10 Agreements You Did not Know Your Startup Needs That Can Cost You Millions of Naira in Losses

Introduction

Last year, BlackCrest had a client who was being threatened by an investor over a $20,000 equity investment. The founder had accepted the cash under an oral agreement and then the business had gone bad. And because there was no legal agreement documenting their deal, the investor claimed the money was a loan and used police to harass the founder for two months before we stepped in.

Agreements can make or mar your startup ambition. As a founder, you don’t need to know or have all the agreements in the world, you just need the most basic ones that keep you out of trouble.

1. Founder’s Agreement:

 The founders agreement is one of the most powerful documents any founder can have. Remember the case of Facebook when one of the early team members came to sue Mark and claim shares in Facebook? They ended up with a settlement worth millions of dollars in today’s value but he could have been a billionaire if he signed a founders agreement with Mark. Your startup might be worth $20 today but could be worth $1 billion tomorrow. Your founders agreement is how you protect your equity in the business. A Founder’s Agreement outlines each founder’s roles, responsibilities, ownership percentages, and decision-making powers. This is what makes it so essential.

2. SAFE Note:

When you try to raise, remember that things can go wrong in the future. Ensure that you manage this risk by including clauses in the investment agreement that you sign. The best investment agreement we recommend to early-stage founders at BlackCrest is SAFE Notes. SAFE means “Simple Agreement For Future Equity”. Founders who raise funds with a SAFE have the following benefits

• They don’t have to repay the money because it is equity funding.
• They don’t have to give up any equity upfront.
• They don’t have to think about valuation until the next funding round.
• They retain significant control over their business.
• They can raise funds quickly and cost-effectively.

Failing to structure the SAFE properly can lead to misunderstandings, delayed conversions, or disputes between founders and investors, jeopardizing the startup’s financial stability.

3. Intellectual Property (IP) Assignment Agreement:

This agreement ensures that the startup owns all intellectual property created by employees, contractors, or even founders. This is particularly helpful when you have a founder who leaves the team. If the IP belongs to the company, they can’t take it with them and will still be bound by the non-compete clause in the founders agreement.

4. Non-Disclosure Agreement (NDA):

NDAs are crucial when sharing sensitive information with potential partners, investors, or collaborators. Founders have lost millions of dollars worth of trade secrets by not signing NDAs with potential clients.

Note that most VCs won’t agree to sign one, so you need to be smart when dealing with them. Don’t overshare.

5. Terms of Service (ToS) and Privacy Policy:

For startups operating online platforms or providing services, having clear and comprehensive ToS and Privacy Policy documents is vital. Unclear Terms of Service and Privacy Policy can lead to lawsuits and fines worth millions of Naira. Ensure you liaise with a startup lawyer or startup law firm like BlackCrest in setting up your privacy policy and terms of service.

6. Employment Contracts:

Clear employment contracts are essential for defining the terms of employment, including roles, responsibilities, compensation, and benefits. Without clear employment contracts, employees can get in trouble. Did you know that as an employer, you are liable for the actions of your employee in the course of business? Did you also know that employers are expected to provide pension contributions and health care plans for their employees under Nigerian labour laws? If your runway is a little tight, consider working with independent contractors on a contract basis.

Get in touch with a startup law firm like BlackCrest to ensure you put the right clauses that help you avoid the legal burden of employers under the law.

7. Business Agreements/Contracts:

Establishing clear and legally binding contracts with customers is crucial. Unclear terms can result in misunderstandings, disputes, and financial losses if services are not delivered as expected or payment terms are not properly defined. Every founder has the responsibility of avoiding bad deals for their company.

Do not sign any document you’re unsure of. Always consult a lawyer or startup law firm like BlackCrest.

8. Partnership Agreements:

When entering into partnerships with other businesses or individuals, having a well-drafted partnership agreement is vital. In addition to ensuring your agreement is in order, also investigate your potential partners.

A partner involved in money laundering can lead to having your assets frozen by the government. This can cost you millions of naira in losses.

9. Shareholder Agreement:

As a startup grows and attracts external investors, a shareholder agreement becomes crucial. It outlines the rights and obligations of shareholders, mechanisms for dispute resolution, and procedures for the transfer of shares.

Ensure you have one with your shareholders, your founders agreement only covers the founders.

10. Licensing Agreements:

Startups often engage in licensing agreements to use third-party technologies or intellectual property. Failing to negotiate and document these agreements properly can lead to legal disputes, licensing fee discrepancies, and even injunctions that can halt the startup’s operations.

You do not want to know just how badly the court can mess up your business because of a clause in an agreement you signed.

Conclusion

There are many forms of agreements you will come across as a founder, but always remember these 10 as the ones with the ability to bring your entire operations to a halt. Global losses of startups occasioned by bad contracts are in billions of dollars. So, ask yourself this, do you want to be a part of the loss stats? Or part of the good stats on startups that avoided billions of dollars in losses because they managed their contracts better.

Remember, no matter what happens, we are rooting for you.