One of the most frequent questions that I get asked is “What legal documents do I need for my startup?”. So, after explaining that you are never 100% legally covered, I then go on to explain which documents they need, when they need them and how much they cost.
In the below post I’m going to answer this question in the hopes that it will give you clarity and help you avoid common mistakes made by early-stage startups.
Important things to take note before reading:
Note 1: each startup is unique, and each industry is different. So, some types of startups will most likely need additional legal documents. For example, if you’re entering an industry that is heavily regulated, you may first need a Legal Opinion (a document drafted by a lawyer basically telling you that it’s ok to do what you plan to do). Or if you’re entering the gaming industry (like an online casino) then you’ll first need to get a license from the government (if it’s legal in your country).
The truth is that most startups only need about 6-9 legal documents to get them up to their first investment. I will cover the 7 main legal documents and explain each one.
Note 2: The prices mentioned are only to give you a very rough idea of the costs. I have intentionally given a wide range when referring to prices, because the price will depend on numerous factors, such as: the type of startup, the industry, the size of the team, the size of the project, the language the document is, the legal jurisdiction, the size and prestige of the law firm/lawyer, and finally: your location, or the location of your lawyer. Lawyer’s rates in the U.S. or the United Kingdom are substantially higher than lawyer’s fees in most other countries.
Note 3: I know that it’s tempting to try and save money on legal documents by using ChatGPT, or copying the document from your competitors, but it is important to know that: ChatGPT is only about 60% accurate and will not know how to adjust the document to your specific needs, and copying from someone online is copyright infringement which will get you sued. If you really don’t have the money, the best option (at least for the very beginning) is to buy an online template of the document.
1. NDA / Confidentiality agreement:
What is it?
An NDA is one of the more common legal documents used by many startups and business owners. Let’s say that David has a startup, and he wants to hire Amy as a freelancer to build his website, but he’s worried that Amy might steal his idea or share it with others. To try and prevent this, David can ask Amy to sign a confidentiality agreement – also known as an NDA – Non-Discloser Agreement. This agreement obligates Amy to keep confidential/secret any information or materials that David gives her. Some (extended) NDAs also include sections that cover non-compete (preventing Amy from creating the same business) and ownership of the intellectual property (see more about this under “Waiver” here below). It is also worthwhile noting that there are few types of NDAs. The is also an MNDA – “M” standing for “mutual”, versus the regular NDA, and there is also an extended version of an NDA which includes sections about non-compete (preventing Amy from competing with you), non-solicitation (preventing Amy from stealing your employees) and other sections.
What’s important to know about the NDA?
Many entrepreneurs feel that they need to protect their idea or startup information. Although this does make sense when working with most service providers and/or potential partners, it is important to note that most VCs (venture capital) firms and lawyers won’t sign this agreement.
There are numerous reasons for this. First, both VCs and startup lawyers meet with hundreds of startups each month. If they had to negotiate each NDA, they would be spending tens of hours a month doing so. Second, by signing the NDA, they would be limiting themselves (legally) from potentially working with similar startups and perhaps exposing themselves legally (if another startup with a similar idea comes along, then the first startup might one day say: “hey, you gave them my idea”). And lastly, it’s a waste of their time, because 99% of VCs and lawyers don’t steal ideas! That’s just not their business.
How much does an NDA cost: $300 – $1,500.
Bonus tips:
First, you shouldn’t be sharing anything too secret anyway. Second, the chances of someone stealing your idea are tiny – the reason for this is simple: the hard part is NOT the idea, it’s the 2-4 years of your life implementing the idea! Lastly, SHARE your idea was as many people as possible. Why? Because you will learn a lot of valuable information! One last thing: by asking a VC to sign an NDA, you are signaling to them that you aren’t familiar with the industry norms.
* The only situation in which you might ask a VC to sign an NDA is if you have created some really unique technology and you haven’t patented it yet, and even then, all you need to do is just not share with them the ‘secret sauce’.
2. Founder’s Agreement.
What is it?
It’s an agreement signed by the founders of a startup which defines their relationship, obligations and rights. This document can be anywhere from 5 –
25 pages, and includes a variety of important, even crucial, topics.
Examples of subjects covered in startup founders’ agreements include: division of shares/equity, how to hire and fire one of the founders, who will be on the board of director, how are decisions made, vesting periods (meaning the period of time that the shares are allocated/given out) and many more. Read here all about Founder’s Agreements.
What’s important to know?
- If you’re not a sole/single founder, then this is one of the most important documents you’ll need. According to CBS insights, fights between founders is one of the most common reasons for startup failures and the reasons are obvious: no pay, lots of pressure, lots of getting “no”, lots of ego. The perfect settings for founder fights.
- Don’t wait until it’s too late. What’s the right time? Once you start working together, of if a co-founder is joining, then shortly after you’ve gotten to know each other and you know you want them onboard.
- I work with lots of different types of clients. Some are high tech companies with large budgets, others are private individuals using their personal savings. When needed, I’m more than happy to tell clients that they don’t need a document just yet, or if there’s no choice then to use a document from the internet (not copied, and not ChatGPT!) just for starting. But in this case, trust me: do not use the internet, and do not do it yourself. Get a lawyer to draft the agreement for you!
How much does a founder’s agreement cost: $800 – $5,000.
Bonus tips:
If you want to make the process easier, sit with your co-founder/s over a coffee or pizza, and talk about everything! The more, the better. Read the article about Founder’s Agreements to better understand what topics to cover.
3. Waiver and Transfer of Intellectual Property (“IP”)
What is it?
This is an agreement that transfers any ownership rights in creations (code, websites, app, sketches, mock-ups etc.) from one person to another. It ensures that it’s 100% clear that you or your startup owns all intellectual property created during the collaboration.
* Intellectual property = Intellectual property are legal rights that protect creative ideas and inventions, giving creators exclusive control and the ability to earn from their work while stopping others from using it without permission.
Example: David asks Amy (a freelancer) to build a website for his new startup. The law in most countries states that whoever created the creation (in this example the Website) owns it – unless agreed otherwise*. So, unless David and Amy have an agreement which specifically says that David will own the website, even if David pays Amy, there is a high chance that Amy will still own the website (and why take the chance?).
* “Unless agreed otherwise” have different definitions in different countries. In some countries it could mean “agreed in writing” and in others a verbal agreement could be enough (see pro tip).
What’s important to know?
When engaging with contractors and freelancers, it’s important to have a clear understanding about who owns the intellectual property rights. The waiver and transfer agreement not only safeguards your startup’s ownership but also defines the terms and conditions under which the transfer and waiver of intellectual property occur.
How much does a waiver and transfer of Intellectual Property cost? $900 – $2,500
Bonus tips:
Agreeing verbally is not enough and not worth the risk! Also, if you ever get to court, the person who wins is (unfortunately) not the person who is right, but the person who can prove he’s right, and the only way you’re going to do that is by having a written and signed document! Another important aspect is to make sure that you clearly define what Intellectual property the person is transferring. You want this to be as broad/wide and clear as possible.
4. Service Provider Agreement
What is it?
A service agreement is similar (in concept) to the waiver and transfer of IP document mentioned above, but while both serve to protect your startup’s interests, the service provider agreement covers a much wider range of potential issues. The purpose of the agreement is to protect you from the 100 things that can go wrong when working with service providers, such as late delivery, not the right work delivered, changes in price, liability, confidentiality, ownership and many other issues. A common example for when the Service Agreement is used would be when a programmer is building your app or website, designers creating your brand identity or marketing agencies promoting your product. Another example could be if you are getting advisory/mentoring services or have people on your advisory board.
What’s important to know?
While it may have to pay additional costs upfront, having a well-drafted service provider agreement can save you substantial time and money in the long run by preventing or efficiently resolving potential conflicts – and I guarantee you, that there are almost always conflicts with service providers and clients. It is also important that you make sure that the lawyer drafting the agreement has personal experience in the area of the service being provided. For example, I personally have built (with programmers) about 10 websites. This means that I know the process, know all the challenges along the way and can protect clients against them in the agreement.
How much does a service provider agreement cost? $1,000 – $3,000*
* A short advisor agreement would be on the lower end, versus a complicated project (building a mobile app or software with developers) would be on the higher end.
Bonus tips:
The service agreement is usually relevant when the cost of the service is at least double the cost of the agreement. Otherwise, from a financial point (not necessarily a legal one), it might be best/enough to use the waiver and transfer agreement. For example, if you’re building a relatively simple WordPress website as an MVP, and it’s costing you $900, then it wouldn’t make sense (financially) to spend $1,000 for a service agreement. In this example, the safest option would be to do the following 3 things: (1) get recommendations about the service provider, (2) write down the 10 most important aspects in an email, and get them to agree (make sure you have their full name and contact details, otherwise you won’t be able to enforce what was agreed if need be), and most importantly: (3) control the money, meaning only pay a small upfront deposit (not more than 15%-20%), and then another 1-2 payments based on their progress, and then leave at least 20% for a testing/support period at the end which should be at least 2 weeks.
5. Terms of Service (also known as Terms of Use)
What is it?
The Terms of Service, also known as “Terms of Use” (TOU), is a comprehensive legal agreement between your business or startup, and its’ users. The agreement outlines the rules and guidelines that the users must follow when using your website or mobile app. If done correctly, it is a binding legal contract which will help protect you from getting sued (there is always the risk of getting sued, but if done right, your starting point in court will be substantially better, and it could be the difference between winning or losing. A good example to understand what a TOS is, can be seen by comparing it to the big sign at a public swimming pool that tells people what they can and can’t do.
What’s important to know?
The Terms of Service agreement needs to suit the needs of your website or mobile app and reflect the actual services that you provide. Many people wrongly think that they can just copy the document from the Internet, or worse: from one of their competitors. Doing this will result in 2 things: first, your document will not properly reflect your specific services (which means that you are at risk), and second, this is copyright infringement (because you stole something that is not yours) and there is a high chance that you will get sued.
How much does a Terms of Service agreement cost? $1,000 – $3,000
Bonus tips:
Because the Terms of Service needs to be a legally binding agreement, it is crucial that you get the user’s consent. There are numerous actions that you must take to ensure this. Here are two examples: make sure that the link to the Terms of Service is in a clear and easy to find place on the website/app, and add a tick box for users to actively tick when they sign up (most entrepreneurs make the mistake of having the tick already appear in the box). Again, these are just 2 methods out of a few that you should use.
6. Privacy Policy (+ Cookie Notice sometimes)
What is it?
The Privacy Policy tells your users what information you’re collecting from/about them, what you do with it, who you share it with and for how long you keep it. Having a Privacy Policy is not just good business practice, it’s often a legal requirement. Violations of data privacy laws can result in severe penalties. If done correctly, having a privacy policy will reduce your risk of getting sued, and improve your chances of winning if you do (assuming that behind the scenes you did what the Privacy Policy says that you do with the user’s information). Equally important, if you don’t have one, the Appstore and Google Play usually won’t let you upload the mobile app.
What’s important to know?
The Terms of Service agreement needs to suit the needs of your website or mobile app and reflect the actual services that you provide. Many people wrongly think that they can just copy the document from the Internet, or worse: from one of their competitors. Doing this will result in 2 things: first, your document will not properly reflect your specific services (which means that you are at risk), and second, this is copyright infringement (because you stole something that is not yours) and there is a high chance that you will get sued.
How much does a Privacy Policy cost? $1,200 – $3,000.
The price of the Privacy Policy will vary based on the type of business, type of information collect, your use of it, and perhaps most importantly: do you need to be GDPR compliant.
Bonus tips:
Similarly, to the Terms of Service, because the Privacy Policy needs to be a legally binding agreement, it is crucial that you get the user’s consent. There are numerous actions that you must take to ensure this. Here are two examples: make sure that the link to the policy is in a clear and easy to find place on the website/app, and add a tick box for users to actively tick when they sign up (most entrepreneurs make the mistake of having the tick already appear in the box). Again, these are just 2 methods out of a few that you should use. The privacy policy is one step. The second step is making sure that you manage the information that you collect according to your policy. Additionally, if you’re operating a mobile app, including a Cookie Notice or explaining mobile device permissions may also be necessary. You can read more about it here: Privacy Policy for websites and Privacy Policy for Mobile Apps.
7. Pilot / Evaluation agreement
What is it?
As a startup, you may want to test your service or product on larger companies who are potential future customers. You have an interest to test your service, and they have an interest to try it, because they are looking for new innovative solutions. But these companies will require a legal document governing the relationship and the test period between the two parties. The Pilot agreement covers the main terms and conditions for providing the service, such as payment, the term/period, liability for damages, ownership of the intellectual property, and a whole bunch of other important aspects.
What’s important to know?
Having a clear and legally binding agreement in place is crucial as this will protect you and your startup by defining expectations, responsibilities, potential liabilities, ownership & pricing issues and more. There are 2 types of evaluation agreements – a ‘short’ one and a ‘long’ one. It is important to know the differences between them (You can read more here: Evaluation Agreement).
By having a well-drafted Pilot or Evaluation Agreement, you can ensure that the testing process goes smoothly and that both parties understand their roles and obligations. This can help prevent misunderstandings and disputes that may arise during the evaluation phase.
How much does an evaluation agreement / Pilot agreement cost? $1,000 – $3,000
Bonus tips:
Approaching companies with a professional evaluation agreement sends a signal that you are not just some early-stage startup, but rather that you know what you are doing. This improves your chances of signing the deal. More importantly, it will protect you in case something goes wrong.
8. Incorporating a Company
What is it?
This is when you register a legal entity (a company in this case) and this new legal entity becomes the business. Incorporating a company involves legally forming a separate business entity, such as a corporation or limited liability company (LLC), to conduct your operations. This step creates a legal distinction between the business and its owners, providing limited liability protection and potential tax benefits. Until the registering of a company, you (or you and your partners) are the business. After incorporating, the company becomes the business, and the company is considered a completely different entity (legal organ) for all legal purposes. Meaning that the company, through its’ representatives (you) can act as a separate legal entity – enter into agreements, buy, sell etc. This also provides you better legal protection, because if someone wants to sue you, they sue the company, and not you personally (assuming you didn’t intentionally do anything illegal).
What’s important to know?
There are 3 main reasons to incorporate: first, to provide you with more legal protection. Because the company is a separate legal entity, if someone wants to sue you (for something related to the business), they will sue the company, and not you personally. Second, for tax reasons. I won’t go into this here,
but before you create something too valuable, you should incorporate, so that all the Intellectual Property (“IP”) will belong and be under the company’s name. This will save you from a tax event later down the road. And lastly, if you are looking to raise money, investors will want to invest in a company, and not with a private individual.
Despite the above, if you are still at a relatively early stage, for example still researching the market, interviewing potential customers and doing other preliminary actions, then there may not necessarily be a need to incorporate just yet, as this will just cost you unnecessary fees.
How much does it cost to incorporate a company?
This is hard to answer as it really does depend on the country. In many countries you can do the registration yourself, and it would cost anywhere
from $100 – $1,000 for the registration fees + a lower renewal fee each year.
But as with many other legal actions, there are risks to doing it yourself which is why it would be best to use a lawyer which would add another $400 – $2,000. But this is not the expensive part. The costly aspect of incorporating is usually the fees that you’ll have to pay your accountant to file your yearly tax reports – which is why it’s best to consult with an attorney to make sure when is the best time for you to incorporate.
Bonus tips:
If you are considering incorporating and it is now towards the end of the year, then you might want to wait till until January, because that way you won’t have to pay a renewal fee in the beginning of 2024, and you won’t have to file a tax report for the previous year.
Example: if it’s now October 2023, and unless you really need to, you might want to wait until January 2024.
There aren’t too many legal documents that an early stage startup needs, and you don’t always need them right in the beginning (it’s always better to focus on validating your business idea first or at least simultaneously). But if you are at the stage that you need them, you need to make sure you’re doing them right, and be sure to use the services of an experienced startup attorney.
Feel free to contact us. Good luck with your product or service.