What contracts do I need for my startup?
By Alexandra Balaj & Monica Beffa
Thinking of starting a business? You’re not alone. Each year, an average of 96,000 new businesses are launched across Canada. How many of those startups are successful? How long do new businesses last? What contracts do I need for my startup?
A 2018 study from Innovation, Science and Economic Development Canada found that:
- 77% of startups with 1-4 employees survived 3 years
- the 3-year survival rate grew to 86% in businesses with 20-99 employees
- 63% of all startups survive 5 years
- 43% survive 10 years.
One effective way to improve your startup’s odds is by ensuring you have all the contracts and agreements necessary as well as a well-drafted business plan. Since no business is identical, business contracts should also be customized based on the specific needs and the type of business. Some relevant questions a startup founder should consider are: (1) What type of business model should I have? and (2) What type of worker(s) will I hire? For example, will your business be a sole-proprietorship, partnership, or corporation? Will you hire employees or independent contractors?
These decisions will influence the kinds of contracts and preparation your startup will require. For example, unless you are the sole proprietor of the business and your name is also the name of your business, you will need to register your business within 60 days of opening services. If your business will be a separate legal entity from its shareholders, you will need to incorporate it. If you are hiring employees or independent contractors (or both) you will need an employment contract or an independent contractor agreement. Both contracts will contain details about the work position, but the employment contract should also feature certain clauses and provisions to best protect the interests of the startup and to attract qualified employees.
Some of the clauses and provisions an employment contract should have include:
- terms of employment, salary, and benefits: it is crucial to be aware of provincial and federal laws that apply to employees such as minimum wage and vacation pay
- probation: this allows a startup to terminate a new hire without notice or severance pay within a certain time frame
- warranty: this assures the employer that the employee is not breaching any old employment contracts in working for them
- non-competition: this ensures that a former employee cannot start a business that would directly compete with their former employer within a certain period of time and geographic location
- non-solicitation: similar to non-competition, this clause would ensure that a former employee cannot attempt to take clients or current employees away from your business
- confidentiality: this crucial clause prohibits a former employee from disclosing confidential information or trade secrets they learned while they worked for you
- termination: this clause usually outlines your employee’s right to notice and severance, states the minimum notice you require of their resignation, and outlines “just cause” for termination without notice or severance. Under provincial law, the minimum amount of required notice is one week per year of employment. It is vital for a startup to include a termination clause that grants at least the statutory minimum notice. If an employment contract does not specify, the common law automatically applies which is much more favourable to the employee and grants several months of required notice before termination
- and (depending on the business model) incentive and equity clauses: these outline the kinds of equity (usually some amount of stock or share of the company) or bonuses an employee may receive and the conditions or targets they need to reach in order to obtain them.
Employment contracts can also include intellectual property clauses, but some businesses opt for a separate intellectual property agreement in addition to the employment contract. These agreements protect startups from employees claiming the rights to certain ideas, inventions, or products that they either created or helped create as part of their employment in the company. Further protection may also include trademarks, copyrights, patents, and additional confidentiality agreements.
Beyond employees and independent contractors, larger startups may have to think about commercial lease agreements; non-disclosure agreements; financial agreements; commercial contracts between a business and its vendors, suppliers and other third parties; a shareholder agreement; and contracts for services with clients. Some of these elements are also key features in a solid business plan.
Another example of a common business contract is a shareholder agreement. Corporations divide ownership of the company among their shareholders. These types of businesses are required to hold annual shareholder meetings, keep minute books (collections of important records) and prepare shareholder agreements. Such agreements set out how the corporation is to be managed, including elements such as financial control and (re)structuring; recruitment and termination of employees; records of expenses and loans; current management; dispute resolution methods; and plans in case of bankruptcy or the loss of a founder or director.
Regardless of size or model, businesses should allow their clients, employees, contractors, shareholders, suppliers, and any other parties to have adequate time to read and evaluate any contracts. Prospective employees should also be encouraged to ask a lawyer to assess their employment contracts before signing.
Many entrepreneurs launch startups without a complete understanding of the complexities and nuances involved. Even those who do their research may find themselves in legal or financial trouble if they do not fully comprehend the laws and regulations that apply to their startup. This is where a lawyer who specializes in business and corporate law can help. A lawyer can help draft or review contracts and agreements to ensure that business policies comply with updated federal and provincial legislation, such as:
- the Employment Standards Act,
- the Occupational Health and Safety Act,
- the Pay Equity Act,
- the Integrated Accessibility Standards Regulation
- and the Personal Information Protection and Electronic Documents Act (PIPEDA).
They can also ensure that the final draft matches the intentions and desired outcome of the startup. They can identify key terms with legal or commercial significance and choose the best wording to ensure that the contract and its clauses and provisions are clear, precise, unambiguous, and error-free. Taking these steps to properly draft business contracts minimizes the risk of entering into litigation in case of any disputes. For example, during a contractual dispute, if the key provisions in a business contract are potentially ambiguous, courts will usually interpret them in favour of the employee. Therefore, one of the best ways to maximize the longevity of a new business venture is through proper preparation.