Editor’s note: This article is part of the Startup 101: A Legal Perspective series, guest-written by Odun Longe, a startup lawyer at The Longe Practice. Click here to see all the posts in the 8-part series.
Seems like aeons since I last touched base with you, dear Tech Cabal readers, even if you read from me just a week ago. I could get used to this, but alas, we conclude the “Startup 101 – A Legal Perspective” series this Thursday with a post by Subomi Oraka, a member of our Advisory Board and a senior in-house counsel with one of the foremost private equity firms in Nigeria.
Subomi will be writing from the perspective of a lawyer to an institutional investor. As you have probably correctly surmised, this will be the last post from me in this Series. Hopefully, someday soon, Bankole will once again extend his magnanimity towards us and let us take up some of his editorial space.
Without further delay, let’s get into today’s topic. In this post, I’ll be highlighting a few documents a startup should have, and why they need those documents. These documents are what we lawyers would say are sine qua non to your existence as a startup, which is simply lawyer speak for ‘essential, an absolute requirement, important, vital, crucial, etc’.
Personally, I like to refer to them as the Startup Starter Pack.
So here goes:
This does not require a lot of explaining, as we have discussed incorporation in detail in a previous post in the series. Whether it is a business name, a limited liability company or a partnership, you need to have some form of entity through which you and others would participate in and run your startup. This entity would possess enabling and creating documents, which are most likely documents you filed and received from the Corporate Affairs Commission (CAC).
Typically, a limited liability company’s documentation (which is the most popular) would include your:
- Certificate of Incorporation;
- Form CAC 2 (Statement of Share Capital & Return on Allotment of Shares);
- Form CAC 7 (Particulars of Persons who are First Directors);
- Form CAC 3 (Notice of Situation/Change of Registered Address);
- Form CAC 5 (Particulars of Person who is Company Secretary); and
- Memorandum & Articles of Association, commonly referred to as your MEMARTs.
Non – Disclosure Agreement (NDA)
All startups are built on ideas and the execution of these ideas always involves sharing and funding these ideas with others. An NDA is a contract entered into to protect the confidentiality of information shared between parties. It restricts third party access to the information shared and is enforceable in court when breached. An NDA could be mutual (for circumstances when information is to be exchanged by both parties) or one-sided when only one party is to disclose information.
Every startup should have a template mutual and one-sided NDA to suit any business situation it may find itself. NDAs could be entered into with business partners, colleagues, employees, service providers, consultants, investors etc. Practically, anyone whom you would be sharing confidential and/or proprietary information with.
Sometimes, a non-circumvention clause may be included in an NDA. A non-circumvention clause is a clause which restricts the use of information shared for any other purpose or transaction other than the agreed business use/transaction. So say I reveal details about my supplier to you, a non-circumvention clause prevents you from transacting, without my consent, with my supplier other than for the purpose for which I revealed the information to you.
Intellectual Property (IP) Assignment Agreement
As the name implies, this is an agreement through which an individual assigns rights in an intellectual property to another. Startups are built on a lot of intangible property, inclusive of skills and know-how. When people come together to start a business, their primary contribution usually entails this intangible property, and it needs to be assigned to the startup. The means of doing this is through an IP Assignment Agreement. It should be one of the first documents entered into by founders once they incorporate an entity, i.e. assign all the IP rights used to build or develop the startup to the company. Same also goes for others you engage to work on the startup.
Invention Assignment Agreement
Whilst the IP Assignment Agreement usually addresses the assignment of pre-incorporation IP rights to the startup, an Invention Assignment Agreement assigns the rights that may arise during the lifetime of the startup, it is usually drafted in a “futuristic” manner such that it assigns to the company, rights that may arise whilst executing tasks in the ordinary course of business.
Parties to sign an Invention Assignment Agreement would usually include employees, founders and/or consultants.
It is not unusual to have the IP & Invention Assignment Agreements subsumed under one document.
Employment Agreement or Offer Contracts
As the name implies, this is the letter with which the startup employs employees, or the offer contract with which it engages other “workers” who may not necessarily be employees, e.g. consultants, interns, contract staff etc.
These letters must be carefully worded to ensure that the statutory rights and benefits applicable to each class of workers are covered. You also want to be careful not to term a person who is actually an employee a contract staff and vice- versa. One practical reason to note the fine line separating an employee from other types of “workers” is the statutorily required pension contribution scheme by an employer on behalf of its employees. Any employer who has more than 3 individuals in its employment is statutorily obliged under the Pensions Reform Act (2014) to deduct 8% pension from its employees’ compensation, add an additional 10% to the deducted funds and remit the total 18% to an approved Pensions Fund Administrator on behalf of the client.
Terms of Service
You know that long epistle you typically skip reading and just check the “I Accept” box? You also should have one, especially if you run a business where you collect information from people, which around these parts is often the case as there is almost always an e-commerce or registration angle to most internet/tech startups.
I’ve noticed a few Nigerian startups have terms of service on their website. However, I’ve also noticed that most of them simply copy and paste from a similar startup operating in another country. They do not customise these copied Terms of Service to comply with Nigerian laws and regulations, and thereby render many of the clauses unenforceable and untenable in a Nigerian court against a user.
Whilst your MEMARTs would contain general provisions with regard to the object of the company and its corporate governance structure, a Shareholders Agreement goes further to govern the relationship among the shareholders, and between the shareholders and the company itself.
A standard shareholders agreement would have clauses relating to the disposal or transfer of shares such as pre-emptive rights, rights of first refusal, redemption of shares upon death or disability among others. It would also include other clauses such as issues requiring shareholder approval, assignment of IP and invention rights to the company, appointment of directors etc.
This list is by no means exhaustive. There are several other documents a startup should have, some of which may be specific to a startup because of its peculiar business or industry. However the documents listed in the Startup Starter Pack above are a must-haves to get your bases covered. As always, I am available to take your questions and comments.
Funkola and I say a big thank you to you all for reading our rambles these past few weeks and we hope to come across your way again soon. Please feel free to engage with us on Twitter at @LongePractice, where you can let us know what topics you would like to read from us or just stop to say hello.
Thank you and look out for Subomi’s post on Thursday!
Articles do not constitute legal advice, neither has a lawyer-client relationship been created by engagement in the comment section. If you require professional legal advice, kindly contact your legal adviser.