Startups often cringe when we recommend written contracts. The reluctance to implement them is often three-fold: they're deemed too costly, unnecessary and restrictive.
Written agreements are indeed an investment, but I promise they will save you one down the road.
1. Shareholder and partnership agreements. One of the most important agreements that startups need, but frequently fail to put in place, are shareholder or partnership agreements. In the infancy stage of a startup, the brains behind the operation are all in sync, and cannot imagine ever having a thought or goal that is not aligned.
However, infants grow into toddlers with wills and ideas of their own, and eventually become teenagers who cannot agree on anything. This happens all too often with startups.
The shareholder or partnership agreement anticipates this unfortunate but common evolution of a business relationship. The terms of these agreements will set out the manner with which disputes or challenging decisions are to be resolved, and when the relationship is no longer salvageable, how the parties can part ways.
Without these agreements in place, nothing is predetermined, nothing is fixed, and everything is up in the air. This typically leads to bitter and protracted litigation, eating up company profits and any good will that may have been felt by parties who were once friends.
2. Employment agreements. The other type of written contract that is often overlooked or avoided is the employment agreement. Absent a written contract of employment, many terms of employment will be imposed by operation of law, one of which can be extremely costly to employers, particularly startups: an employee's entitlement to notice of termination or pay in lieu at common law.
It's a common misconception that employees are only entitled to notice of termination of employment or pay in lieu in accordance provincial employment standards legislation which at present amounts to one week of notice per year of service to a maximum of eight weeks.
However, that is only the case if the employee has an enforceable, written employment agreement which expressly and clearly provides that statutory notice and other minimum statutory entitlements will be all that the employee receives upon termination of employment. If there is no written employment agreement with such termination provision, employees are entitled to a significantly higher amounts of notice or pay in lieu which can generally be anywhere between one week to twenty-four months. Again, common law notice is not fixed and therefore often leads to litigation.
Another common misconception is that founders, significant shareholders, and/or officers and directors of the company do not require employment agreements because they are not employees. Any individual who provides services to the company for wages is deemed to be an employee. The term 'wages' is defined by employment standards legislation to include monetary compensation including bonuses, commissions, and profit sharing.
3. Intellectual property agreements. Protecting IP should be of paramount importance to a startup as it's really what the business is all about. Without agreements in place to specify who owns the IP, including the right to claim Scientific Research & Development credits, a startup may find later that it loses the lawful right to use the IP to a former shareholder, business partner or employee.
Bettina Burgess is an employment and privacy lawyer practising from the Kitchener Waterloo office of Gowlings. Bettina frequently advises and assists start-ups with employment and privacy related compliance issues, including the drafting of all necessary documents.
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