising out of any new technology created by the startup during the agreement should clearly be enumerated in the agreement. Further, in the case of commissioned work, the startup should ensure that the technology being used by them to further their contractual obligations is not unlawfully imitated later to be used by the Government or any other agency.
Confidentiality and Data Protection: the startup and the government should enter into a two-way confidentiality agreement depending upon the services being offered by the parties, e.g., in case the startup is providing the government with specialised software to manage non-governmental organisation (NGO) funding, the government should assure non-disclosure of information pertaining to the software, and the startup should ensure that the sensitive information pertaining to fund allocation is not disclosed. An agreement to bring the same to effect should ideally be signed to protect both parties' interests.
Procedure for Quality Checks and Assessment: startups manufacturing products for the government or procuring materials from the government should essentially also include a detailed assessment procedure in the agreement to ensure compliance and avoid future liabilities, e.g., in case the startup is supplying medical equipment kits to the government, they should ensure that an authorised person is undertaking the quality check for the same to ensure that the startup complies with established procedure and also to the save oneself from future foul play.
Termination: The conditions under which the parties can terminate the agreement should be clearly provided in the agreement. Further, provisions pertaining to post-termination compliances, such as clearance of pending payments, transfer of resources, etc., should also be clearly provided in the agreement.
Government collaboration offers startups a valuable opportunity to access resources, funding, market opportunities and unparalleled exposure that can drive growth and innovation. By carefully drafting these agreements with clear, compliant, and equitable terms, startups can navigate the complexities of working with government entities and maximise the benefits of such collaborations.
(vi) Customer Agreements
There are primarily two kinds of agreements that startups can enter with their customers: (i) service agreements and (ii) privacy policy agreements. We shall discuss the service agreement herein below:
Service Agreements
A service agreement defines the legal relationship between a startup and its customers. It provides the rules that customers must agree upon while using the service/products offered by the startup and the guidelines that govern their relationship. Thus, a service agreement can be used as a guide document to manage customer expectations and demands.
Such an agreement would be more relevant in a service-oriented startup as it has direct interaction with its clients/customers, thus enhancing the need for a coherent and comprehensive agreement.
Important Considerations While Drafting Service Agreements
Clear and Accessible Language: The service terms should be written in clear, unambiguous, and understandable language. The information provided should not be restricted due to a lack of legal knowledge. Such transparency helps establish the consumers' trust.
Acceptance of Terms: The provision for accepting terms should be clearly provided, either through a checkbox, a clickwrap agreement, or continued use of the service. Explicit acceptance helps enforce the terms legally. Further, the customer should be notified in a timely manner of any amendment to the terms of service.
Description of Services: The service(s) being offered should be described in a detailed manner. It is preferable to bifurcate the services being offered into heads such as primary, ancillary, and/or special service, and complete details regarding when each service can be sought should clearly be enumerated.
User Responsibilities: The responsibilities and obligations of the customer should be clearly outlined, along with the guidelines as to how a service/product is to be used/not used by the customer. Further, it should be clarified that the startup shall not be liable for any incidental/consequential damage that accrues or arises due to a breach of user guidelines and obligations by the customer. Thus protecting the startup from exemplary financial claims being made against them.
Payment Terms: The agreement should detail the mode of payment, pricing, billing, and taxation structure. It should also conclusively provide for the terms and conditions applicable in case of late/non-payment and their consequences.
Termination and/or renewal of Service: The terms and conditions for a service agreement's termination and/or renewal should be clearly provided. Further, the grounds under which either party can terminate the service agreement, such as breach of terms, inactivity, non-performance, etc., should be exhaustively defined, and the effect of such termination on the ongoing business and outstanding payment obligations should be discussed vide the said contract.
Undeniably, a consumer/customer’s outreach is farther than that of the founders, investors, and/or business partners. This great power of outreach also has great consequences, both good and bad. Thus, considering the far-reaching implications that the customers have, such agreements must be drafted with utter caution and care to safeguard the startup from being mobbed and robbed in case things go downstream. Irrespective of whether the turnout of an event is negative or positive, it is most likely to have a domino effect on the customer base. A service agreement thus assures that the startup can adapt to the highs and lows in an adept manner.
(vii) Common Agreements/ Clauses
The clauses mentioned below are common to all the aforementioned agreements. Their inclusion is unavoidable and necessary to keep the agreements' sanity intact.
Non-disclosure and Non-compete Clause:
Non-compete clauses restrict employees, founders, investors, and even the Government from engaging in activities that are in direct competition with the business being conducted by the startup business for a specified time frame and within a specific geographical area after the business association ends.
Non-disclosure clauses, on the other hand, ensure that confidential information shared during the course of business is not disclosed to unrelated/unauthorised parties, both during and after the subsistence of the business relationship.
Provisions pertaining to non-compete and non-disclosure should be provided in the founders, employee, group, business and investors' agreements to ensure that a startup’s confidential information is kept intact from all ends and the startup can maintain the exclusivity of the business.
Non-Solicitation Clause:
A non-solicitation clause ensures that a startup’s workforce is not poached by former employees, founders, investors, or customers upon the cessation of their engagement with the startup.
The inclusion of such a clause serves multiple purposes: firstly, it mitigates the risk of the workforce being lured away by former clients or founders; second, it ensures business operations remain uninterrupted even upon the exit of a crucial associate; and third, such inclusion helps the startup maintain its competitive edge by discouraging former associates from making any poaching/solicitation attempt.
Dispute Resolution:
Including a dispute resolution clause ensures that all inter-se and intra-se conflicts are managed efficiently and cost-effectively. Such a clause should be included in all agreements, irrespective of the stakeholders involved. Complete details regarding the resolution mechanism to be followed, the body governing such dispute resolution process, key players involved, and an alternate dispute resolution plan should clearly be provided in all agreements that startups enter into.
A strong redressal mechanism for resolving intra-entity disputes is essentially needed, considering that several startups have their Hold co. in foreign countries, wherein Indian law is not applicable or visa-versa. To wriggle out of such legal entanglement without the founders having to sell their soul or equity (which is even worse!), the dispute resolution clause should provide complete details on how, where, when and by whom a dispute shall be resolved.
III. Babyproofing Startup Agreements – Tips for the Entrep(a)ren(t)eur
From our perspective, we can imagine your life anywhere between Jordan Belfort from Wolf of the Wall Street and Ishan Nand Kishore Awasthi from Taare Zameen Par, who is lost in the streets of Bombay. Amongst all the ‘dancing’ letters and ‘waltzing’ numbers, it would be too much to ask if we expect you to read, understand, and interpret the law to your benefit, especially when we know that the funding rounds are making you go dizzy! Quite literally.
Though we are quite sure that you have already decided to befriend us after going through this article (& assuming that you skipped pages), we, like good (lawyer) friends, would still like to surprise you with a table that comprehensively summarises the tips you should follow to ‘proof’ your ‘baby’ from unnecessary legal entanglement:
Be completely aware of your business | Like no child is better known by anyone other than his parents, it is essential for you to know your business in and out. The market, key players, biggest competition, relevant law and regulatory compliances, issues, etc., should be at your fingertips. |
Due diligence: a Necessity | Irrespective of your startup's stage, conducting thorough due diligence regarding the contracts being entered into is essential. Considering that business and law are both dynamic in nature, the terms of the agreement may need constant upgradation to keep up with the law and ever-changing market practices. |
Draft clear and uncomplicated agreements | It is not necessary to use complex words to draft agreements. The language should be concise and unambiguous, ensuring the contract is easily understandable and implementable. If you are, however, stuck with legal jargon, seeking an opinion/review is always advisable. |
Clearly demarcate Responsibilities | The roles and responsibilities of each person associated with the startup should be clearly defined and demarcated in the agreement itself. To avoid conflicts of interest and intellect, it is essential that each person is aware of the work he is hired for/allotted to. In cases wherein a binding responsibility is to be created, the word ‘shall’ should be used, while in cases wherein the allotted task(s) is discretionary, the word ‘may’ should be used. Merely by the use of such simple words, task distinction can effectively be created. |
Idea and Identity Protection | It is essential that the innovation/technology and/or idea, which is the basis and unique selling proposition (USP) of the startup, is protected from infringement. The rights and ownership pertaining to (i) pre-existing IP and/or (ii) IP created during the course of employment should be clearly provided for. Startup founders should promptly apply for trademark/copyright registration if any new IP is created. Further, to prevent the duplication of trade secrets and business information, all key personnel running a startup should enter stringent non-compete and non-disclosure agreements to ensure that the startup maintains its competitive edge. |
Comprehensively define the mechanism of dispute resolution | The dispute resolution clause should cover every possible primary and non-contributory (PnC) for resolving conflicts. Details pertaining to the method of dispute resolution, forum, choice of mediator/ arbitrator, and jurisdiction should be provided. The startup industry is extremely dynamic and fast-paced. Investors closely watch each activity undertaken by a startup, and every financial quarter is crucial, so it is inadvisable for a startup to be involved in protracted and expensive litigation. Thus, efforts should be made to resolve disputes at the pre-litigation level itself. |
We understand how difficult it is to survive in an environment wherein things are ever-changing. In such scenarios, it is better to act proactively as it is the only cure to all commercial and legal problems. Babyproofing contracts are vital for startups to avoid falling prey to common contractual loopholes capable of snowballing and self-consuming the startup. By being mindful and vigilant, startups can mitigate their risks and instead entirely focus on building and growing their business. A solid contractual foundation works like Noah’s Ark. It saves the business, its founders, employees, investors, and any other person directly or indirectly related to the startup. Even in the worst-case scenario, a well-drafted agreement can turn a dead startup into a Phoenix that rises from its ashes.
Authored by Anshi Bhatia, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.