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Business start-ups: the 7 legal documents you need to get your business started

Most people create a start-up with the view to selling it (or at least a large part of it) down the track.

Putting in place appropriate legal documents helps to clearly communicate the arrangement to all the relevant players, and also assists in maximising the value of the enterprise when a sale of the business takes place. So what are those documents?

1.     Business Start Up Lawyers’ Terms and Conditions of Sale (T’s and C’s)

Your start-up will either be selling goods or services or both. Key issues for your T’s and C’s include payment terms, warranties (if you have any), limitation of liability clauses, confidentiality clauses, termination provisions, privacy, intellectual property and disclaimers. Sometimes personal property securities or other security issues need to be considered.

Every business is different. It is a mistake to assume that the T’s and C’s of your competitors can be cut and pasted into your own T’s and C’s.

2.     Business Succession Agreement

This is often called a business will or a buy-sell agreement and its provisions are often incorporated into a shareholders agreement or partnership agreement.

The shareholders agreement or partnership agreement will set out the rights and responsibilities of each shareholder or partner. As start-up lawyers, we can assist you with suggestions as to what ought to go into the agreement if you are unsure.

A start-up lawyer can also advise on how the entry and exit of shareholders or partners can be managed within the agreement so that regardless of the trigger event that gives rise to the exit, the exiting shareholders or partners receive the proceeds of their sale at an agreed price and on time.

3.     Website Terms

Most businesses have a website these days. Where the start-up is intended to trade online, the terms and conditions need to govern the arrangement between the business and the customer in relation to the use of the website.

For online businesses, the website terms can be incorporated into the terms and conditions of sale used by the business.

Where the business does trade online, the website terms should deal with issues such as prohibited conduct and copyright. They can also include disclaimers for errors and viruses as well as issues relating to ownership of third party materials.

The disclaimer should also extend to links posted on the website, and can conclude a statement to the effect that the business is not recommending any of the goods or services of the third party website.

4.     Business Start Up Lawyers’ Privacy Provisions

The Privacy Act 1988 has been the subject of continuous updating with the most recent being in March 2014. Now small businesses with an annual turnover exceeding $3 million must comply with the ‘Australia Privacy Principles’. As penalties are now potentially very severe, it is strongly recommended that the business has a privacy policy clearly setting out the personal information it will be collecting from consumers and how it intends to use it and disclose it, and what security measures it has in place to ensure the security of that information.

5.     Employment contracts

Your investors will want to know what your responsibilities are and what their own responsibilities are. Sometimes investors or founders are employed by the start-up company and sometimes they are contracted to the start-up company under a contractor agreement. The same issues arise in each instance: what do the other parties expect from them and what do they expect from the other parties who are helping with the funding? Beyond these issues, an employment agreement or contractor agreement will help convince your investors that your business is legitimate and that their money will be used carefully and sensibly. The investors will also be looking for a restraint of trade clause in the agreement to prevent the founder from leaving and starting up an identical business the following week.

A properly drafted employment contract will canvass things like:

i)               Whether the employment is covered by an Award under the Fair Work Act.

ii)             Probationary periods

iii)            Long service leave and annual leave

iv)            Salary and any applicable bonus

v)             Garden leave

vi)            Superannuation

vii)          Ownership of intellectual property

viii)         How and when the employment agreement can be terminated; and

ix)            Applicable restraints in relation to ex-employees, customers and business relationships.

An issue frequently overlooked is that relating to the start-up business’ employment policies. These can include matters such as internet use, employee obligations at office parties, harassment and bullying, social media use and use of alcohol and drugs. In addition, matters such as who owns or controls the employee’s LinkedIn or business Facebook profile are becoming very relevant.

6.     The documents needed to get funding

Crowdfunding is currently illegal in Australia. Our Business Start up Lawyers expect that changes to the law will make it legal by the end of 2016 with the proposed insertion of a new Chapter 6D into the Corporations Act. In the meantime, a start-up founder is generally limited to raising up to $2 million from up to 20 investors in any 12 month period. And spamming people is not permitted, neither is publicly advertising your offer. However you can generally canvas ‘sophisticated investors’ being people with net assets over $2.5 million or an annual salary of $250,000 or more.

The proposed new Crowdfunding laws will allow unlisted public companies to raise up to $5 million per year, with each investor limited to investing $10,000 in any 12 month period.

 

 

7.     What about preference shares

Some investors are attracted to the idea of owning preference shares. A preference share gives the owner a priority and will be repaid ahead of the ordinary shareholders on a liquidation of the company start-up. However, preference shareholders are still behind unsecured creditors in a company wind up.

Preference shares can pay dividends ahead of the dividends payable on ordinary shares. This typically makes their dividends more regular than the dividends that ordinary shareholders receive, particularly in a start-up environment where profits can be sporadic.

It is common for preference shares to be converted (or convertible) into ordinary shares at some time in the future. Frequently the conversion rate (1 for 1, 1 for 2 etc.) is the subject of strenuous negotiation between the start-up founder and the potential investor.

The underlying shareholder agreement or business succession agreement will also usually provide for a mechanism by which the preference shares can be bought and sold. Other issues for negotiation include whether the dividend is fixed or floating and whether it will be franked.

If you want to get your business going, then contact our Business Lawyers Sydney for expertise in business law advice. Call Leigh on 02 9964 0022. He is an Accredited Specialist in Business Law. Leigh Adams Business Lawyers. We get you there.