This article is written by Riti Khandelwal.
Imagine, you pitched your million-dollar idea to an investor and later he sets up a million-dollar company with that idea. It is one of the worst nightmares. There is nothing much you can do against a business giant because of lack of resources and lack of evidence. However, this type of situation is completely avoidable if you have legally restricted him by an agreement from using or sharing your idea.
People often tend to ignore legalities before setting up a startup. They don’t realise that an agreement can not only limit their liability but also save their time in dispute resolution which their startup might face in the future. The number of startups has rapidly grown during previous years. India has the second largest Ed-tech industry in the world and it is expanding at a rapid speed. It is set to touch $3.2 billion by 2022. Pandemic has increased the popularity of Ed-tech platforms. And if you want to dip your hands into this industry then these are some of the agreements which you need to know about while setting up your own Ed-tech startup.
1. Employment Agreement
Employees are the basic unit of any business institution. This agreement contains rights, duties and obligations which an employer and employee have towards each other. This agreement shall contain following clauses:
- Job specific terms: This clause must contain duties of the employee, scope of his work, term of his employment, salary and incentives of the employee, policy for reimbursement of conveyance and travel expenses, leave policy and termination process.
- Reference to company policies: This clause must contain company policies related to code of behavioural conduct of the employee at workplace. These days companies have strict policies against sexual harassment, therefore The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 must be kept in mind while drafting this clause.
- Non-Compete Clause: This clause restrain the employees from competing in the same business as the employer, till the time he is working for the employer.
- Lock-in and Penalty Clause: An employer invests in the training and skill development of an employee. Therefore, this clause protects the employer from the damages caused by the early termination of the employment agreement by the employee. This clause provides a minimum lock-in period whereby if the employee breaches the lock-in period he shall be liable to pay compensation.
- Non-solicit: We all might have watched the Suit, where leaving Partners are not allowed to take their clients with them. This clause plays the same role for the employer. In case an employee ceases employment, this clause prohibits him from maintaining any kind of relationship with the clients, consultants, agents etc of the employer.
- Copyright and Intellectual Property: Since it is an Ed-tech startup the key question is who will own the Copyright and IP rights of the designed courses. Therefore, this clause shall contain information of ownership of Copyright and IP rights.
2. Interim Service Agreement
Since it’s an Ed-tech company, an expert might be required to do more than a task. He might be required to work on additional projects. And therefore, an interim service agreement comes into the picture. It is an agreement made for additional services which are provided by a person.
It shall specify the parties to the agreement that are client and service provider, a brief background of the parties, term period of the agreement, whether the term period can be extended and what are the procedures which need to be followed to extend the term period, what are the services which the service provider is under obligation to provide to the client, salary of the service provider, additional charges which service provider is entitled to receive, obligations of parties, warranties and liabilities of service provider, who shall have IP rights of the product created by the way of services under the Agreement, what shall be classified as confidential information, consequences of misusing confidential information, force majeure clause and when shall the agreement stand terminated.
3. Non- Disclosure Agreement
Every startup needs investors to raise capital. And for that one needs to share confidential information with the investors. Therefore, one of the ways to protect confidential information is by way of NDA. NDA is a legal agreement which puts a party under obligation to maintain the secrecy of information provided by the other party. This can prevent any person from sharing or misusing confidential information about the company. Every agreement has a confidentiality clause but it is always better to have a Non- Disclosure Agreement.
It must contain certain information and clauses:
- Parties Clause: Stating who the parties to the agreement are.
- Scope of Confidential Information: NDA shall have a clause classifying and defining what shall fall under the definition of confidential information. The party sharing the information must ensure that the classification and definition of confidential information is broad enough to cover all disclosed information and the other party does not find any loophole in it. Both oral and written information fall under the scope of confidential information.
- Obligations of Party Receiving the Information: This clause must contain obligations that not only prohibit the receiver to share confidential information with the third party but also prohibits him from using this information for his own benefit or use.
- Remedies: An NDA must state the remedy in case of breach of term and condition of the Agreement. This remedy can be in terms of monetary compensation or injunctive relief.
- Exceptions: An NDA must contain exceptions of confidential information. This must include situations where a party can disclose confidential information.
Further, it’s better to include a dispute resolution clause or jurisdiction clause in an NDA. This will save time for both the parties in case of any dispute.
4. Terms and Conditions of Website
Though making User Terms is not a legal requirement, it is better to make users bid by an agreement to limit your legal liability and avoid misuse of the website/app. Any user who agrees to access your website or is a registered user automatically enters into an agreement. These terms must be clearly mentioned on your website. User Terms shall contain:
- Introduction Clause: This gives details about the parties to the agreement and has a disclaimer stating that as soon as a person agrees to access or register on this website/app they shall be considered to agree with these terms and shall enter into an agreement. They cannot use or have access to the website until and unless they accept the User Terms.
- Who can use Platform: This clause gives details about who shall and shall not be considered as an eligible user of the website/app under the law.
- Behavioural Conduct: It specifics the code of conduct which users need to maintain. Such as, users shall not use foul language on the platform, users shall not create any kind of mischief during online classes, users shall not share any material provided by the platform to third parties etc. The language of this clause must be as broad as possible.
- Termination Clause: It shall mention in what cases the user can be barred from the website/app.
- Jurisdiction and Governing Laws: It shall mention the jurisdiction of the agreement. The Company should try to solve Issues and disputes of the users informally.
- Limits of Liability: This clause helps you to mitigate your responsibilities and liabilities towards the users. Whereby, you can state that the company shall not be liable for the damages caused to the user through the use of this website/app.
- Intellectual Property Clause: By the means of this clause you can restrict the users for the use of academic purpose only. And also, that you own all the copyrights for the material available on your app/website.
- Contact Information: You must provide contact details in case a user has any grievances with the website/ app.
- Payment Clause: If the company is providing paid services then the payment clause can be a lifesaver. It shall contain all the details regarding the payment for eg: amount to be paid, when the payment shall be ducted, type of offers or services which will be offered for specific payment etc.
- Type of personal or sensitive personal data or information collected. Sensitive data or information refers to password, financial information such as Bank account or credit card or debit card or other payment instrument details, physical, physiological and mental health condition, sexual orientation, medical records and history, biometric information purpose of collection and usage of such information.
- Whether there will be a disclosure of information including sensitive personal data to any third party. A corporate cannot share sensitive information to a third party without a prior consent of the user.
- Details of grievance officer, in case the user has any grievance against the corporate.
7. Return and Refund Policy
If the Company provides paid services then the users should be made aware of their rights to refund. This helps in gaining trust of the users. These policies provide knowledge to the users about refunds on various services, on what kind of services they can claim refunds, till what time they can claim refunds, whether they can claim refunds or not. By accepting these policies, the user and the company enter into a contract whereby the user cannot claim more than what they are actually entitled to get, likewise the company will have to give refunds to the users according to the policy.
8. Loan Agreement
Less tax on loans makes it one of the best options to raise capital. Loan Agreements are mostly made by the Lenders however, it is important to understand what a Loan Agreement contains so that one does not get exploited. The Loan Agreement must have details of the parties to the agreement, the circumstances in which one party has approached the other party for loan, what shall be the interest rate, mode of repayment, dates of repayment, what is the purpose of the Loan Agreement, details about security interest, who shall have the ownership and possession of the security interest, representation and warrants of both the parties, what shall be considered as an event of default and what shall be the consequences of an event of default, who shall bear the cost of registration, mode of communication among the parties and jurisdiction of the agreement or how shall dispute between the parties will be resolved.
Every bank and lender has a prefixed format of Loan Agreement. It is mostly initiated from the side of the Lender. Therefore, while borrowing one read the Loan Agreement carefully.
9. Founders Agreement
Founder’s agreement is an agreement between the Founders of the Company. It shall contain certain clauses:
- Equity Ownership: This shall specify the proportion of equity ownership (capital and shareholding) which each co-founder shall have in the company.
- Vesting of Founders Shares: This must include the procedure which needs to be followed in case any of the co-founders leaves the company and the rights of remaining founders over the shares of the leaving founder.
- Roles and Responsibility of Founders: This shall include responsibilities that each founder has towards the company. Responsibilities can include managerial, administrative and financial responsibilities.
- Transfer of Shares and Encumbrance: This clause prevents founders of the company from selling, assigning, transferring, pleading, disposing and creating encumbrance on their shares, directly or indirectly without the prior consent of other co- founders.
- Right to additional capital: This clause shall state whether in case the company issues new shares, the founders shall be entitled to purchase those shares in proportion to the shareholding of that founder in the company.
- Future Investment: A company always needs investments therefore, it is wise to mention in advance how these investments shall be raised.
- Non- Solicit: Since founders are the full- time employ of the company they can be restricted from soliciting any employee or a client.
- IP Assignment: This clause must include information regarding who will own the IP rights over the design or the idea of the product developed by one of the founders of the company.
- Confidentiality: This clause restricts the founders to share confidential information with any third party to the contract. It is always better to make an NDA instead of just adding a confidentiality clause in an agreement.
- Termination: This clause shall contain details about the events when the agreement shall terminate.
- Dispute Resolution and Governing Law: This clause shall state the jurisdiction of the agreement and dispute resolution method which founders must opt during the time of dispute.
10. End User License Agreement
Since it is an Ed-tech startup, it will provide its services through an app/ website or software. Therefore, in order to protect IP rights and restrict people from copying your work it is better to bind them in an agreement. End-user or the person who has purchased your services will have access to all your designed courses, teaching methods and study material. By binding them in an End User License Agreement you can restrict them from reproducing and misusing your work. EULA is a form of click wrap agreement that grants a license to the end-user to use the software, according to the terms and conditions and the purposes mentioned in it. A EUCL must specify the type, name and version of the software or website/app, duration of the license, jurisdiction of the agreement, restrictions while using the software or app, representations and warranties of the user, liabilities of each party if erroneous events occur with the website/software/app and how dispute arising out of the agreement shall be resolved.
These are some of the agreements which might help in an Ed-tech startup. People often ignore the legalities while setting up a startup. They do not consult a lawyer and just copy the format of the agreement in order to save money. However, this can jeopardize the future of their startups. It is always a good idea to consult a lawyer before setting up a startup. Good advice and a good agreement can save a lot of money and time in the future. It reduces the risk of them being exploited. Legality is one of the important aspects to figure out while setting up a startup. It is something that cannot be taken for granted.
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