India: Startups In India - Do You Need To Have Agreements, With Co-Founders / Employees / Consultants Etc.?

Now that you have finally decided to put your idea to test by setting up your startup entity an important aspect which often remains unattended is putting in place formal Agreements.

Questions which often come to mind:

  • Do we need formal written Agreements?
  • If yes then what Agreements do we actually require?
  • What should these Agreement provide for?

The simple answer to the above questions is that even though you can still operate and manage your startup without any formal written Agreements, but there is always a risk in the long run, especially when differences arise between the founders with regards to running the business or any other account and at that point of time one always regrets not having executed written Agreements clearly spelling out the terms and conditions that we wish to put in place.

For your understanding in this section, we set out brief information about elementary Agreements which must be entered into between the concerned parties.

1. Joint Venture Agreements/ Agreement with Co-Founders

It could be quite possible that your start-up has been founded along with your friends or family members, if not a sole proprietorship. Mutual trust is one aspect, but when it comes to business, it is sensible that one must carefully draw basic understanding between themselves in order to operate and manage the business. These agreements should define roles and responsibilities of all stakeholders, capital contribution, governance, profit sharing, additional funding, mode and manner to settle disputes, exit clauses etc.

In case, a start-up decide to operate through a partnership, one must meticulously draft a partnership deed with an endeavor to encapsulate all situations beginning from the establishment up to the dissolution of the partnership.

Following are the important clauses which are generally provided for in joint venture agreement:

The Agreement constituting JV generally covers the below clauses:-

  1. Name/type of the entity;
  2. Mechanism for initial funding: share capital/ debt;
  3. Drafting of charter documents (i.e. memorandum and articles of association, or amendments thereto);
  4. Management of the entity: composition of board of directors, decision making at the board and shareholder level meetings;
  5. Additional funding requirements;
  6. Anti-dilution provisions, Transfer of shares/interest;
  7. Pre-emptive rights;
  8. Positive and negative covenants;
  9. Manner of preparing accounts and audit;
  10. Manner for dealing with Intellectual Property Rights
  11. Sharing of profits/ dividends;
  12. Confidentiality;
  13. Termination and Exit mechanism;
  14. Arbitration and dispute resolution;
  15. Non-compete and non-solicitation;
  16. Governing law.

2. Agreements with Employees

It is a standard practice with Indian entities to either issue letter of employment or execute employment agreement with their employees at the time of their engagement.

Such letter/agreement outline terms and conditions of employment of the concerned employee and his key performance areas. It is quite often seen that entities use standard form employment letters/ agreement irrespective of the nature of work and the position at which an employee is inducted, this often results in ambiguity and vagueness especially at the time when the employee is to be removed or a dispute arises with the employee. This should be avoided. One may have an agreed template with certain standard conditions which will remain sacrosanct for every letter of employment/ agreements, however, while drafting and negotiating terms of employment with the prospective candidate , a careful thought must again be given to each and every term and condition and the same must be captured with modifications to suit the particular requirement.

Following are the important clauses which are generally provided for in a letter of employment/ employment agreement:

  1. Formal clause for offer of employment and acceptance of the terms of offer by the employee;
  2. Scope of services, duties and responsibilities;
  3. Remuneration;
  4. Incentives, bonuses and other perquisites, allowances etc. if any;
  5. Place of work and working hours;
  6. Leave and holidays;
  7. Manner of dealing with proprietary and confidential information and data protection (this is quite critical in the startup possess critical intellectual and proprietary information);
  8. Non-compete and non-solicitation;
  9. Term of employment and termination provisions including age of retirement;
  10. Process of settlement of disputes; and
  11. Governing law

Many organizations, also get a separate non-disclosure/confidentiality agreement signed from its employees. Please refer to next paragraph for more details on non-disclosure and confidentiality agreements.

3. Non-Disclosure/ Confidentiality Agreements

Generally, referred to as NDA (non-disclosure agreement) in legal parlance. This is an agreement through which a party who is disclosing any confidential information, which may be about its business strategy, financial projections, technical knowhow, trade secrets, details of clients, business ideas, pricing methodologies etc., tends to place strict conditions on the recipient of such information from any disclosure of the same to any third party.

Following are the important clauses which are generally provided for in NDA's:

  1. Definition of 'Confidential Information'. One need to carefully analyse such information and put under this definition;
  2. Terms and conditions of use of Confidential Information;
  3. Surrender of Confidential Information after termination of relationship, may be that of employer and employee or employer and independent contractor;
  4. Survival of conditions for confidentiality even after expire of the term of NDA;
  5. Conditions of care and diligence while handling Confidential Information;
  6. Permissible disclosures;
  7. Dispute resolution; and
  8. Governing law.

4. Consultant Agreements

Very often consultant are engaged by companies. In this case too it is advisable to have a 'Consultancy Agreement'; there is material difference between a letter of employment and a Consultancy Agreement. Consultant Agreements are generally entered into when any entity intends to engage any person or party for limited period or for a particular assignment and not as a regular employee.

There is no employer-employee relationship in this case and the consultant is not typically entitled to the benefits enjoyed by the employees, unless it is specifically mentioned and agreed upon in the agreement. Independent consultant agreements are quite prevalent in the industry and is extensively used.

Following are the important clauses which are generally provided for in consultant's agreement:

  1. Formal clause for offer and acceptance of the terms of engagement;
  2. Scope of work, duties and responsibilities;
  3. Fee- be fixed fee or lumpsum or a combination of both;
  4. Incentives;
  5. Place of work;
  6. Provision of off-days;
  7. Manner of dealing with proprietary and confidential information and data protection;
  8. Non-compete and non-solicitation;
  9. Term of engagement and termination provisions;
  10. Process of settlement of disputes; and
  11. Governing law

5. HR Manual/ Handbook

Startups may not initially require a detailed HR manual/ handbook. But, gradually with progression in business and increase in number of head-count, it will be imperative to have a manual which will provide inter alia all human resources related policies applicable to different level of employees working in the organization.

HR policies are to be drafted and aligned with the State laws and local labour legislations applicable to the State where work place is located.

In India, every State has their separate labour legislations/rules/regulations; therefore, while drafting a HR manual and defining policies therein, one need to be familarised with these applicable State legislations.

Following aspects/policies which are typically provided in the HR Manual:

  1. Code of conduct and standards;
  2. Non-discrimination;
  3. Policy prohibiting smoking and consumption of alcohol, drugs and other illegal items;
  4. Confidentiality;
  5. Harassment and bullying- including policy on prevention of sexual harassment;
  6. Grievances redressal mechanism;
  7. Disciplinary procedure;
  8. Policy on probation and confirmation to employment;
  9. Background Checks;
  10. Annual Performance Review;
  11. Employee Stock Options Plans;
  12. Training and Developments;
  13. Performance Appraisals;
  14. Location and transfer;
  15. Assignment of Intellectual Property Rights developed by an employee during the course of his work in office;
  16. Working hours, and manner of dealing with absenteeism;
  17. Leave Policy: annual leave/sick leave/ maternity leave/ leave without pay etc.
  18. Dress code;
  19. Safety policy at work place;
  20. Resignation, Termination, Suspension from duties;
  21. Death- benefits to legal heir;
  22. Exit interview;
  23. Handover of company property;
  24. Lay off

© 2015, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Vinay Vaish, Partner, Vaish Associates Advocates
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