As you position your business for funding or sale, here are a few documents you will want to consider having in place:
Right out of the gate when starting your business you should have a Founders Agreement or Shareholders Agreement that sets out the rights of the founders or partners if something goes wrong. Too often one of the initial founders of a company fails to live up to his or her commitment and leaves the company putting the remaining partners in the difficult position of trying to buy back ownership from the departing founder. Founders start excited about the prospects of the business and encourage each other to move forward. In the euphoria of launching a business no one wants to be the one to grind things to a halt by talking about the “what ifs.” What if a founder gets bored? What if the company doesn’t make money as quickly as the “hockey stick projections” show? What if a founder moves away? You don’t want 10 or 20% of your company walking out the door with a non-contributing partner. Protect yourself with a Founder Agreement or Shareholders Agreement.
As you work with consultants who help you get your business launched you need to do what you can to protect your concepts, ideas and intellectual property. Require consulting agreements, non-compete (non-competition) and non-disclosure agreements and invention assignment agreements from consultants and employees who help you. You don’t want to pay for your consultant’s education only to have them leave and openly compete with you after they help you launch your concept. To be effective, non-compete agreement are required to protect a legitimate business interest, be supported by some form of payment and be reasonable in scope, geography and time. Some states further restrict non-competition agreements and your agreement in one state may not protect you in another.
As a business owner, you will have to deal with vendor contracts, lease or sublease agreements for space and equipment, licenses for the distribution and other general agreements. Contract law is present in almost every aspect of business operations, binding your new company and potentially you personally to terms and liabilities. Make sure you understand the consequences of signing on the dotted line. You could, literally, be signing your life away. It costs little to review a document or agreement before signing, compared to the thousands of dollars required to simply commence or defend legal action. Entrepreneurs want to save money and time but, when it comes to binding contracts, you’re better off seeking advice from a professional business attorney. You don’t know, what you don’t know about contract litigation.
If you are licensing rights to sell products or services under a certain name, you need a License Agreement. If you are licensing a brand name or if the agreement is provided by your vendor, make sure it doesn’t require an upfront payment or you could be unwittingly selling or buying a franchise without a proper franchise disclosure document. Franchises need to comply with Federal franchise laws and regulations and with Utah’s small business opportunity statutes. Consider the relationship and requirements closely to ensure you are simply providing or receiving a license, not a franchise.
For some business ventures it makes sense to work with independent contractors as long as possible, others may need to higher employees right off. Hiring employees brings an additional complexity to any business venture. Regardless of your size, once you have employees you should create an Employee Handbook to define company operating procedures. Even if the handbook only sets forth expectations regarding working hours, vacation or flex time. If you don’t have an Employee Handbook, employees tend to create their own rules or argue that you created a precedent when you gave Nathan time off to support his favorite soccer team and they should get the same. An Employee Handbook should also set out how you will handle discrimination and harassment complaints. Writing policies and a little training will help you when you get your first call from the state because of an employee complaint. Periodic employee sensitivity training should also be a part of your human resource plan.
You may need Employment Contracts for Executives and Offer Letters for managers specifically explaining that no employment contract is being offered. Utah is an “at-will” employment state and generally employees may be fired at any time for any reason, except if an employment agreement exists (directly or indirectly), the termination is in violation of public policy, or prohibited by statute. Properly determining and defining exempt and non-exempt employees also becomes important to avoid fines and penalties associated with requiring a non-exempt employee to work more than 40 hours a week thinking he or she is an exempt employee. Paying time and a half to an exempt, disgruntled employee after she worked an extra 10 hours a week for a year on top of a fine from the state adds up.
Before enacting a stock option plan, carefully consider if a Cash Bonus Plan will accomplish the same objectives. Often a Cash Bonus Plan is just as effective in motivating employees as a stock option plan and it won’t result in employees walking away with a percentage of the company. Stock option plans involve promising the holder ownership purchase rights in corporations and limited liability companies. Incentive Stock Option Plans are drafted to meet the requirements Internal Revenue Code (IRC) Section 422 so stock options can qualify as “Incentive Stock Options” to receive special tax treatment under Section 421(a) of the IRC. To be an Incentive Stock Option (ISO) the option must meet the requirements of Section 422 of the Code when granted and at all times until exercise. Generally the requirements include:
- The option may be granted only to an employee who is required to exercise the option while he or she is an employee or within three months after termination of employment.
- The option must be granted under a written plan document specifying the total number of shares that may be issued and the employees who are eligible to participate in the plan.
- The plan must be approved by the stockholders within 12 months of the plan adoption.
- Each option must be granted under a written agreement listing the restrictions placed on the option such as a restriction on transferability and including a price which must be at fair market value and the option exercise period not to exceed 10 years.
Most businesses should consider the benefits and costs of filing for trademark protection for their name, logo and other product and service marks. In many instances a state trademark may be sufficient, others may justify filing with the U.S. Patent and trademark office. Patents should also be considered for novel products and technologies.
Invariably, most businesses will be faced with contract law disputes concerning agreements and understandings with vendors, suppliers, landlords, customers, employees and other businesses. Before filing a lawsuit, it’s worth taking time to consider how to resolve the dispute before resorting to legal action. Litigation is expensive, the costs quickly add up for all parties in a dispute. Many times the litigating attorneys are the only ones who come out ahead. “A matter of principle to a client today becomes a matter of finance tomorrow,” Ted Paulsen quipped based on years of experience as a litigator before retiring to focus on transaction work.
Contract litigation requires carefully reviewing the contract in dispute, as well as considering the circumstances, and balancing this with the law. Not all contract law disputes can be resolved before a lawsuit is filed. Explore all your options, including negotiation meetings, if litigation is necessary go into it with your eyes open: a great deal of time and expense will be involved. The threat of litigation is often enough to get parties to agree to negotiation meetings and resolve their differences outside of court. Don’t let pride sink your business. The stakes can be high when contract litigation goes to court and large sums are involved. If you are considering contract litigation, meet with an experienced litigator willing to recommend other options. At the end of the day, it’s about retaining your future business – not making the largest sum possible from one litigation case.