Contract Types Startups Need To Know (and Use)
In the fast-paced world of startups, having the right contracts in place is crucial for safeguarding your interests, establishing solid business relationships, and ensuring smooth operations. However, with hundred of contract types available, navigating the legal landscape can be overwhelming for founders and entrepreneurs. In this comprehensive guide, we delve into the essential contract types that every startup should be familiar with.
Why Do Startups Need Contracts?
Contracts are crucial to startups because they provide a legal framework that outlines the rights, obligations, and expectations of all parties involved, including founders, investors, employees, and partners.
They help establish clear guidelines and protect the interests of the startup during critical early stages.
Contracts also facilitate effective risk management by addressing potential disputes, defining intellectual property rights, and establishing confidentiality provisions.
Furthermore, contracts help startups secure funding by providing assurance to investors and lenders that their investments are protected and governed by formal agreements.
Contract Types for Startups
From client agreements to vendor contracts, investment terms to intellectual property protection, here are some of the key contracts that can empower your startup and set you on a path to success. The exact types of agreements required will depend on your startup’s industry, business model, and the specific services it requires. It’s important to work with legal professionals to draft or review these agreements to ensure they accurately reflect the specific needs and protect the interests of your startup.
Test Your Own Contract Practices
A business starts with a contract, and if and when it ends, it will likely dissolve via contract, too. Articles of incorporation assign a corporate form— like a Corporation, S Corp, or LLC—and liabilities to various entities. Bylaws set up rules about how your firm runs, can help resolve disputes, and more.
If there are multiple founders or shareholders, this agreement establishes the rights, responsibilities, ownership percentages, decision-making processes, and equity distribution among the founders/shareholders. It helps prevent disputes and provides a framework for addressing key issues within the startup.
Partnership/Joint Venture Agreements
If the startup is entering into a partnership or joint venture with another entity, these agreements establish the terms, obligations, and expectations of the collaboration. They cover areas such as profit sharing, decision-making processes, resource contributions, and dispute resolution mechanisms.
Startups often seek external funding from investors. These agreements outline the terms of the investment, including the amount invested, equity ownership, board representation, investor rights, exit strategies, and any specific terms and conditions imposed by the investors.
Most businesses both purchase and sell a variety of goods and services. They also sell stock in the company and enter into other agreements to raise capital.
A purchase order is how you buy goods or services. It is a document a buyer sends to a seller to request specific items or services. It contains:
- Descriptions of the product(s)
- Number of items
- Purchase date
- Arrival date/time
- Cost per unit/total cost price
A purchase order becomes legally binding when signed. However, it is useful even without a signature because of the information it includes.
Purchase agreements are detailed contracts between two parties to buy and sell products and services. They become legally binding when both parties sign. They include the items in a purchase order plus additional information like:
- Choice of jurisdiction
- Responsibilities of each party
- Agreement terms
- Method to end the agreement
- Remedy for breach of contract
Startups often rely on third-party vendors or suppliers for various goods and services. These contracts define the terms of the relationship, including pricing, delivery terms, quality standards, warranties, intellectual property rights, and dispute resolution mechanisms.
Non-Disclosure Agreements (NDAs)
NDAs protect the confidentiality of sensitive information shared with employees, contractors, investors, or potential partners. They ensure that parties involved are legally bound not to disclose or misuse confidential information.
This is the most common type of NDA and is used when only one party is disclosing confidential information to another party. It establishes the obligations of the receiving party to keep the disclosed information confidential and restricts its use for any purpose other than what is agreed upon. Unilateral NDAs are often used when a startup shares confidential information with potential investors, contractors, or employees.
Mutual NDA (or Bilateral NDA)
A mutual NDA is used when both parties involved in a business relationship intend to share confidential information with each other. It ensures that both parties have an equal responsibility to protect each other’s confidential information. This type of NDA is often used in situations where two companies are exploring a potential partnership, joint venture, or collaboration.
A multilateral NDA is used when more than two parties are involved in sharing and protecting confidential information. It establishes the obligations of all parties to maintain the confidentiality of the shared information. Multilateral NDAs are typically used in complex business transactions, such as mergers and acquisitions, where multiple parties need to exchange sensitive information.
Some of your employees will have employee contracts, but there are several more contract types that you may enter into with your team members. Depending on your industry, you may have more or fewer contracted, at-will, and independent employees.
Employee contracts record the responsibilities, rights, and rules between employees and employers. Businesses typically employ most workers at will and do not have written contracts. A company may employ some people under a group contract, often with a union. And a smaller number of people may have individual employee contracts.
An employment agreement should clearly outline items both parties deem essential. It should record salary and benefits—bonuses, retirement, and insurance, for example—along with the terms of employment, work responsibilities, and performance goals. It should contain the rules for performance reviews and spell out the results of those reviews. It should also list the terms by which the parties can end the contract.
Independent Contractor/Consultant Agreements
Not everyone who works for you is an employee, nor do they need to be. Independent contractors (or consultants) can come in for a limited time or a specific project under the terms of an independent contractor agreement.
Independent contractors often perform the following jobs:
- App development
- Software engineering
- Content writing
- Graphic design
This comes with a warning: If you pretend an employee is a contractor, you can get in trouble with the government. Employees and independent contractors have different rules governing them. For example, full-time employees get benefits while an independent contractor working full-time for four weeks does not.
A non-compete agreement states that an employee cannot leave one business to work for a competitor. These agreements are frequently used in industries with:
- Proprietary information
- Information technology
- White collar jobs
- Finance and banking
These contracts are generally narrow and limited in time to a year or two. If a dispute reaches court, the courts often rule against a non-compete agreement or interpret it as narrowly as is reasonable. Some fields (like medicine) ban non-compete agreements entirely.
Intellectual Property Agreements
Intellectual property (IP) is the ideas you own. You may own a coffee mug as physical property. Your redesign of the handle to improve it is your intellectual property. The cartoon character on the front of the mug is someone else’s IP. Many businesses start with only IP and the idea that others will pay money to buy or use it.
IP assignment agreement
When a company is formed, an intellectual property assignment agreement delegates the ownership of the IP portfolio to the company. Often, this IP is the most valuable thing the new company owns. The company gets its value from the founders turning their IP over to the company itself.
Invention assignment agreement
An invention assignment agreement gives the company ownership over IP developed by its employees while they are on the clock for the company. This typically applies to engineers, designers, and creatives the firm hires to develop new ideas that the company owns and profits from.
Technology assignment agreement
A technology assignment agreement is a third way for a company to gain IP. Using this contract type, the company buys ideas developed before the corporation existed, often with stock. This exchanges ownership of ideas for partial ownership of the company.
Copyright license agreement
One company or person legally allows another to use its copyrighted material for a profit with a copyright license agreement. This license spells out the details of the copyrighted material’s use, including:
- Length of time
- Types of use
- Rights and obligations on both sides
For non-copyrighted IP, this is called an IP license agreement. Things like slogans, ideas, basic text logo elements, and lists of ingredients cannot be copyrighted.
You may need to use various types of service agreements depending on the nature of your business. Here are some common service contract types for startups:
Standard Services Agreement
A standard services agreement is a contract that outlines the terms and conditions specific to a particular project or engagement between two parties. It typically covers the details of the specific services to be provided, project timelines, pricing, payment terms, intellectual property rights, confidentiality, and other relevant provisions. It is usually used for a one-time or limited engagement and is tailored to the specific project or service being provided.
Master Service Agreement (MSA):
A master service agreement is a more comprehensive and overarching contract that sets out the general terms and conditions that will govern future transactions or engagements between the parties. It serves as a framework or template agreement that covers the broader legal relationship between the parties, allowing for multiple projects or services to be governed under a single agreement. Instead of repeatedly negotiating and executing separate contracts for each project, the MSA provides a foundation and establishes the general terms that apply to subsequent work orders or statements of work (SOWs).
Statements of work
A statement of work (SOW) is part contract, part planning document. It lists goals and deadlines alongside a roadmap to achieving them. An SOW is often made for an independent contractor working alongside company employees. This way, they can see how their work fits into the company’s broader project.
Software as a Service (SaaS) Agreement
Startups that utilize or provide cloud-based software services often enter into SaaS agreements. These agreements define the terms of the service, such as access, support, data security, intellectual property rights, and payment terms.
Service Level Agreement (SLA)
An SLA is a contract that outlines the agreed-upon level of service and performance metrics for services provided by a vendor or service provider. Startups may use SLAs when outsourcing critical functions such as IT support, customer service, or data hosting.
Data Protection Agreements
Protecting your data is one of the biggest concerns firms face today, and contracts are one of the top tools you have to do so. Data piracy happens regularly, whether teenagers steal songs or overseas corporations rip off designs for electronics they will make and sell back to consumers in the U.S. You want to protect your proprietary data and your customers’ private data.
Confidentiality agreements/non-disclosure agreements
Confidentiality agreements stop the parties to the agreement from sharing private or sensitive information. Non-disclosure agreements are a subset of confidentiality agreements.
Confidentiality agreements give at least one party the duty not to disclose the information they hold. They are frequently straightforward, and you may include them in another contract type, such as an employment contract or a sales agreement. Things that a confidentiality agreement might govern include:
- Confidential business information
- Trade secrets
- Pricing information
- Personally identifiable information about parties to the contract
You may have these confidentiality agreements with different people/institutions. These contracts can be between:
- Other relationships where information needs to stay private.
End-user license agreements
An end-user license agreement (EULA) is a contract between the software maker and the person or company buying and using the software. It sets the rules and restrictions for the software’s use. These agreements are very narrow and only cover the software’s use. The end-user does not own the software.
Software license agreement
A software license agreement allows the person or business who licenses the software to use it but not to own it (or other complex arrangements). Often, these contracts are more specialized than EULAs.
For example, with a software license, you may contract to own some uses of the software and the results of its operation but not other uses. Software license agreements have become especially important with the advent of software as a service (SaaS).
Not all data protection is about a company as an entity. Some contract types, like privacy, are about protecting your customers. Websites increasingly need robust privacy policies to match the laws in Europe, California, and a growing number of other jurisdictions. These laws give customers control over their personal data and its collection and use. Privacy policies are even more critical when minors are involved.
How to Manage These Contract Types
When you have only a few contracts, managing them may be fairly simple. But as your contract volume inevitably increases, you should consider a contract management system designed to streamline and automate all aspects of the contract management process. You’ll be able to centralize and organize contract information, enabling efficient contract creation, tracking, and management throughout the contract lifecycle.
Whether you’re a seasoned entrepreneur or just starting your journey, a contract lifecycle management (CLM) system will provide valuable insights to help you make informed decisions and navigate the complexities of contract management in the startup world.
- Why Do Startups Need Contracts?
- Contract Types for Startups
- Test Your Own Contract Practices
- Foundational Contracts
- Purchasing Contracts
- Non-Disclosure Agreements (NDAs)
- Employment Contracts
- Intellectual Property Agreements
- Service Agreements
- Data Protection Agreements
- How to Manage These Contract Types
Want more content like this? Sign up for our monthly newsletter.
Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.