4 October 2019
Essential Agreements for Your Business
What agreements do I need for my business?
A significant part of my practice involves advising clients on which agreements best suit their business needs and goals. Whether it’s two partners looking to start a new venture, a growing business looking to fundraise, or a more established entity negotiating an acquisition, they all need agreements that will protect them from risk and allow their businesses to flourish.
A bootstrapping business may not be in a financial position to put all necessary agreements in place before they launch their business, but it is still important that they understand that investing at least some money now can protect them from potentially incurring thousands in litigation costs later.
Following is an overview of some common agreements, why they are important, and how having the right agreements in place at the right time will benefit your business regardless of the stage of growth you’re at.
Any business involving two or more owners should get legal advice on drafting a shareholders’ agreement as early in the process as possible, ideally at the time of incorporation. Starting a new venture often involves a ‘honeymoon’ period during which the owners are getting along very well and are fully engaged and bringing new ideas to the table. It is not uncommon during this stage for owners to take their good relationship for granted, not anticipating the challenges that may follow.
Business partners, especially friends and family, can sometimes get into disagreements over seemingly trivial issues which, if left to fester, can cause anxiety and further confrontations as the business grows and becomes profitable. Therefore, the key consideration for any business involving multiple owners is to ensure that the expectations, responsibilities, rights and restrictions of each owner are clearly defined in a properly drafted shareholders’ agreement.
Critical discussion points may include:
- what happens when one partner wants out of the business
- whether each shareholder will need to provide a proportional amount of investment funds when the company needs cash
- what happens to the shares on death or disability of one of the owners
- non-competition/non-solicitation clauses to protect employees and customers
- key-man insurance, which protects an owner’s family in the event of disability or death
The agreement can be designed to be as simple or as complex as necessary to minimize disputes, ensure clarity, and avoid misunderstandings between the parties, even if all parties are not in full agreement on all points at the outset. The agreement can always be tweaked in future, as the business evolves.
The absence of a shareholders’ agreement covering the most essential aspects of the relationship between the parties can allow a business to ultimately suffer from deadlock due to unresolved disagreements, and lead to costly litigation.
Also known as an NDA or a confidentiality agreement, this type of agreement is important to have in place before you communicate with any suppliers or investors who may be privy to the core secrets and data that underlie your business. Without an NDA in place, third parties are under no inherent obligation to protect or maintain confidentiality around the information received, leaving little recourse for your business in the case of a privacy breach.
This agreement should be drafted prior to engaging in any substantive discussions with such third parties. Another option to a standalone NDA may include inserting tailored confidentiality clauses into other existing agreements. Your lawyer can help you decide which approach is best for your business.
Employment / Independent Contractor Agreement
Any business hiring an employee or engaging the services of an independent contractor (also known as a freelancer) should require that the party being hired sign an appropriate employment agreement document. This protects the business not only from potentially incurring thousands in unforeseen severance obligations should the employee be terminated in future, but also protects any intellectual property developed through the course of the employee’s duties to the business.
Businesses will also want to ensure that independent contractors are responsible for self-reporting any tax liabilities to the Canada Revenue Agency, are adequately protecting confidential information from falling into the wrong hands, and that any out-of-pocket expenses are pre-approved by the business.
These agreements should be drafted and adopted prior to the hiring of the third-party, as it is very difficult to implement once the relationship has commenced.
If a business in the growth phase is looking to fundraise, either from third-party investors, friends, or family, a subscription agreement is essential to ensure appropriate compliance with securities laws. Many private businesses are unaware of the strict securities laws governing how non-founders can invest in the business. The broad eligibility categories for any person looking to invest in your company include:
- accredited investors
- friends/family/business associates
- minimum investment threshold by an individual
If a business decides to raise money from third parties without carefully obtaining legal advice, they risk severe penalties and potentially even jail time. Before considering or accepting any external funds, ensure your lawyer is qualified to advise you of the necessary requirements under securities law that govern your business.
Tips for Good Agreements
A poorly drafted agreement can cause more headaches than it’s worth, not to mention potential litigation should interpretation of the agreement come into question. Non-lawyers should avoid drafting their own agreements, even if it may seem convenient or expedient to do so, as a variety of laws and case precedents may be applicable to the agreement and can undermine its enforceability and legality.
Having an agreement drafted by a lawyer does not automatically ensure that it is a “good” agreement. A lawyer who is not fluent in business law may provide a document that is substandard. A good agreement should demonstrate a deep and nuanced understanding of the relevant laws, be formatted clearly, and use concise language when possible without the need for extraneous legalese. It should contain a section that defines terms, which should then be used consistently throughout the agreement. For example, we often encounter capitalized terms used in agreements that lack any proper definition and for which the context remains ambiguous.
Where applicable, commercial agreements should include:
- details on the length of the term of the agreement
- renewal provisions
- clear pricing and payment provisions
- termination clauses (and identify the effect of any termination)
- data ownership/intellectual property aspects relating to the business
- appropriate indemnities to help prevent the need to go to court for enforcement
Alternative dispute resolution and jurisdiction are also important considerations that should be discussed, since they also have the potential to avoid costly litigation.
Businesses may be hesitant to incur legal fees, especially at the outset, for obvious reasons. While certain agreements can be appropriately postponed until they are truly necessary for the business, some of the essential agreements covered here are important to discuss and implement sooner rather than later to ensure your business avoids potentially costly litigation and is well-protected for the future.
Anand Athiviraham is a Senior Associate in our Business Law Group. He is a regular writer and presenter on the topic of business law, with a focus on tech startups and growing entrepreneurs.