Legal Support for Startups, Founders and Venture-Backed Companies in India
The legal framework of a startup must evolve in step with its business operations, and must meet relevant compliance requirements at key stages including business expansion, capital raising, workforce expansion, and partnership development. Investors and acquirers will review core documents related to corporate governance, rights and responsibilities, and intellectual property when conducting due diligence.
As external counsel, Corrida Legal shall advise the founders and startups throughout the lifecycle of their business (incorporation to fundraising). We shall assist in drafting shareholder cum founder’s agreement, ESOP plan, intellectual property documentation, and other legal support. Ou aim is to establish a robust legal system and minimise commercial risks.
Founder Rights, Roles and Shareholding Arrangements
A founder may be involved with the company as a shareholder, director and employee. These positions need to be considered together, particularly when the company is raising external capital.
The founder-related provisions may deal with:
- responsibility for the company’s day-to-day management;
- full-time involvement in the business;
- transfer restrictions and lock-in;
- vesting of founder shares;
- consequences of resignation or termination for cause;
- death or permanent incapacity;
- confidentiality and intellectual-property protection;
- non-solicitation obligations; and
- the investor’s rights if the founder proposes to transfer shares.
Where the investor is relying on the continuing involvement of the founders, it may require them to enter into employment agreements in a form acceptable to the investor.
The effect of a founder’s employment ending should not be left separate from the treatment of the founder’s shares, board position and management rights.
Startup Fundraising and Term Sheet Review
A term sheet is a document that outlines the primary commercial understanding on which the investment would be made before the definitive investment documents are negotiated between the parties.
The terms may include the instrument to be issued, the amount of investment valuation, the resulting equity interest/shareholding, and whether the investment will be made in one or more tranches.
Where a later investment tranche is linked with revenue, profitability or another business milestone, the milestone and its consequences should be recorded clearly. The valuation applicable to the later tranche may depend on whether the milestone is achieved.
The term sheet may also deal with:
- creation or expansion of an ESOP pool;
- permitted use of the investment amount;
- board representation;
- founder lock-in obligations
- investor consent matters;
- founder vesting and transfer restrictions;
- pre-emptive and anti-dilution rights;
- tag-along and drag along rights;
- liquidation preference;
- investor information and inspection rights; and
- the proposed exit mechanism.
Although the proposed investment may remain subject to due diligence and execution of definitive documents, provisions relating to exclusivity, confidentiality, announcements, costs and dispute resolution may be recorded as binding.
Review of records and commercial contracts enables businesses to identify and resolve issues before they become commercial risks and give rise to due diligence concerns.
Legal Due Diligence for Startup Investments
An investor may perform legal, statutory, financial, tax and business due diligence prior to finalising the investment structure.
The legal covered diligence may include the company’s incorporation and statutory filings, capitalisation, previous securities issuances, shareholder arrangements, material contracts, employees, consultants, intellectual property, licences, leases and disputes.
The company may also be required to confirm that:
- its corporate and statutory records are complete;
- its shares were validly issued and allotted;
- material contracts are valid and enforceable;
- all board/shareholder approvals have been obtained;
- employees and consultants are engaged under written documents;
- intellectual property used in the business belongs to the company or is properly licensed;
- required licences and registrations are in place;
- the company has implemented confidentiality and non-disclosure measures;
- related-party arrangements have been disclosed; and
- there are no undisclosed claims or proceedings affecting the business.
Due-diligence findings may take the form of conditions precedent, specific warranties, disclosures or indemnity items under the definitive investment documents. Due diligence not only identifies the existing issues but assess if such issues can be resolved before closing of the definitive documents.
The company should therefore review its records before the investor’s document request is circulated. Corrective work is generally easier before the transaction timetable and closing conditions have been agreed.
Share Subscription Agreements and Investment Closings
The definitive document set may include a share subscription agreement, shareholders’ agreement, investment agreement and amended constitutional documents.
The conditions preceding investment may require:
- board and shareholder approval of the transaction;
- alteration or reclassification of the authorised share capital;
- appointment of authorised signatories;
- adoption of amended Articles of Association;
- valuation and private-placement documentation;
- execution of founder employment agreements;
- completion of all regulatory filings with the Registrar of the Company;
- transfer or registration of intellectual property;
- completion of the agreed due-diligence actions;
- receipt of statutory or third-party approvals; and
- adoption or expansion of the ESOP pool.
The closing process should set out the evidence required in respect of each condition. It should also specify the procedure for receipt of the investment amount, issuance of securities, issue of the relevant certificates and completion of the post-closing filings.
All conditions precedent, warranties, and representations must be drafted in a way the responsibilities of parties are clearly outlined and any consequences of non-fulfilment are clearly defined.
Where the investment is being made in separate tranches, the documents should distinguish the conditions and closing requirements applicable to each tranche.
Investor Rights and Corporate Governance
The shareholders’ agreement records the rights and obligations of the founders and investors after the investment.
The governance provisions may deal with board composition, quorum, annual business plans, investor reporting, further financing and the decisions which cannot be taken without investor consent.
Reserved matters may include:
- changing the nature of the business;
- issuing further securities;
- incurring expenditure outside the approved business plan;
- creating a subsidiary;
- appointment of key managerial persons;
- entering into related-party transactions;
- starting/discontinuing a line of business;
- undertaking a material acquisition or disposal; and
- changing rights attached to the company’s securities.
The company may also be required to provide financial and management information and permit access to records, directors and key personnel.
These obligations need to be understood by the management team. A business decision taken informally may still breach the investment documents if prior approval was required.
Founder Employment, Employee Agreements and Consultant Contracts
The employment agreement for a founder or key employee may contain provisions related to remuneration, duties and responsibilities, reporting, place of work, confidentiality, intellectual property, termination and handover/exit.
It may also require the employee to devote full time and attention to the company and disclose inventions, improvements or developments made in connection with the company’s operations.
Any inconsistency between founder, employee or investor documents may arise issues during negotiations and investor funding rounds.
Consultants should have separate written agreements. The agreement should record the services, fees, allocation of time , relationship with the company, confidentiality obligations, ownership of work and return of company equipment.
The commercial terms should reflect the relationship.. A consultancy agreement should not be used merely to avoid preparing the employment documentation required for an employee.
ESOP Plans and Employee Option Agreements
An ESOP plan may be established to attract and retain employees, reward performance and align employee interests with the company’s growth.
The plan may be supported by board and shareholder approvals and individual option agreements. The option agreement records the number of options granted, vesting schedule, exercise price and exercise period applicable to the employee.
The plan should also address:
- eligibility for option grants;
- administration by the board or designated committee;
- treatment of options following resignation or termination;
- death or permanent disability;
- procedure for termination of ESOP;
- failure to exercise within the prescribed period;
- restrictions on transfer of options;
- change in control;
- maintenance of ESOP register;
- tax responsibility; and
- issue and allotment of shares after exercise.
Vested and unvested options may be treated differently when the employee leaves. The consequences should be available in the plan and option agreement before an exit occurs.
Commercial Contracts and Startup Intellectual Property
The recurring commercial agreement for a startup may include customer and vendor agreements, marketplace agreements, distribution or resale arrangements, software and SaaS agreements, licences, purchase orders, leases, consultancy agreements, master service agreements and non-disclosure agreements.
The contract should specify the scope of services or products being supplied, payment terms, deliverables, confidentiality, intellectual property, liability, termination and dispute process.
Technology and development agreements should clearly state that whether the work created specifically for the customer and material already belongs to the startup. Use of an existing platform, process or tool while providing services should not automatically transfer ownership of that material.
The company should also ensure that intellectual property created by founders, employees and consultants has been assigned to it or is being used under a written licence. This becomes particularly important where the company’s brand, software or business material was created before incorporation.
Founder, Investor, Employee and Commercial Disputes
Startup disputes can take many forms such as founder exits, share transfers, investor rights, employee departures, consultant deliverables, customer payments or ownership of intellectual ownership disagreementsy.
The appropriate agreement, approvals, representations and factual record should be reviewed before a legal notice, reply, settlement proposal or arbitration communication is issued.
Where an investor dispute relates to warranties, conditions precedent, use of funds or governance rights, the transaction documents and disclosure material will ordinarily form the starting point of the review.
Ongoing Legal Retainer Support for Startups
A monthly legal retainer may include commercial agreements, HR laws advisory and documentation, POSH compliance, data privacy, negotiations, corporate legal advice, trademark work, disputes, registrations and legal updates.
The retainer allows the company’s fundraising, employment and commercial requirements to be reviewed against the same corporate and contractual record. This is useful where several workstreams are proceeding at the same time.
Frequently Asked Questions
When should founders document their arrangement?
Founder arrangements should preferably be documented before substantial capital, employees or intellectual property are introduced into the company.
Is a startup term sheet legally binding?
The proposed investment may remain subject to due diligence and definitive documents, while identified provisions such as confidentiality, exclusivity, costs and dispute resolution may be binding.
What is reviewed during startup legal due diligence?
The review may cover corporate records, shareholding, securities issuances, material contracts, employment and consultancy documents, intellectual property, licences, leases and disputes. Issues that affect timelines, gaps in intellectual property rights and unresolved compliance are also given particular attention.
Why may an investor require founder employment agreements?
The investor may be relying on the founders’ continuing involvement and may require their duties, confidentiality and intellectual-property obligations to be documented. This agreement also protects the company’s confidential information and ensures continuity in business operation even after the completion of investments.
What are reserved matters?
Reserved matters are identified company decisions which require the consent specified in the shareholders’ agreement.
What documents are required for an ESOP?
The company may require an ESOP plan, corporate approvals and individual option agreements recording the grant, vesting and exercise terms.
What happens to ESOPs when an employee leaves?
The treatment depends on the plan and option agreement and may differ for vested and unvested options.
Should intellectual property created before incorporation be transferred to the company?
The company should have written ownership or licensing rights over the intellectual property required for its business.
Can investment funds be used for any purpose?
The investment documents may restrict the use of funds to the approved business plan and require consent for another use. Any deviation from agreed terms may require the prior approval of the investors.
When is an ongoing legal retainer useful for a startup?
A retainer is useful where fundraising, contracts, employee matters, investor requirements and compliance work arise through different teams.
Conclusion:
Corrida Legal partners with startups from the stage of incorporation till the stage of fundraising. When a company raises capital, enters into commercial contracts, or expands its workforce, it must ensure that the governance framework and compliance are in line with the legal obligations.
We act as a legal partner and deliver practical, commercially oriented legal advice to our clients at every stage of their business.
