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How startups can protect their rights with commercial contracts A contract, be it commercial or non-commercial, reduces the risk for any business as it is backed up by the law.

By Jyotsna Chaturvedi

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Every startup, no matter what idea, service or product it may wish to sell is bound to come into contact with various people and has to form relationships to succeed. In the process of forming these relationships startups will not only be associating with co-founders and customers, but also employees, vendors, investors and public relations agencies.

In a world like ours, it is essential that whichever relationship forms in business is legalized so that it does not turn into something ugly if things go wrong, and even if they do not, simply as a matter of principle a startup needs to have everything in black and white. A contract, be it commercial or non-commercial, reduces the risk for any business as it is backed up by the law.

Now in a layman's language a contract is a document that is signed between two people when they agree upon a proposal with mutual consent and if any of them do not comply, they will be penalised in the court of law. Negotiating on terms and then drafting all of it into a legally binding contract is a step higher on the ladder to success.

There are approximately 14 types of contracts which might be beneficial for a startup, right from the initial stages until it is in business. To simplify things, let us divide your work into stages and explain you the various contracts you would need at each stage.

Stage 1

Gearing Up for a Brand New Start

  • Founder Agreements
  • Intellectual Property (IP) Assignments

The very first step into the entrepreneurial world is a big decision and needs to be made carefully from registering your company name to partnering with different people, everything is about to start in the journey of your business.

The two important contracts you will need at this stage are Founder Agreements, which will cover all aspects of ownership, decisionmaking, responsibilities and even the way matters will function and be executed. The second contract is Intellectual Property (IP) assignments, this is a contract where co-founders assign their pertinent rights towards intellectual property to the company.

Stage 2

Finding Funding

  • Finder Agreement
  • Investment Agreement
  • Investment Term Sheets
  • Non-Disclosure Agreements (NDAs)

Now, it is pretty evident that most of the startups are on a lookout for proper funding to excel in the industry, in the process the first contract to be made is the Finder Agreement, an agreement where the company agrees to pay the finder a certain amount in return of the funds he/she gets in.

Then comes the Investment Agreement and as the name suggests it is between the company and its investor who get a certain share of ownership in the company in exchange with the investment made. Moving to the next agreement, Investment Term Sheets are made that ensures the terms under which an investor would be investing in the company.

It is followed by NDAs, which is between startup founders and its investors before they share their creative and exceptional ideas of the company making sure their trade secrets remain a well guarded secret.

Stage 3

Finding Rental Space

  • Commercial Lease Deed

Your company might be small initially and might take time in expanding business however running a business from home can be a problematic situation and to start on the wrong foot could lead to a disaster. The best solution to keep safe is to move to a commercial space. At this stage you will require Commercial Lease Deed.

Stage 4

Expanding Business: Hiring Help

  • Employment Agreements
  • Intellectual Property (IP) Assignments (Employee)

NDAs With Employee Ideally a company grows as it moves ahead and grows beyond its founders. Hiring new employees will require Employment Agreements which will specify the terms of employment like salary, benefits, vacation times and company shares.

Employee would also be signing Intellectual Property (IP) Assignments (Employee) this will ensure that trade secrets, ideas, innovations would be safe and any new idea or invention that an employee comes up with will be owned by the company. A NDA (Employee) is made between the company and employee as well to ensure the inside working and strategies of the company.

Stage 5

Vendor Services

  • Service Agreements
  • Statements of Work

Every startup has to procure services and for this it comes in contact with vendors. Service Agreements that include Development Services and Consulting Services.

These agreements are based on the services required, for instance a mobile app needs to be developed or a launch party for the business needs to be catered and so on. Statements of Work (SoWs) are detailed terms of services and deliverables that usually come as a part of the Service Agreements.

Stage 6

Delivering Products To Customers

  • Distribution Agreements
  • Reseller Agreements

A startup has to make sure whatever it may be selling reaches the customer and in order to do so it might hire a third party help if they do not do it by themselves. Distribution Agreements are made between vendor or manufacturer and distributor.

The agreement includes whether there are exclusive rights or territory specific areas, duration, etc. Also a Reseller Agreement is made where other companies buy the product and clubs it with other products for reselling.

Stage 7

Licensing Product or Service

  • End User License Agreements (EULAs)
  • Software Licenses
  • Evaluation Agreements (Trial/Test License)

It is essential for software businesses to make sure how other use their IP rights irrespective of being free or paid. For this, startups make End User License Agreements (EULAs) – they are agreement pointers as to how a user may use the software.

These are non-negotiated shrink-wrap or browse-wrap agreements. These limit the licensor's liability and prohibit reverse engineering. Software Licenses are more detailed and negotiated than a EULA click-wrap as big clients and custom software require a negotiated agreement.

Last of the agreements is the Evaluation Agreement (Trial/Test License) this is for prospective buyers to inspect a product (usually a software) before buying or paying for the license.

Other than all these, e-commerce startups have an added requirement to look at Terms of Use Agreement that sets forth all the terms and conditions for an individual to use the company's website. A privacy policy is usually attached along to the website that states what will be done with the personal details gathered from the customers and how that data will be used or sold to third parties.

For such extensive contracts, no matter at the first stage or last, it is essential that startup take professional help and hire a legal aid to draft all the contracts and also make them understand various clauses. It is always better to be clear about each and every detail that one puts their name to.

Jyotsna Chaturvedi

Principal Associate, Maheshwari & Co

Jyotsna Chaturvedi is an Associate member of Institute of Company Secretaries of India (ICSI) as well as Graduate in Commerce. She has experience in different areas of corporate and commercial laws & practice including drafting and vetting of Joint Ventures, Term Sheets, Shareholder Agreements and other Commercial Agreements, Incorporation of a Company in India or abroad, Foreign Direct Investment, Secretarial audit and compliances, Due Diligence of Companies, liaison with various government and nongovernment authorities and agencies such as Reserve Bank of India, Director General of Foreign Trade (DGFT), Ministry of Corporate Affairs etc.

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