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This article has been written by Samridhi Jain, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction 

Surprisingly, so many startups don’t get their fundamentally crucial legal documents in place before starting up. Taking risks as entrepreneurs is accepted but ensuring that you don’t end up in a legal soup by missing out on the documents is not acceptable to the laws of India. 

If you are one of those, don’t worry – this article is just for you!

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Let’s understand the 10 essential and important legal documents needed to start a start-up in India!

A structured business plan

Before even beginning to talk about a business plan, make sure you ask yourself this question: Would I purchase my own solutions if I faced a similar problem in life?

This question will give you the reality of whatever it is that you are offering.

Let’s move to create a structured business plan.

A frequent mistake committed by new startups is the failure to put up a structured business plan in place. A concrete step by step process must be established to carry out the operations of the business. 

Benefits of a business plan

  • Great funding and investment as the investors are motivated to invest in a startup that has a system in place.
  • Gives a clear direction to the people working in the company.
  • Brings focus on the key areas and problems the business is looking to solve.
  • Improves overall decision making of the business.

3 questions to ask before creating a business plan

  1. What problem am I trying to solve?
  2. How do I plan on solving this problem?
  3. Why is my solution model the best fit?

What should a business plan include?

  • A great summary that makes people want to read more about the business: this should include the market gap that you are trying to fill or the problem you are looking to solve and why people would purchase your solution.
  • A mission statement: what are the guiding values and principles behind the business?
  • A brief “why” of the business and its developments: your core motivation to build the business and events that have transpired till the creation of the business plan.
  • Goals and objectives of the company.
  • Ownership and management: include characteristics of the founders and narrate a story.
  • A detailed description of the products/ services.
  • Market overview.
  • Fulfilment of legal requirements.
  • Marketing strategy.
  • Competition strategy.
  • Production/ service strategies.
  • Location.
  • Inventory management.
  • Supplier/vendor management.
  • Financial goals.
  • Expenses.
  • Capitalization process.
  • Repayment plan.
  • Exit strategy.
  • Attaching supporting documents.

Steps to create a business plan

  1. Gathering information about the above topics.
  2. Answering Frequently Asked Questions on the business structure document and the website.
  3. Review, revise and edit all the information.
  4. Present it creatively.
  5. Update and revise periodically.
  6. Make sure all the legal compliances specified are put into action and keep updating the business plan according to the developments.

A business registration document: Certificate of incorporation

Registration of the business entity is one of the most crucial aspects of starting up.

A certificate of incorporation is an extremely crucial document as it makes the business valid and comes into existence.

Contents of a Certificate of Incorporation

  • The name of the business and abbreviations, if any.
  • A statement of purpose for the business.
  • The registered address of the business, corporate address, if any and a registered agent for the address.
  • The number of the shares of stocks that are authorized to be issued and details of the different types of stocks that can be issued by the company if there are more than one type.

Non-disclosure agreement

Startups are opened with the main aim to bring new and innovative business models and products and services. There are always people and companies looking to duplicate such ideas and know about the internal business model and could try to extract information from various people involved in the startup. 

An NDA will prove to be extremely useful to protect your trade interests. This Agreement is entered between parties in order to protect the company’s confidential information. 

This is an Agreement that identifies confidential information and lists down guidelines to maintain the same. The main purpose of the non-disclosure agreement is to protect sensitive information.

For example, if a company is getting an investor on board then they will sign an NDA with the investor before sharing the confidential or sensitive information with the investor.

Contents of a Non-Disclosure Agreement

Following are the parameters to be included in an NDA

  1. The why of confidentiality: why is the information so confidential?
  2. How will the confidential information be handled?
  3. Who is the owner of this confidential information?
  4. What are the obligations of the other party?
  5. Defining an ample amount of scope in the document
  6. What will the remedies be in case of a breach of confidential information by the other party?
  7. What will be the exceptions and what are the different types of disclosures available at the disposal of the other party?
  8. The period for which such information shall be kept confidential and when it has to be returned.

Shareholder’s agreement

A shareholder’s agreement is when you are getting an investor on board in your company. It’s one of the most crucial documents to determine the rights and obligations of the shareholders. This document determines the relationship between the shareholders and also proves beneficial in case a co-founder decides to leave the company.

It contains details of the terms and conditions of purchase and sale of shares and the consideration for which such shares will be exchanged. 

It also gives the criteria to be fulfilled to satisfy the sales and guarantees that both the company and entrepreneurs make to the buyer or investor.

Shareholders are given some number of shares in the company and this means that they become one of the owners of the company and enjoy rights in crucial times of decision making.

In the long run, this facilitates faster resolution of any disputes that might arise, as well as smooth cooperation.

A shareholder agreement should be drafted by your business lawyer or by a legal expert. 

Contents of a shareholder’s agreement

Following are the questions that necessarily need to be included in a shareholder’s agreement

  1. What is the proportion of shares that each shareholder will hold?
  2. What will be the different classes of shares, if any for different categories of shareholders for the company? 
  3. Will shareholders get preference when a new issue of shares is made? If yes, which shareholders will be preferred over the others? 
  4. Can the issuance of any such shares be halted by the board of directors?  Can they also stop the transfer of shares?
  5. What are the rules for transferring shares?
  6. What are the mechanisms to end the contract, the exit strategy and policies? What are the ways to solve disputes?

Employment contracts and offer letters

Employment agreements form the basis of the personnel in the organization. It consists of the rights and obligations of the employees and also contains guidelines as to how disputes would be resolved within the organization.

It also specifies the hiring information, the confidential information that will be shared with the employees, etc.

To make sure the documents are in line with all laws- it’s advisable to get it done by a lawyer or a paralegal if you are looking for cost benefits. The offer letters must also be very clear when hiring new employees. These establish what is expected out of the employees.

Contents of an Employment Agreement

  1. Terms of employment: contains roles and responsibilities, working hours and grounds of termination.
  2. Commitments required on the job. 
  3. Ownership and accountability.
  4. Job leaves such as holiday paid job duration, and dress code is all covered by company policy.
  5. Employee Expectations.
  6. Vesting of shares by the company.

Quick note: Like a structured offer letter, there must also be a legally approved resignation letter for the employees leaving the company

These are the laws applicable in the case of worker’s rights:

  • The Industrial Disputes Act, 1947
  • The Trade Unit Act, 1926
  • The Inter-State Migrant Workmen (Regulation of Employment and Service) Act, 1979
  • The Payment of Gratuity Act, 1972
  • The Employees Provident Funds and Miscellaneous Provisions Act, 1952
  • The Employees State Insurance Act, 1948.
  • Building and Other Constructions Workers Act (Regulation of Employment and Conditions of Service) Act, 1996
  • The Industrial Employment (Standing Orders) Act, 1946
  • The Contract Labour (Regulation and Abolition) Act, 1970

Bylaws

Every startup requires a set of working rules or principles to regulate its environment. Bylaws are the rules that control the association. They ensure that every startup operates efficiently and correctly, and they give everyone involved in the startup’s operations a voice.

Bylaws will cover a variety of topics, including voting rights for membership, board member elections, and approvals, as well as other aspects of the organization’s internal operations.

Bylaws dictate how a corporation must lawfully conduct itself. It is a good way to lay out the startup framework, individual responsibilities, and governance in clear terms. Consider a bylaw that can assist in resolving a dispute over a person’s tenure or specifying whether a decision must be accepted by a simple majority.

IP agreements

For most businesses, Intellectual Property (IP) and deep values are the ideal combinations for success. Many startups, on the other hand, lack these intellectual property rights. Startups often rely heavily on intellectual property, as the company’s portfolio evaluation is what attracts reputable investors. It is important to have full control of intellectual property.

For example, an Intellectual Property Assignment Agreement may be one of the most critical legal documents for your startup, deciding whether or not you can get the funding you need to expand. This is particularly true for technology companies, as investors and venture capital firms often evaluate the value of your IP portfolio.

Founder and co-founders’ agreement

In the case of startups with several founders or founding parties, signing an agreement that specifies the working coordination of all parties and shapes outlines to establish boundaries becomes mandatory. It’s to keep any future disputes at bay. Both co-founders should sign a formal operating agreement to prevent any disputes among the startup’s founding parties.

The agreement should specify the founders’ relationship, the likelihood that all work will eventually belong to another organisation, and a basic communication and conflict-resolution provision that will help avoid conflicts.

Each of the founders’ roles, ownership, and initial investments are detailed in this document. A founders’ agreement, which lays out the duties and roles of each of the co-founders, is recommended during the incorporation stage of a company. For this text, it’s also a good idea to have a written format.

A founder’s agreement should be written on stamp paper with the assistance of a lawyer or a paralegal.

Contents of a founder’s agreement

  • The business’s description.
  • Details on the funds raised (by founders and investors).
  • Information on who owns what (in the company) and the co-founders’ roles and responsibilities.
  • Reimbursement (salary drawn by each of the co-founders).
  • Details of the founders’ exit procedure.
  • The company’s dissolution process.
  • Dispute settlement specifics.
  • Provisions of a different type. (assignment of intellectual property rights, non-compete clauses, etc.)

Terms of use and privacy policy 

Most startups and small companies have (or should have) a website to promote their company and products. A Terms of Use Agreement, which is meant to be an agreement between the Website owner and the site’s users, as well as any buyers of products or services from the site, is required for these Websites.

Contents

Limitations on how the site can be used, disclaimers, liability limits, disclosure of the site’s privacy policies in dealing with consumer details, copyright security notices, the jurisdiction where any conflicts must be brought (ideally, the site owner’s hometown), and much more are all included in a well-drafted contract.

There are three main reasons why you should have a set of terms of service and a privacy policy:

  1. Online Payments – If your website or mobile application does not have terms of service or privacy policy, you will be unable to obtain a payment gateway. As a consequence, you will be unable to accept online payments.
  2. Trust – Most consumers don’t want their information shared with others in any conditions, and if you don’t have these policies in place, they won’t be able to trust you with their data and company. If you want people to feel safe using your website, you’ll need a privacy policy.
  3. Security – As a company, you will be unable to take action against a user who misbehaves on your website, such as by hacking or by uploading offensive, pornographic, or abusive content.

Licenses and MOU’s

A memorandum of understanding, or MOU, is a formal and gentle arrangement between two or more parties. A memorandum of understanding comes somewhere between a formal contract and a handshake. It covers all structured discussions you’ve had with vendors, future partners, and other business associates.

A memorandum of understanding (MOU) is a perfect way to set in writing the terms of a project or partnership between workers and employers.

Any company must also have licenses to operate. Several licenses are applicable in India, depending on the nature and size of the company. Knowing which license is needed for your startup and securing them is always the best way to get your company off the ground.

Lack of applicable licenses will result in expensive litigation and needless legal battles. Business licenses are the legal documents that enable a company to function, while business registration is the process of officially listing a company (along with pertinent information) with the registrar.

For example, an e-commerce company may need additional licenses such as VAT registration, Service Tax registration, Professional Tax registration, and so on, while a restaurant may need licenses such as Food Safety License, Certificate of Environmental Clearance, Prevention of Food Adulteration Act, Health Trade License, and so on.

DPIIT startup recognition- registering on Startup India: A Checklist

  • The age of the company and its operations does not exceed ten years from the date of incorporation.
  • Incorporated as a Limited Liability Partnership, a Registered Partnership Firm, or a Private Limited Company.
  • Yearly Turnover: Should not have had annual revenue of more than Rs. 100 crores in any of the fiscal years since incorporation.
  • The entity of origin: An entity should not have been created by severing or reorganizing an existing company.
  • Scalable & Creative: Should focus on creating or improving a product, process, or service, and/or have a scalable business model with a high potential for wealth and jobs growth.

Refer to this website for more: https://www.startupindia.gov.in/content/sih/en/startup-scheme.html

Final Tip: Create duplicate copies of every single document and also create soft copies so that the business runs smoothly.

References

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