Starting a Startup: Where to Start - Part 7: Sign Here: Basic Agreements

Shira Teger, Associate at Yigal Arnon & Co.
This series was written for you: the entrepreneur with a dream. We want to help you turn your dream into a thriving reality by sharing our expertise with you.

What follows is a series of articles outlining the basics you need in order to start a startup in Israel; it contains terms you need to know, steps you will have to take, and considerations to ponder when making choices about how to run and grow your company. We'll add a new chapter each week – so keep coming back for more! As always, we welcome your comments below.

If you missed Part 1 (Making it Official: Incorporation)Part 2 (Who's Who and Who to Hire)Part 3 (Division of Labor)Part 4 (Picking a Supporting Team)Part 5 (Protecting Ideas: Intellectual Property), or Part 6 (Money, Money, Money: Funding) - be sure to check them out. Otherwise, we are proud to introduce Part 7 of this series: Sign Here: Basic Agreements.

During the life of a company, there will be a lot of paperwork. Unfortunately, that's the way corporate life works, and the best you can hope for is to become familiar with the agreements you'll need, how to negotiate them, and how to keep your needs for agreements to a minimum (which, of course, is relative). Below is a brief rundown of some of the agreements you'll come across at the start of your startup.

Founders Agreement.

This is the agreement that you and your co-founders will sign at the very outset – maybe even before you've actually incorporated a company. It functions to set out the relationship among the founders, including ownership ratios, rights, roles, and what happens if one of you leaves the company (because you want to, or because your buddies are tired of you). Most often, this agreement is cancelled once the company has a financing, and it is replaced by elaborate articles of association (the governing charter of the company) and sometimes a shareholders' agreement and, occasionally, by something called a repurchase agreement.

Non-Disclosure Agreements.

One of the most ubiquitous agreements in the corporate world is the non-disclosure agreement, or "NDA" for short. The purpose of the NDA is to protect your company's confidential information. The person signing the NDA promises not to use your secret info for any purpose but the purpose you agreed to. An NDA can be a one-way agreement, where one side is the discloser of information, and the other side is the receiver. An NDA can also be a mutual agreement, or an "MNDA", where each side discloses and receives information. Depending on the nature of your relationship and how much and what type of information you expect that you'll be disclosing to the other party, you will decide which format suits the occasion. NDAs are important for commercial partners, for employees and consultants, and other service providers.

A variation of the NDA also includes provisions that guarantee that intellectual property created by employees and freelancers belongs to the company. This version not only says, "my secret information is mine", but it also says, "if you create anything new and useful while you're working for me, it's mine." This version of an NDA can be called a Proprietary Rights and Assignment of Inventions Agreement, or something along those lines. Refer to our installment on intellectual property for more on assignment provisions.

For more information on NDA's you should check out Joeri Kresiberg's NDA Guide for the Perplexed, and don't forget to take a peak at YTech's NDA templates.

Share Purchase Agreement.

As discussed earlier, one of the most common ways that startups raise money is via equity investors. And one of the most common agreements that governs such investments is called a "share purchase agreement", known as an "SPA" for short (pronounced S-P-A, rather than "spa").

An SPA typically opens with a description of the proposed transaction (for instance, who is investing, how much, and what they're getting in return). Then there is a list of deliverables: actions or documents that need to be provided or completed before the transaction can go through. The next section of the agreement is frequently the representations and warranties, or "reps". The reps are where the company (and sometimes, the founders themselves) makes a number of assertions and states facts about the company – for instance, what its share capital looks like, who owns the IP of the company, who is employed by the company, whether there is any litigation taking place, etc. This is what the investors rely upon when they make their investment. If the company provides false or incomplete reps, it can be liable to the investors for a lot of money. So the idea here is: Disclose everything. Allow your investor to make an informed decision. Don't forget that once they put money into your company, you and the investors are on the same team. After the company's reps, the investors often give a few basic reps about their ability to make the promised investment. The SPA is then signed by the company and all the investors.

Convertible Loan Agreement.

Just like the SPA governs an equity investment, the convertible loan agreement (or CLA) governs a convertible loan. The CLA sets out the basic terms of the loan: who, how much, when the loan converts or matures, and the equity into which the loan can be converted. Note that when it comes to CLAs, the latest advice is to watch out for potential tax withholding implications for the company on certain interest or interest-like components of the deal, so get your accountant or legal tax advisor involved early in this process.

SAFE Agreement.

The Safe is the American cousin of the CLA, and it is becoming increasingly popular in Israel, too. "Safe" is an acronym standing for "simple agreement for future equity." As its name implies, under a Safe, an investor puts money into a company, and in exchange, it has a right to receive equity in the future.

The content of this article does not constitute legal advice.

Shira Teger is an associate in Yigal Arnon & Co.’s high-tech practice. In her previous incarnation (before choosing a life of law), Shira was a journalist.

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