By: Maks Ewendt
As your company grows, whether that’s an increase of customers, employees, or solutions, the types and complexity of the agreements your company uses needs to keep pace. While that may seem daunting, these agreements will become a part of your company’ foundation, and will enable continued growth while limiting your company’s liability. This Part 1 will help you understand when your company may need to utilize legal agreements, and what types of agreements you’ll often encounter in certain situations. Part 2 of this blog will dive deeper into specific terms and how they may impact your business decisions.
When Does My Business Need an Agreement?
A good rule of thumb to determine if your company should have a legal agreement in place is whether or not there is a transfer of value between parties. If there is, you should have an agreement in place to describe and define such a transfer. A company’s most common transfers for value typically fall within three categories:
- Ideas: Intellectual Property, Business Ideas, Trade Secrets.
- Debt & Equity: Promissory Notes/Lines of Credit, Shares/Units, and Stock Options.
- Money: The buying or selling of goods or services in exchange for currency.
Why Are Agreements Important to My Business?
While entering into an agreement requires additional steps, and time, before moving forward, there are several important reasons to take a beat to paper those transactions.
The beginning of any transaction is the best time to determine remedies for potential issues. Having this conversation early will prevent future costly and time-consuming litigation. The more “worst-case-scenarios” that an agreement contemplates while everyone is happy and on good terms, the less likely a conflict down the road will end up in court. This is also the best time to divy up accountability between the parties, since neither party is likely to volunteer to be accountable once something has gone wrong.
A thorough agreement will also guide the parties through important questions that may not have come up during the early conversations of a deal. Issues such as warranties, information transfer procedures, and liability caps often aren’t considered until the parties start working through an agreement.
What Relationships Should Be Accompanied By An Agreement?
In short, most. When you consider your company’s ecosystem, most of its relationships with other entities are based on transferring ideas, debt/equity, or money. It’s important to realize that these transactions can either be incoming or outgoing for your company. The graphic below may help you visualize all of the relationships your company may have that would benefit from having an agreement in place.
What Types of Agreements Should My Company Consider?
There are several standard agreement types that serve specific functions depending on the transaction. Keep in mind, though, that agreements can also be drafted to accomplish multiple goals within one vehicle, which will reduce the time and effort devoted to the process. As an example, a sales agreement can (and should) include the treatment of confidential information, which alleviates the need for an additional NDA. The below list includes examples of standard agreement names based on transaction types.
- Non-Disclosure Agreement – Allows for initial discussions between parties that may contain confidential information or trade secrets.
- Data Use Agreement – Establishes the process and obligations between parties that want to transfer a specific set of data, typically for a limited purpose.
- End User License Agreement (EULA) – Outlines how end users, typically of software, may or may not use the solution they have access to.
- Website Terms and Conditions Agreement – Explains how visitors to your business’s website may and may not use the website and the content that can be found on it.
- Advisor Agreement – Enables an advisor to your company to be compensated for their time and effort via shares or stock options.
- Partnership Agreement – Establishes a business relationship between persons or companies that will share in the ownership of the business.
- Investor Agreement – Includes the transfer of both debt or equity and money, as equity in a company is sold to fund its growth.
- Sales Agreement – Stipulates each party’s obligations and responsibilities when your company is selling its product or service.
- Supplier Agreement – Defines your purchase and use of your supplier’s products or services that you may include in your own products or services, including flow-down or passthrough terms. This is typically also your supplier’s sales agreement.
- Vendor Agreement – Governs purchases by your company from businesses other than suppliers, which enables it to operate. These differ from supplier agreements as the products or services purchased will likely not be utilized by your company’s customers.
- Reseller Agreement – Restricted to the sales process, captures how another company is able to sell your company’s products or services in exchange for compensation.
- Partner Agreement – Establishes the relationship between your company and another that enables either party (or both) to act on the other’s behalf on a limited basis.
- Employee Agreement/Offer Letter – Depending on your state’s employment laws, outlines your employee’s compensation, benefits, rights, and obligations during their employment, as well as your company’s policies and expectations.
- 1099 Contractor Agreement – Procures the services of an independent contractor for the benefit of your company, with several key differentiators from an employee which requires less benefits and protections for the independent contractor.
While these agreement categories set the tone for the transactions they’re used to govern, the real magic is in the clauses and specific terms that are included within each agreement. We’ll dive into some of the most common clauses and how their terms may impact your business in Part II of this blog coming next quarter.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.