4 Essential Legal Documents for Every Start-Up
First off, you should know that the documents we will be discussing in this article are not mandatory. However, that being said, you would be crazy as a founder of a start-up not to strongly consider having these documents when you start your company (or in the early years).
Our platform has been around for a while now (launched in July 2015), and we have shared a lot of useful (at least in our opinion) legal content for Nigerians, especially for start-ups and small business owners.
Since we launched, we have gained a few insights, number one being that no one likes to hire lawyers or get involved in legal stuff, they only do it when they have to! Lawyers are an expense which if can be avoided, will be avoided. This is because, for start-ups, cash is tight.
Every founder in Nigeria knows that they need to incorporate a company or register a business name for their start-up, all start-ups know that they need to register with the tax authorities, and in some cases register with the Special Control Unit Against Money Laundering. If you don’t know this then you should read our articles about registering a business name or a limited liability company in Nigeria, and how to register for tax.
Once a start-up crosses those mandatory registration hurdles, they distance themselves from the law (and lawyers), they feel the lawyers have played their part now. If you are one of those entrepreneurs, then you should finish reading this article, and hopefully you will be a bit wiser.
There are certain documents which aid the process of growth of your start-up, and this article discusses a few of them.
This Agreement is sometimes referred to as the Shareholders Agreement (if the business is registered as a limited liability company). For the purposes of this article we will assume that the start-up is a registered limited liability company because of the many benefits this structure has.
This Agreement ensures that the running of the company and the responsibilities of the founders are well detailed and so it reduces the potential for conflict between founders so the start-up can be run smoothly and profitably. Key clauses that are covered in the Founders Agreement include:
- Management Structure for the start-up
- Share Transfer Restrictions
- Accession Procedure i.e. adding new parties to the Founders Agreement, and additional shareholders to the start-up
- Sharing of dividends, and the provision of additional funding by the shareholders
- Non-competition of Directors – basically that Directors of the company or key shareholders cannot set up or be involved with companies (now or in the future) which are in direct competition with the company
- Pre-emption rights in respect of transferring existing shares and issuing new shares – This will ensure that existing shareholders have the chance to participate in new share issues without being diluted.
- Share Vesting – Under these clauses, a shareholder does not obtain the full benefit of the shares he owns until certain conditions have been satisfied, such as remaining with the business for a minimum period of time or achieving a specific milestone. After those conditions are satisfied, the shares or a certain pre-determined percentage of the shares will “vest” in the shareholder. Otherwise, the company may have an automatic right to repurchase the shares.
- ‘Drag along’ and ‘tag along rights’ – Drag-Along clauses ensure that if a set percentage of shareholders wish to sell their shares to a third party, they can force the remaining minority shareholders to sell under the same terms, in order to ensure that the third party can receive 100% of the shares. Conversely, Tag-Along rights require a shareholder selling their shares to include other minority shareholders under the same terms. This ensures such minority shareholders are not “cut out of the deal”.
Terms and Conditions
This is arguably the most important document as it is essentially the contract between you and your customers. The important information which need to be included in the standard terms depends largely on the nature of the business and the type of customers, however important things to be covered include:
- the duties of both customer and supplier,
- a description of the products or services to be provided,
- payment terms,
- the duration of the agreement and steps required to terminate it,
- the law which governs the terms and conditions
It is important to note that there are certain obligations which are imported by law into all terms and conditions, and these are those consumer protection rights set out in the Federal Competition and Consumer Protection Act – which is the law which protects consumers in Nigeria.
The Terms and Conditions of a start up is therefore a very important document, and should ideally be drafted by a lawyer. We tend to see some entrepreneurs who try to save on costs and then copy and paste the terms and conditions of a similar company to theirs. While this might seem like a good idea, we at Lawpadi think it is a recipe for disaster. Terms and conditions of a business are by their very nature a bespoke document and the terms should take into consideration everything about that particular business and not another business.
You should therefore consider putting one in place as soon as possible if your business does not have one yet.
Every founder’s worst nightmare is sharing their business idea with potential partners and investors, and then waking up one day to see that this person has stolen their idea. This is especially so in countries like Nigeria where there is a perceived lack of respect for intellectual property protection. If you are really worried about how to protect your business idea, you can read this article here.
The Non- Disclosure Agreement (NDA) is one of the ways you can protect your business idea, basically what this document does is it commits whoever you share your idea with to confidentiality. An NDA can be a mutual agreement between two parties not to share information with third parties, or it can go one-way (since you’re sharing information about your idea with them).
However, using an NDA is a bit of a tricky thing; most experienced investors do not really like the idea of signing an NDA for initial discussions, and the reason is pretty much down to the fact that they believe (through years of experience) that there is an abundance of supply of ideas, and it serves them little purpose to constrict themselves even before they hear about your idea, on the very slim chance that your idea is the 1 in a million idea which is completely unique and which no one has ever thought about!
The NDA has clauses that deal with ownership of the confidential information being shared, and under what circumstances anything can be divulged to third parties.
Independent Contractor Agreement
For a number of founders, when starting off your company you will have to hire people to do different tasks, whether it’s designing your logo, or building your website, or setting up digital and social media accounts. The best way to regulate these relationships is to use Independent Contractor Agreements (also referred to as Work for Hire Agreements). A few of the important things that must be covered in this sort of agreement include:
- The scope of the work that needs to be done
- How much the work will cost and what the payment milestones will be
- What happens if the arrangement doesn’t work out and how can it be terminated
- Ownership of the intellectual property of the work created
There are a lot of other legal documents and agreements which founders should be aware of, things like
- Employment Agreements for when they start employing full time members of staff
- Internship/Volunteer Agreements for early growth phases when you can’t afford to hire full time employees
- Terms Sheets and Equity Investment Agreement for when you start to raise investment from friends and family, angel investors and institutional investors
- End User License Agreements if your company builds and licenses software
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We hope you have found this information helpful. Please note that this information is provided for general informational purposes only and is not intended to be legal advice. No lawyer-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a qualified lawyer.