The relentless push of starting a new business often means legal details are pushed to the side in order to start bringing in money. Eventually, though, every businessman must go from the initial leap of faith in starting the business to taking a leap of faith in other people -- the employees, investors, and sometimes joint venture partners who make continued business growth possible. At this point, the legal details which could previously be safely skipped become crucial.
Here are the legal documents which are the most important for almost every business to have, in order to protect both you and your business in the long term.
A shareholders' agreement
As soon as there is more than one owner of your business, you need to have a shareholders' agreement. For many people it turns out to be the most critical contract they ever sign. Properly drafted shareholders' agreements govern how the business decisions are made, how the company raises capital in the future, and ultimately how the investors will exit the company. These are all crucial matters which require agreement in advance.
Particularly important are preemption rights to new securities issues (which help prevent investors' shares being diluted by future attempts to raise capital), preemption rights on securities transfers (which give them a degree of certainty about the people with whom they do business), as well as drag-along and tag-along rights. (These last rights can be important if one or more of the owners seeks to exit.)
Drafting a shareholders' agreement for your business forces you and the other investors to sit down and address these key issues up front, before they become a problem.
Secretarial documents for the company
The Corporations Act 2001 mandates certain legal record-keeping for all companies. If you fail to comply, it can lead to fines from the Australian Securities and Investments Commission, not to mention potential disputes among the investors. If these issues are not taken care of and the fundamental documents for the company are thrown together with little if any thought, this may result in serious problems down the track.
Similarly future potential investors doing due diligence will want to inspect the company's books, and showing them a company register that's a shambles reflects poorly on your firm's potential.
Key company secretarial documents explain who the directors are and show they have been properly appointed and make sure investors have the proper evidence of their holdings. This means board resolutions which approve any issues and transfers of shares, share certificates to evidence share holdings, transfer and application forms, and the like. Overall the company's records should all be in order.
Non-disclosure agreement (NDA)
Whilst you may be able to pique potential investors' and customers' information without giving away too much confidential information, sooner or later you will need to give away potentially sensitive details. It's true that trust is important to any relationship, but it's good business practice to put in place the legal protection of a well-drafted confidentiality agreement or non-disclosure agreement (NDA).
In many cases requiring an NDA before engaging in business discussions can help you present yourself as a professional, prudent businessperson also.
One of the most significant steps in any business is hiring your first employees. Most important is of course choosing the right people to employ, but all too often business owners bring on employees without a proper employment contract. This in turn often results in major problems down the track.
Particularly crucial is that the business' employees cannot lay personal claim to the company's intellectual property. There should also be confidentiality provisions, since you are exposing your businesses' inner workings to your employees. Finally, for staff who will be accessing the company's key suppliers or customers and proprietary knowledge, consider reasonable non-compete and non-solicitation provisions.
Australian employment law is a minefield, it's true. But a proper employment contract is essential when hiring any employees.
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