In this article Sarang Khanna, Content Marketing Executive at iPleaders, talks about the essential legal contracts for your startup that you MUST know about. Also, how to minimize your costs of getting them drafted.

Businesses are set up by putting plans into action. Anyone who has started a business, knows the importance of having tangible reproduction of ideas and expectations. Contracts are just that. Contracts state the expectations of the parties and define their boundaries. Contracts legally bind individuals and/or businesses to their words, and give both parties certain rights. They are enforceable by law, and there are assured penalties for any breach.

Contracts are a great safeguard for any business, and especially important for young startup companies. To have a written agreement in place is often the first step done right which paves the way for several others. Partnership = Contract. Employment = Contract. Investment = Contract. License = Contract. For almost any relationship that you or your business indulges in, there needs to be a contract.

Let’s look at some of the most essential agreements that you will have to draft (or get drafted) in order to have organized and successful operations at your new startup. We will also try to give you an idea of how much each of these contracts can cost if you want it to be drafted by lawyers and what can you do to save that crucial capital.

Founders Agreement  

For an early age startup, this is a crucial agreement that defines ownership, responsibilities, operations and decision making policies. It is a commonplace mistake for young companies to not be aware for the basic and essential clauses that founder agreements must contain.

What if your co-founder deserts you in between? What if they misuse their decision making power to land you in a legal soup? It is always better to have a detailed founders agreement in place, even before you have formally incorporated the company.

The purpose of founders agreement is to minimize the surprises and confusion that come along with having a young company trying to scale up. This contract helps avoid disagreements, and also acts as a guide in case they crop up. Although a fairly basic type of contract, but it can still cost anywhere between 3000-10,000 Rupees if you get it drafted by a professional.

Non-Disclosure Agreement (NDA)

It all starts with an idea, doesn’t it? What if that idea itself is stolen, when you are prematurely looking for partners and investors to work with? Is there a way to protect your idea? Well, a Non-Disclosure Agreement (NDA) could be your answer.

However, ideas are hard to protect, and moreover, investors don’t sign it. The real value lies in execution of that idea and NDA’s can only protect you so much before you have started your business. They are not a magical spell that would give you 100% safeguard against theft of ideas.

Does the term ‘confidential information’ in your contract include ideas and concepts? Should you have a non-compete clause in your NDA? Well, it depends on which side of the contract you’re on. There is always one party that has information to protect and the other party that is getting the information. How broad you want to keep the definition of ‘confidential information’ then becomes a matter of negotiation. Further, non-compete clauses in NDA’s  are rare and also problematic to enforce. Often you can risk losing your potential partner just by having this clause in place. Beware!

Truth is, NDA’s are and will be violated. The threat of litigation, which is often empty, has stopped acting as a deterrent. One can sue to enforce the non-disclosure agreement in case of breach, unfair competition, actions against the terms and misuse of trade secrets, among others.

To know which clauses to add in your NDA is imperative. These agreements are detailed, and lawyers can charge you anything upwards of 10,000 Rupees to draft one for you. To know how you can draft this on your own, you can refer here for details!

Rent Agreements

If you are not primarily an online business, you will require an office space to work out of. Rent and lease agreements are required when hiring a commercial space. Sometimes, even for online businesses operating out of homes, violation of terms of residential agreements can force you to move into a commercial space.

Can you imagine what could happen if your leased office space becomes of no use to your business due to unforeseen circumstances? I personally know of a business that suffered immensely when the government decided to shut all neighboring streets around their shop, as they had to lay down the metro line. With the construction of metro and then an additional flyover, traffic went drastically down and the business was rendered useless. Livelihood is at stake in scenarios like these.

Your rent agreement can have solutions in place in case of such problems. Do you have the right to further sublet in your contract?  Do you have the right to terminate the agreement if the purpose of use (business) becomes impossible? Read your lease contracts carefully before signing. Know the fundamentals before hand and add relevant clauses that save you from these horrifying times. To know more about the crucial basics of rent agreements, click here.

License Agreements

Several licenses are required when you are doing a business in India. In a country obsessed with paperwork, there is a license for everything. From simple tax registrations, to import-export licenses, trade licenses, shop and establishment license, end user license agreements, etc. The list can go on.

Are you a restaurant operating in the bustling localities of Delhi? You’ll require an additional license from the fire department. Not a restaurant but only a food delivery service being operated out of your own home? You will require a food and health license from FSSAI. Setting up a small waste disposal factory in the outskirts of your city? You’ll need an air and water pollution control permit.

For every business that you can think, there is a long list of licenses that you need in order to start operations. Find out which all licenses apply in your line of work. Do your research and then move forward after fulfilling all legalities.

Vendor Agreements

You have to enter into vendor contracts for many additional services that your business must require. No business is self sufficient, and having the right vendor agreements during the early stages of your business is essential. These agreements are useful for setting expectations between parties before the transaction of sales or services takes place.

However, the underlying context of even a few words in the vendor agreements can transfer large risks from one party to another. I have personally encountered so many problems in vendor agreements that go unnoticed until it’s too late. One needs to be extra cautious with vendor agreements and must read and understand each paragraph and also make changes to protect themselves.

Imagine if a hidden or cleverly worded clause in your vendor agreement could suddenly trigger your cost hike for a service that you are buying from a vendor. What if due to some violation of law by your vendor, your business becomes liable for something illegal? Can you think of smart clauses to add to your agreement in order to be protected beforehand in such eventualities? Comment below and let the community know.

Employment Contracts, Investment Contracts, Protection of Intellectual Property, Terms and Conditions, Franchise Agreements, etc. etc. etc.

When being a part of any kind of deal with any party,  you need to have a contract. Sure, it may seem a little daunting for young companies to indulge into intimidating legalese, but contracts are your best friends. They are the outlines to so many operations of your business and they ensure organization so that you don’t have to. (Ideally!)

Often beginners make the mistake of being party to an unenforceable contract and let go of all their worries by just signing one. Remember, you will not cease to be vulnerable if you do not understand the basics of what you are signing and how contracts operate. Not only for lawyers, contracts have become a vital part of everyone’s life today. Even if you are a pakoda-seller outside another eatery you will still need to negotiate your terms of contracts to operate out of that given place. Let’s say you are a student trying to rent a room next to your college, you will again need to be aware of contracts.

Contracts are everywhere, and as I already mentioned, they have the ability to be your best friends. For businesses, they are crucial in running them and defining their trajectory. It is best for everyone to understand and to know how to draft all contracts. Resources like this can and have empowered normal people like you and me by allowing us to take matters in our own hands. Not to mention the huge amounts you can save by drafting your own contracts.

Empower yourself and your business, and don’t let clauses make you leave defenseless.

Amen!