In order to actually be able to one day sell your company, or even raise money in a priced equity round from venture capital, your Company will undergo many rounds of legal due diligence; that’s the process where your investors’ or acquirers’ lawyers make sure your company owns its IP, properly issued stock, has no massive tax surprises, and has not entered into any otherwise damaging agreements.
Due diligence findings can sometimes lower the value of the deal, and in some cases kill it altogether. Passing muster means erring on the side of having good contracts (both internally within your company and outside of it), and erring on the side of earleir legal review.
This is the most fundamental “contract” your startup has, because it sets the parameters on which it operates, especially with respect to the number of shares, and classes / series of shares, your Company is legally permitted to authorize the issuance of. It can be (and often is) “amended and restated,” though this requires additional consents, and will not by itself fix mistakes caused by a previous version of the Charter.
While this is often (for startups) a fairly boilerplate agreement, just because it’s boilerplate, doesn’t mean it’s not important. Some of its key functions are to set the rules of how Boards are composed, or make decisions; how stockholders vote; how officers are elected and removed; it also may set transfer restrictions that affect stockholders’ abilities to sell or transfer their stock, and many other key corporate processes, especially as your corporation matures.
Boards approve or ratify certain material decisions about the Company and its actions; stockholders, in fewer cases, do the same. In many cases, action without such Board or Stockholder consent, as applicable, is not effective; it’s also ineffective if those Board and Stockholder consents are not properly executed (e.g. pursuant to the rules in the Bylaws; the rules under Delaware General Corporate Law), or for other unique reasons.
At least in Silicon Valley, this is the kind of instrument you’d expect to see to reflect a stock grant to a Founder (alongside a Board Consent, and probably an 83(b) election if there’s vesting). There’s a few components to a key RSPA; Assignment of stock; acknowledgment of payment of consideration, whether cash or services (but careful, these have different tax consequences); representations and warranties; restrictions; repurchase options (if vesting); spousal consent; and more. Getting this right is very important, since stock, in the vast majority of cases, should be issued at fair market value (FMV), and if you wait too long, your FMV may have changed.
Also critical to file an 83(b) election if your stock is subject to vesting; use www.file83b.com!
The main (not only) function of this agreement is to ensure that any employee contributes the appropriate intellectual property over to the company. Sadly, relationships with employees or co-founders do often go sideways, and if you don’t get this IP assigned before (1) that relationship blows up, or (2) the value of the IP changes significantly, then you may have an issue on your hands. Therefore, get IP assigned from any employee (or consultant / other service provider) assigned ASAP, ideally before work starts.
Although non-competes are increasingly being rejected, Employment Agreements may also set confidentiality and other restrictions; terms of non-solicits or no-conflict language; make certain representations and promises; and more.
Much like Employment Agreements, one of the main functions of Contractor / Consultant agreements is to ensure that IP is assigned–particularly for Venture Capital-track SaaS startups. However, because contractors don’t always have regular pay with the company, and are usually working on or assigning to you a more specific set of work than an employee, there are a few other important sections to Contractor Agreements. That includes the Statement of Work, or whatever other section describes the scope of work to be delivered, a description of cost and payment terms, timelines, and other business details. You may also put more effort into negotiating the indemnification and limitation of liability provisions with a Contractor than you would with an employee, as these allocate work amongst you.
Careful not to go too ham with these Agreements, as in some states, it can be used as evidence that they’re really an employee.
Depending on how your product & sales process works, you might have customers totally self-service online (especially for more static products & services, or smaller customers), or sell through a custom MSA, Order form, or other set of terms. What kind of terms you need to start with depends on that question.
When your customers self-service check out, and particularly where you are selling a cloud service that users simply log onto in order to access, and you are capable of pricing and billing without custom order forms, you might benefit from Common Paper or BonTerms Cloud Services Agreements if you are okay with having more neutral terms (read: Maybe less favorable to you, but theoretically less likely to be negotiated). If you want something more friendly to you, you might look to Cooley’s Terms of Service.
When your customers close deals more by custom generated terms, order specifications, MSAs; or if your solution involves bespoke services / is not a simple cloud-accessed solution, or may have multiple cross/up-sells; you might need more of a Master Services Agreements with one or more Statement(s) of Work. These often do much of the same work as the Cloud Services Agreement, but are structured with a different sales process in mind, and possibly a different kind of transaction altogether).
In either case, some of the critical terms include business terms like term & termination, mutual vs. unilateral, auto-renew, pricing & payment terms; as well as many legal terms like IP licensing or right to access; limitation of liability; indemnification; warranties; dispute resolution and more.
The devil is always in the details; even if you look like a totally generic cloud-hosted SaaS vendor, not in a regulated industry, and with totally “standard” business preferences, a little bit of legal review here goes a long way.
If you are ready to start issuing options or smaller equity grants to non-founding members, you may consider adopting an Equity Incentive Plan, AKA EIP or Stock Option Pool [a bit of a misnomer since you can also issue non-options from it]. Alongside that Equity Incentive Plan document, you’ll need one or more forms by which you actually issue stock or options, when the time comes, from that plan. Those forms could include one or more of Stock Option Grants (ISO/NSO/Early Exercise); Restricted Stock [Purchase] Awards (for stock grants for services [or cash] consideration).
Solid versions of the Equity Incentive Plan (EIP) and its Forms are available in many places online, including Orrick’s content library, you *could* self-service this, but there’s lots of footfaults, including (1) making sure there is room in the authorized share count, including specifically at the common level, (2) obtaining proper consents, including board and stockholder consents), (3) around taxes, as especially options have particular tax requirements–including 409A, and (4) more generally.
This is another one where we’d recommend using a lawyer or an established software solution.
A super common way for startups to raise money these days is by issuing Simple Agreements for Future Equity, AKA SAFEs–this instrument was made up and available by YCombinator, including in its several forms; Post- or Pre-Money; with Valuation Cap; with Discount; and with Most Favored Nations.
We highly recommend you to use the YC SAFE if you’re doing a SAFE at all; the document should include language in there to the effect of, “This Safe is one of the forms available at http://ycombinator.com/documents and the Company and the Investor agree that neither one has modified the form, except to fill in blanks and bracketed terms”.
Try to avoid giving up Most Favored Nations clause unless you’re confident you won’t issue other SAFEs with more investor-friendly terms than this one. Otherwise, choosing between Valuation Cap and Discount depends on a lot of things–if you’re not confident in the valuation of your company, negotiating a Valuation Cap is more of a blind guess, whereas a Discount will be a relatively consistent hedge.
Between using the Post-Money and Pre-Money SAFE, most people use the former these days, but the Pre-Money does in some cases have advantages for founders as far as dilutive consequences, among other differences.
Would recommend checking in with a lawyer before doing this, especially if it’s your second round or set of terms under a SAFE, because it may be more dilutive to you than it is to other SAFE holders.
The most common kind of Side letter to come alongside a SAFE is a pro rata right, that gives your investor some right to maintain their position on the cap table at least through the next priced equity round. YC also has a standard version of this letter available on its website; you should use that barring some other concern.
Investors with more leverage might look for more rights, including a longer horizon to exercise this right; more information rights; a board or board observer right; certain voting rights; and more. Consider these carefully; they can have an outsized impact on your company.
In a dream world, legal is always involved. When budget or time constraints make that simply not possible, try to prioritize legal input around these topics; it can be hard to anticipate whether any given matter naturally implicates these topics, so even short conversations with lawyers can sometimes be helpful. In no particular order:
It’s impossible to summarize all legal considerations, so details may be helpful, and the above isn’t a complete list. Hope this is helpful, and don’t hesitate to let us know if it’s helpful to discuss any of this!
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