Congratulations! You’ve formed your new company by filing a certificate of incorporation or articles of incorporation (or certificate of formation or articles of formation for an LLC) (often referred to as your “charter”) with the Secretary of State. But what should you do next? The key agreements that you will need to get in place generally fall into three categories: (1) entity formation documents, (2) employment and compensation documents, and (3) documents for protection of your company’s intellectual property. Each category is addressed below.
Entity Formation Documents
After forming your new company, it will need to follow some rules of the road. If you formed a corporation, your charter will provide a basic framework for your corporation. Alternatively, if you formed a limited liability company (LLC), the laws of the state of formation will provide default rules, but you will likely want to customize the rules for your company in an operating agreement. Below are some of the other corporate documents you should consider:
- Bylaws – Bylaws provide a corporation (not an LLC) with rules for the Board of Directors and shareholders to conduct corporate business, describe the officers of the company, and may include various other items, such as stock transfer restrictions.
- Founders Subscription Agreements – The initial shareholders or members of the entity will purchase their interests in the company under this agreement. If the founders are also providing services to the company, the subscription agreement may also provide the company with the right of repurchase, which allows the company to repurchase shares if the founder stops providing services before a defined period of time. Subscription agreements typically also include a right of first refusal that permits the company to purchase shares from the founder if the founder tries to sell his or her shares.
- Shareholders’ Agreement – The terms of this agreement vary substantially, but often include an agreement among the shareholders to elect directors designated by certain shareholders, a right of first refusal to buy a transferring shareholders’ shares, a buy/sell agreement and/or a drag-along right in the event a majority of the shareholders want to sell the business. Some corporations do not adopt a shareholders’ agreement if the corporation expects to raise venture capital shortly following incorporation since most venture capitalists will insist that the corporation adopt agreements that are inconsistent with the shareholders’ agreement.
- Operating Agreement – LLCs have greater flexibility to determine the management structure of the entity (for example, will the members or manager control the day-to-day decisions of the company?) than corporations and have additional tax considerations to describe for members since LLCs are pass-through entities. Operating agreements typically spell out these terms, along with the terms that corporations usually include in the bylaws and shareholders’ agreement.
Employment and Compensation Documents
Each company must also determine how it will build its team. Most early stage companies adopt the following employment and compensation terms shortly after formation:
- Offer Letter – This is a standard agreement, which provides the employee’s title, supervisor, salary, and benefits. The agreement also incorporates the employment terms and conditions, which provide key protections for the company.
- Employment Terms and Conditions – The employment terms and conditions are incorporated into the employment agreement and are sometimes the only agreement a founder will sign in his or her capacity as an employee of the company. Employment terms and conditions may go by several other names, including Proprietary Information and Invention Assignment Agreement or a variation of that depending on the terms of the agreement. Typically, this agreement includes an assignment of inventions made during employment by the employer, a confidentiality requirement with respect to the employer’s proprietary information, a non-solicitation requirement with respect to employees and customers of the employer and, depending on the jurisdiction in which the employee is providing services, a non-competition agreement.
- Consulting and Advisor Agreements – Many early stage companies rely on services and advice from a collection of individuals or organizations that continue to help the founders develop the company. In order to ensure that the services and advice they provide stays with the company, many early stage companies enter into consulting and advisor agreements that formalize the role and document the rights of both the company and the consultant or advisor.
- Equity Incentive Plans – Equity incentive plans provide a pool of shares (or units of an LLC) for the company to grant to employees, consultants, and other service providers under various awards. The most typical awards for emerging companies are restricted stock purchases and stock options (either tax-favored incentive stock options or non-qualified stock options). The plan and form of award agreements are typically adopted early on and amended as the company’s needs change or it needs to refresh the pool.
Documents for Protection of the Company’s Intellectual Property
In addition to formal employment terms and conditions and formal consulting and advisor agreements, the most important agreement for most emerging companies to have shortly after formation is a non-disclosure agreement. This agreement is usually entered into with unrelated third parties who may come in contact with the company’s proprietary information and is intended to protect the company’s rights to its intellectual property.