Complete DIY guide: legal basics for startups

Startup founders are certainly great at design/engineering/sales etc. However when it comes to a legal part it turns out that they know almost nothing. Therefore, it is not surprising that a huge number of legal mistakes is made, especially in the early days of the companies.

That is why I’ve decided to start a series of articles that will help non-lawyers to establish and to maintain a basic legal part of their startups. From my experience, legal mistakes can be easily avoided and you don’t need lots of money to do that. Of course there are quite a lot of articles about that, but personally i don’t like them. Most of them are overly complicated, not structured and lack clear guidelines.

Please note that I’m not trying to sell you any legal services. I will simply describe basics of the legal part of IT startups (both software and hardware). Those basics, from my point of view, will work fine till you have enough money for a proper lawyer. I personally have 8 years of experience as a legal counsel and now I’m a general counsel in an IT company. But I also have a startup (Staply). So I’ll be able to share my own experience and show how we approach different legal issues.

I will describe the following big topics in my articles: Founders agreement, Intellectual property, NDA (non-disclosure agreement), term sheet, employment agreement, privacy policy, terms of use and more.

Since, most of the start-ups are targeting US and European markets (at least at the initial stage) I will use legislations of the US (California) and England, when describing particular clauses of the documents. I will provide my comments about them right in the description of the statement/clause of each document.

If you are interested, feel free to subscribe to this blog. Also, if you have any questions i will be happy to advise on specific issues that you have. Let’s begin.

Founders Agreement: CEO responsibilities #

One of the main documents in startups is an Agreement between the founders or just “founders agreement”. It is very important to sign this agreement between all the founders before any operations are started. Mainly to avoid problems when one of the founders decides to leave the company or when one of the founders doesn’t seem to work enough.

First thing that should be mentioned in Founders Agreement, is CEO’s designation and responsibilities. All founders need to discuss the responsibilities of each of the founders and choose, who will be the CEO (Chief Executive Officer). Typically, the CEO is the person, who generated the initial concept (idea) of the start-up, but it varies from startup to startup.

Among typical responsibilities of the start-up CEO are the following:

• Developing of the global strategy of the company in short and long term.
• Establishing and maintaining relationships with investors, sponsors.
• If capital was already raised, reporting to investors the current status of the company and developing a new strategy for the company or editing an existing one.
• Organising and managing sales of the product.
• Developing and implementing a marketing strategy.
• Performing legal support to the founders and employees.
• Developing a business plan, including, but not limited to milestones, cash flow, product vision and description, break-even analysis, swot analysis, competitors analysis.
• Hiring and firing of the employees.
• Firing founders.

The last point is quite important, since you don’t want to have founders, who don’t do anything and don’t want to leave the company. So here you need to develop and agree on KPI’s (Key Performance Indicators) for each founder or you can add the power to fire founders to the CEO (quite a rare case). We’ll talk about it later, in one of the next articles.

Where can I find a template of the Founders Agreement? #

I’m a huge fan of the Docstoc service, where, upon payment of $15-20, you can download almost every type of the document, including Founders Agreement. In Docstoc such agreement templates can be called “Pre formation founders agreement”. For example, this one is quite good. However in my opinion, docstoc contains only quite specific templates and examples of Founders Agreements. I’ll develop my own template and then share it with you soon.

Staply experience #

In Staply, we signed Founders agreement right before we started to work. In our team, there are two founders, Greg and me. I prepared quite short (adopted for us) Founders agreement, when we started our first project 1 year ago. So, before starting Staply, i just amended existing agreement and we both signed it.

Here is how the CEO’s responsibilities look in our agreement:

• Developing and managing of the software development. The software includes web, desktop and mobile applications.
• Managing of the tasks.
• Developing the business plan.
• Hiring and firing the employees.
• Planning the structure of the group of the companies (how different legal entities will correspond to each other, where the capital will be, where the Intellectual Property will be, terms and conditions of the particular legal entity working, etc.)
• Developing and implementing the marketing strategy.
• Developing and maintaining relationships with investors and media.
• Searching and identifying of potential partnerships.
• Developing legal documents. Docketing.
• Managing of the intellectual property - new inventions identification, development of the global intellectual property prosecution and protection strategy, communication with external agents and attorneys on issues, related to intellectual property.
• Managing of the budget.

We also agreed that I’ll be the CEO and that i won’t have the power to fire Greg. Instead of it, we agreed on KPI’s and Vesting. I will provide our numbers, when we will discuss these topics.

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