When launching a startup, you want to make and keep your startup as valuable as possible. But in order to do that, your tech startup needs to ensure that (a) the intellectual property is owned by the startup, and (b) the co-founders who own the startup have proper incentives and rules to handle inevitable contingencies. Thus, your tech startup should have the following 7 legal documents:
File a charter with the secretary of state and get your startup incorporated. There’s nothing sexy about this document (for now), except that you authorize the amount of your corporation’s shares and set par value. Yet the charter is important because it creates the entity that will hold the IP your team is developing. Additionally, it’s difficult to make big-boy corporate maneuvers like issuing stock options and raising capital without incorporating.
Who gets to vote? How are board resolutions passed? How are officers elected? The bylaws determine the corporate governance of your startup, as they are the rules and regulations for the corporation’s internal administration and management. Startups often fail to draft bylaws, as bylaws aren’t submitted to the secretary of state. Don’t be one of these startups, unless you are 100% certain that your startup will never have any corporate governance issues. (I’m 100% certain that no one should be 100% certain of that.)
The shareholders agreement governs the relationship between the shareholders of the company and touches upon issues like a shareholder’s right to transfer his or her shares, rights of first refusal, redemptions upon death or disability, etc. This is another often overlooked startup document which can be invaluable in the event a co-founder leaves your startup.
Stock Purchase Agreement
A stock purchase agreement is made between each shareholder and the corporation, which regulates the transfer and sale of the corporation’s stock to the shareholder. It determines how much stock will be purchased, the price of the stock, and how the payment will be made (cash, IP, or another form or combination of consideration). A shareholder will typically make investment representations in this document, such as that he or she is acquiring the shares for investment purposes only and not for distribution.
Stock purchase agreements come in two forms: Non-restricted and Restricted. Non-restricted stock purchase are the normal stock purchase agreements: You pay for your shares, they are yours. Restricted stock purchase agreements are used when a co-founder’s shares will vest over time. I wrote a blog post about why your startup should consider vesting its stock.
Technology Assignment Agreement
The technology assignment agreement is made between the shareholder and the corporation, where the shareholder assigns (sells, transfers, conveys, etc.) intellectual property to the corporation. A typical technology assignment agreement will list the IP to be assigned to the corporation on an exhibit to the agreement, with the shareholder representing he or she is the sole owner of the IP. Additionally, the shareholder will agree to execute all necessary documents to effectuate the IP transfer (e.g. documents with the USPTO).
The technology assignment agreement is usually referred to in the stock purchase agreement, as an IP transfer to the corporation can be consideration (full or partial) for the stock purchased by the shareholder. Keep in mind that technology assignment agreements deal with IP that was created by the IP owner before the owner became a shareholder of the corporation (such as IP created by founders pre-incorporation).
Invention Assignment Agreement
While the technology transfer agreement takes care of pre-incorporation IP, the invention assignment agreement works to assign IP created by founders post-incorporation over to the corporation. The shareholder acknowledges in this agreement that all IP developed solely or jointly with the other co-founders is the property of the corporation–not the property of the individual shareholder. This document can also be used to list all “prior inventions” that relate to the startup’s business in which the shareholder wishes to retain ownership.
Other sections or clauses typically found with the invention assignment agreement are: confidential information clauses, at-will employment clauses, and arbitration agreements.
An employment letter is made between the shareholder and corporation. Many startups overlook this document, but it can be useful to put the terms of each co-founder’s employment in writing. It can help set the tone and manage expectations of each co-founder.
These 7 legal documents, together or individually, won’t make your tech startup valuable. Your team creates the value. But these 7 legal documents will help ensure your tech startup retains its value and that your team’s hard work doesn’t go to waste.