Clearing legal matters

Zero business action before clearing legal matters

There is plenty to think about – including legal matters and necessary contracts – once you set out to make your business idea come true. That’s why new companies must solve also legal matters within the first year or so. You are focused on making this amazing idea become a reality; you make plans, find a business location, maybe set-up a production, get investors or a partner on board. 

It all happens so fast, and as days turn to weeks and months, you can simply forget to get the pivotal deals you make in writing. Then suddenly, one of your suppliers fails to deliver, or your lease is cancelled, or your partner quits and copies your business idea. Now, even if you can’t avoid such scenarios, you can try to prevent them from hurting your business. The following articles are created to help and inspire you to make the right choices and clear all legal matters in due time.

There’s a contract for almost anything

Depending on the type of business you are in and the way you plan to develop it, whether it is having partners, taking in investors, hiring new employees or maybe partnering with a range of suppliers, it’s always recommended to create a contract. This article will give you an introduction to the most important contracts you may come across as an entrepreneur and what they should cover as a minimum. As all business areas are different, we recommend that you hire a lawyer to create your contracts. 

Before diving into the specific contracts, here is the basic information that you’ll find in just about any kind of agreement:

  • Names and roles of the parties
  • Term of the agreement (the start and end dates within which the agreement should be in effect)
  • Pricing and payment terms
  • Confidentiality (how commercially sensitive information that the parties receive about each other can be used) 
  • Consequences for breaches of the agreement
  • Governing Law (what rules that will be used to interpret the meaning of the agreement)
  • Dispute resolution rules
Partnership Agreement

Shareholders' Agreement

When you start your company together with someone else, this is one of the most important documents. Even though legal matters might be the last thing on your mind, it is important that you take the time to agree upon what your ownership should look like by creating a Shareholders' Agreement. A Shareholders' Agreement usually takes every possible contingency into account - among others it includes information such as:

● Responsibilities and workload split between the owners.

● Ownership split.

● Profit and loss compensation and distribution among owners.

● Decision making rules.

● Buy and sell rights (if an owner leaves, dies or is unable to work).

Non-Disclosure Agreement
Employment Agreement
Manufacturing Agreement
Distribution Agreement
Sales Agency Agreement
Licensing Agreement
Subcontracting Agreement

Shareholders' Agreement

When you start your company together with someone else, this is one of the most important documents. Even though legal matters might be the last thing on your mind, it is important that you take the time to agree upon what your ownership should look like by creating a Shareholders' Agreement. A Shareholders' Agreement usually takes every possible contingency into account - among others it includes information such as:

● Responsibilities and workload split between the owners.

● Ownership split.

● Profit and loss compensation and distribution among owners.

● Decision making rules.

● Buy and sell rights (if an owner leaves, dies or is unable to work).

Non-Disclosure Agreement

When you enter into collaboration with an external party you often have to give out commercially sensitive information regarding your business. In such cases, the best way to make sure that the business information you give out is protected is by using a Non-Disclosure Agreement (NDA). The NDA specifies what the parties can and can’t do with the information they have received during their collaboration by including information such as:

● What information the agreement covers.

● How information can be used by each party. 

● Consequences for breaches.

● How information should be destroyed or returned.

Employment Agreement

If your business is growing, you will probably have to hire some people. When doing so, a contract of employment protects both your new hire and your business. It allows you as an employer to specify the employee’s task and responsibilities as well as what you are promising in return. An employment contract usually includes information such as:

  • Start date (and end date, if the employment is to be temporary). 
  • Type of employment (full-time, part-time, probationary, temporary)
  • Job title and job description
  • Place of work (and if the employee agrees to travel
  • Hours of work (and if the employee agrees to work additional hours if requested).
  • Salary details
  • Time off and vacation policy.

Manufacturing Agreement

When you have designed a product and found the right manufacturer it’s time to agree on the terms of your arrangement. The Manufacturing Agreement specifies each party’s responsibility by including information such as:

  • Quality and quantity of goods.
  • Shipping and risk split during shipping.
  • Liability (what happens if the product causes damages when being used).
  • Warranties (guarantees that the goods are in the agreed condition).
  • How the potential Intellectual Property Rights to your product can be used.

Distribution Agreement

If you’re a manufacturer, a Distribution Agreement could be an option if you want to have your product sold in a specific area by giving an external party distribution rights. The Distribution Agreement can be either exclusive or non-exclusive depending on whether you want to keep the opportunity to have the product sold by yourself or someone else in the territory that the agreement covers. Usually a Distribution Agreement also contains information such as:

  • Grant of right to distribute.
  • Territories that the distribution right applies to.
  • Allowed usage of trademarks and other Intellectual Property Rights.
  • Quality and quantity of goods.
  • Shipping and risk split during shipping. 
  • Terms for repurchasing of inventory of products when the agreement terminates.
  • Warranties (guarantees that the goods are in the agreed condition).

Sales Agency Agreement

If you are developing, manufacturing and selling products or services, you might want to appoint an agent to market and promote some of your products. This type of arrangement gives the agent the authority to act on your business’ behalf. In exchange for their services you will pay a commission. The Sales Agency Agreement normally contains information such as: 

  • Grant of right to market and promote your business/product.
  • Exclusivity or not of the authority.
  • The responsibilities of both parties.
  • Territory that the authority applies to.
  • Commission and expenses.
  • Ownership and allowed usage of trademarks.

Licensing Agreement

If you are the owner of a patent, trademark or another Intellectual Property Right (IPR) and want to give someone else (a licensee) the right to use it, you can grant this person a license. In such cases you should get a Licensing Agreement into place. This agreement covers information such as: 

  • License grant (the terms and conditions of which the licensee can develop, market or in other ways use the product as well if it can be sub-licensed by the licensee).
  • Exclusivity or not of the license.
  • Territory that the license applies to.
  • Compensation terms (e.g. royalties or flat-fee).

Subcontracting Agreement

If you have success and a lot of projects, you might decide to get someone to help you do some of your work for you. When engaging a subcontractor, you want to protect your business if the subcontractor fails to deliver what was agreed. The Subcontracting Agreement outlines all the expectations to ensure that the subcontractor complies with the main contract by including information such as: 

  • Change control (how you can make changes to the services).
  • Liability (what happens if the subcontractor fails to perform under this agreement).
  • Insurance requirements for the subcontractor.

We asked a couple of our business advisors and three entrepreneurs about their experiences with handling contracts. Learn from them, why working out contracts for every action, deal or agreement can be of value to your business.

Mistakes your business can’t afford

Not all legal matters can be solved with having the right contracts in place. Already when registering your business, you need to consider legal structures. Registering the wrong type of business might cost a lot to you. 

The consequences depend on the type of mistake, but could be anything from having to repay taxes, getting a fine from the authorities or being sued by e.g. a business partner. Make sure to re-register your business with the business authorities, when your business structure or demands change e.g. you get a co-owner, want to import and export or want to hire employees.

Speaking of the latter, when taking on employees the Employment Agreement is not the only important paper: An employee handbook or human resource manual should also be made to ensure that every employee receives the same information. Even though these are not legal documents, they should contain the policies, conducts and procedures of your company as well as how certain legal issues are dealt with (such as discrimination or sexual harassment).

Make sure to avoid these legal mistakes

  1. Failing to protect the privacy of your customer data in accordance to current rules.
  2. Having no legal document stating how issues will be resolved among shareholders. 
  3. Not considering what to do if a business partner leaves, dies or gets divorced.
  4. Failing to establish the right legal structure for your company.
  5. Publicly (even if anonymously done) trashing your competitors on the web.
  6. Failing to protect property by not getting a patent, copyright, or trademark or design right.
  7. Not paying your employees the minimum wage or following other employee protection acts.
  8. Not reporting your tax/VAT correctly.

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