Agreements and Contracts for Startups and new business set-ups in India
The term Startup is quite prevalent in recent times and highly promoted by the Government of India (GOI). The Prime Minister of India started the Startup India Campaign in 2016 with an objective to support and promote entrepreneurs, build a robust startup ecosystem and transform India to a country of job creators instead of job-seekers.
Before we move towards the mechanics of legal terminology, let’s understand the term “Startup”. Earlier defined in the Companies Act, 1956/2013 and recognized in accordance with the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, a start-up shall be an entity which:
Once you have decided to put your idea to test in the market, by setting up your startup company the next thing which needs to be attended is of putting in place written formal agreements catering the various needs of the business. Although oral agreements have legal validity under the Indian Contracts Act, 1872, however its interpretation and enforcement in case of ambiguity or dispute is still a critical issue.
A written agreement in place clearly spelling out the roles and responsibilities between the parties is helpful in the long run to eliminate any risks or differences arising in the code of conduct. Legal contracts address such issues that may become contentious in future. Besides issues on rights, obligations, representations, warranties etc., a special care has to be taken with respect and relevance to Indian Laws and other practical difficulties that are noteworthy in Indian context in enforceability and interpretabilityby Indian Courts and therefore, a professional support in this regard couldsave time and resultant costs in litigation.
Articles of Association and Shareholders Agreement are one of the agreements required at the initial stage of any business. Apart from these two, here are few of the other important Agreements for an entity seeking to establish its business in India, briefly summarized below-
Intellectual Property Agreements like Trademark
A Trademark simply provides a unique identity to your goods or services creating a brand imagein the eyes of consumers thereby attempts to gain consumer trust. It prevents usage of any similar mark by any other competitor in the market without legal permission of the owner. Brand strengthening is also possible through a registered mark that also helps gain confidenceof the consumers.
Non-Disclosure Agreement / Confidentiality Agreements (NDA):
NDA is another first set of document that will protect the startup ventures and safeguard your business idea and intellectual property. An NDA details out the following: definition of confidential information, its ownership and manner of handling, time range that the information will be disclosed or the confidentiality will be maintained, etc.
Foreign Collaboration Agreement:
With global outreach and technical advancement, Foreign Collaborationshave become animportant driver of growth in the country. Foreign Collaboration Agreementis a contract/arrangement between two or more companies from different countries entered for exchange of technical know-hows, technical designs and drawings, training of personnelor other exchange of services for mutual benefit. It requires government approval and other additional legal formalities. In order to ensure quick processing of proposed foreign collaboration arrangements, central government has issued guidelines on this behalf.
This agreement holds importance when the business is conducted not directly by the company but through the agents appointed on that behalf to deal with the goods or services of the company. Agency contracts exhibit certain peculiar characteristics of its own inter alia providing for the date of commencement and of termination of the agency, scope and nature of the agency, commission, liability, reimbursement of expenses etc.
Consultant Agreements are generally entered into when any entity intends to engage any person or party for limited period or for a particular assignment and not as a regular employee.There is no employer-employee relationship in this case and the consultant is not typically entitled to the benefits enjoyed by the employees, unless it is specifically mentioned and agreed upon in the agreement. The agreement provides for scope, nature and terms of engagement, fee or other incentives or provision of work etc.
A Partnership Agreement is a contract between two or more partners in a partnership that is used to establish the responsibilities, and profit and loss distribution of each partner, as well as other rules about the general partnership, like withdrawals, capital contributions, and introduction or retirement or expulsion of partners.
Employee contracts and offer letters
Employee contracts are essential to any organization in order to safeguard the employer employee relationship. Such contracts may include Terms and condition of employment (e.g., compensation, role responsibilities, working hours and grounds for termination), Reporting structure, Expectations, Required commitments, Share vesting and Company policies (e.g., vacation days, paid time off the structure, dress code).
In case of startups with multiple founders or founding parties, it becomes necessary for them to sign an agreement that defines the working coordination of all parties, and form outlines to define boundaries. It is to prevent any conflicts in the future. The agreement should describe the relationship of the founders, provide the probability that all work will belong to some entity in the future and outline a basic communication and conflict-resolution clause that can help prevent disputes.
Other Business Agreements
There can still be numerous numbers of contacts/agreements/arrangements which bring legal binding between the parties, the sole intent is to make a clear understanding of rights, duties and responsibilities among the parties.