Table of Contents
Every business is different. Therefore, the key contracts needed for your limited liability startup business can differ from other businesses. However, all commercial contracts generally allocate risks and responsibilities. This is because all businesses want to ensure they know what:
- is expected of them
- to expect of the other party; and
- happens when something does not go as expected.
In short, contracts help you obtain commercial certainty and limit liability.
Therefore, depending on what kind of business you operate, what sector you are operating in, and how your business is structured, there are a few common contracts you as a start-up business owner will likely encounter.
This article will outline four of the key contracts needed for a startup business. Each section will explain:
- what the contract seeks to do;
- who it is for;
- when you may not need the contract; and
- key ideas to bear in mind when negotiating the contract.
Agreements for the Supply of Goods and Services
What is It?
These are contracts between:
- you and your clients; or
- you and another supplier, such as another company you purchase materials from.
Typically, each party will want to contract on its own terms. This is because the terms for the supply of goods and services will generally be favourable to the party using the contract.
Who is It For?
In short, every business, as you enter into a contract any time you sell a product or buy a service. Therefore, understanding the terms of the contract will ensure you are certain about your rules and responsibilities.
Who is It Not For?
Again, these contracts are for all businesses that buy or sell goods or services. Even if you do not have a written contract when you sell your product to a customer or purchase materials from a supplier, the law will imply a contract. Therefore, it is better to contract on your own terms.
What Should You Negotiate?
Most contracts for the supply of goods and services will have the following provisions:
- a definitions clause — this specifies words or phrases that may be open to interpretation;
- conditions precedent — this lists conditions that have to be fulfilled before the contract comes into effect, e.g. both parties having the right insurance;
- the agreement — this outlines who will provide whom with what and for how much;
- representations and warranties — these are statements made by one party to the other which are taken to be true (if they later turn out to be wrong, parties can seek legal action);
- indemnities — where one party promises to pay the other party a certain amount of money if an unwanted event happens;
- limitation and exclusion of liability clauses — these can cap the amount one party will pay the other in the event of a breach of contract; and
- force majeure clauses — this provision specifies what happens in the case of an unexpected event (e.g. a flood) that makes it difficult for either party to perform their obligations.
Employment Contracts
What is It?
Employment law is a separate area of law that determines the nature of the relationship between the employee and employer. However, an employment contract can refine and shape this relationship to a certain extent.
Who is It For?
Any company that plans on hiring employees needs an employment contract. This may include companies with only one employee, such as a startup, depending on what your role is.
Who is It Not For?
If you do not employ anyone, you will not need an employment contract.
What Should You Negotiate?
Common terms in an employment contract include:
- salary and any bonuses;
- entitlement to any shares;
- contracted hours;
- who provides the tools and equipment;
- holiday entitlements;
- disciplinary and grievance policies;
- confidentiality or non-disclosure agreements;
- non-compete agreements; and
- required notice periods to bring the contract to an end.
These include the employee’s right to:
- ensure the employer observes its duty of care to the employee;
- the statutory minimum wage; and
- the statutory minimum holidays.
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Shareholders’ Agreements
What is It?
A shareholders’ agreement is a contract between all shareholders of the same company. It is between the shareholders in their private capacity.
Who is It For?
Shareholders’ agreements can supplement company law and grant shareholders certain rights and obligations that they would not otherwise have. Additionally, it can give unhappy shareholders an extra cause of action if they are treated unfairly. Rather than suing the company or company directors, they can claim against other shareholders.
Who is It Not For?
Typically, if you are the sole shareholder, you will not have a shareholders’ agreement. However, as a matter of contract law, it is possible to have someone who is not a shareholder as a party to the contract, though this would not make sense in most commercial circumstances.
What Should You Negotiate?
Some common provisions that you may wish to negotiate include:
- promises that the shareholders will not compete with the company;
- restrictions on transferring or selling shares;
- the terms by which profits such as dividends will be shared;
- the conditions under which a shareholder is entitled to become a director;
- confidentiality agreements;
- ownership of intellectual property rights (especially if your startup is based around business ideas subject to copyright); and
- promises not to amend the articles of association without all shareholders’ consent.
Commercial Lease Agreements
What is It?
If your business has its own offices, unless you own the underlying land and building, you will lease your office from a landlord. The relationship between you and your landlord will largely be governed by the lease agreement. At its most basic level, it evidences your right to exclusive possession of the premises, provided that you use them according to the terms of your lease.
Who is It For?
Any business that is leasing its offices from a commercial landlord.
Who is It Not For?
You do not need a lease agreement if you own your business premises outright or work from home. However, if you work from home, you must understand the terms of your residential lease to ensure you are not breaking the contract.
What Should You Negotiate?
The main provisions of a commercial lease include the:
- term;
- rent;
- service charges;
- insurance provisions;
- repairs;
- alterations and improvements; and
- assignment and subletting.
Key Takeaways
Contracts should be written to ensure both parties know their rights and obligations and the outcome if something does not go according to plan. While all businesses are different, most startups will enter into the following agreements at some point early on in their growth:
- agreements for the supply of goods and services;
- employment contracts;
- shareholder agreements; and
- commercial leases.
Therefore, you should understand what these contracts are, how they work, and their key provisions.
If you need help with the key contracts needed for your startup business, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Almost all businesses will buy and sell goods and services. This means your business as a startup will almost certainly need to enter into these types of contracts. Additionally, if your startup business hires any employees, they will have employment contracts. If you lease your offices, you will have a commercial lease. Finally, if there are other shareholders, it is common for startup shareholders to agree to contracts between themselves known as shareholders’ agreements.
Commercial agreements should prioritise certainty above all else. Therefore, you should know what to expect out of the other party, just like the other party should know what to expect from you. Finally, it is also important to be certain about what each party will do if something does not go according to plan.
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