Startup legals

May 31, 2017

Disclaimer: This document is for information purposes only and does not constitute legal advice.

By Louise Eldridge, Partner, Bristows LLP

In order to keep the main toolkit brief, we have included the outline of terms and example provisions mentioned in the Startup legal guidelines into this blog.

An outline of the terms you could include in Heads of Terms is provided below:

Transaction: the nature of the commercial arrangement to be entered into between the parties.

Performance Obligations: Who, What, How, Where, When?

Payment: the proposed price to be paid. This provision might also deal with specific details such as the time of payment.

Intellectual Property (“IP”): depending on the nature of the startup’s business and the commercial arrangements it may be relevant to include certain provisions relating to the ownership of IP rights.

Timetable: the timetable for the commercial transaction.

Duration: the amount of time that is to be set aside for negotiations. This provision should also make clear that either party is entitled to withdraw from negotiations.

Exclusivity: if the parties wish to ensure that the other side is not entering into negotiations with a third party on a similar basis, there may be exclusivity provisions in place for the duration of negotiations.

Confidentiality: it should be clear that all matters discussed during negotiations will remain confidential to the disclosing party. This provision is particularly important if you will be discussing anything which is not widely or publicly known at the time of negotiations.

Drafting: which party will be responsible for providing initial drafts of documents. This provision may also include a proposed date for a first draft.

Governing Law and Jurisdiction: if the MOU/Heads of Terms are expressed to be fully or partially binding, the document should set out which country’s laws will govern the agreement and, in the event of a conflict between the parties, which country’s courts will be entitled to hear the matter.

Provisions to note in the contract and / or where there may be “misalignment” include:

Insurance levels: if you are specifically required to have certain types of insurance, for example public liability, this should be appropriate to the commercial arrangement and the amount to be paid under the contract. Where appropriate, you might also request that the other side also has insurance.

IP protection & IP Liability: if IP is central to your start-up it is important to ensure that the provisions dealing with IP are robust and protect your IP. It should be very clear about where ownership lies – you may not want IP developed during a particular project to be assigned to the third party. Further, it is important to ensure that any provisions dealing with IP warranties are reasonable and do not give rise to an unreasonable level of risk.

Performance obligations: the contract should set out what each party is required to do and when they are required to do it by. If appropriate, it may also include specific terms setting out certain performance targets to be reached, KPIs or service levels to be maintained.

Warranties: a warranty is an assurance or promise in a contract, the breach of which may give rise to a claim for damages. Careful consideration should therefore be given to any warranties you are required to give, to ensure that you are not unduly exposed to risk.

Exclusivity & anti-competition clauses: a clause of this type might restrict your ability to provide the same or similar goods or services to other parties. You should consider whether such a clause is appropriate to the commercial transaction.

Liability: this clause will deal with what the corporate’s remedy is if you are in breach of the contract. The level of liability should typically be commensurate to the value of the contract. Startups will also want to ensure they avoid terms which provide for uncapped liability or personal liability for the startup’s founders. The corporate should also be reciprocally liable for any breaches that they commit under the contract.

Limitations on Liability: if a startup wishes to limit its exposure to the amount of damages a counterparty could seek to recover, it is essential to include express limitations on liability in the contract. A startup may seek to exclude certain types of loss and introduce financial caps on liability, which may be, for example, by reference to the amount of fees paid under the contract during say a 12 month period or in the case of certain types of liability, by reference to a particular level of insurance cover.

Remedy and recourse: this provision should set out the steps that each party should take if there is a breach or failure under the agreement. You should ensure that any time limits and notice provisions are reasonable, and that you will be able to comply with them.

Term and Termination: this provision sets out how long the contract will last and how either party can bring the commercial relationship to an end. You may want to build in a break clause by adding a provision which allows for the contract to be terminated early, for example if the contract length is two years allowing for termination after a year.

Governing Law and jurisdiction: it is preferable for the governing law and jurisdiction to be that of the country where your startup is located. This ensure that, should any legal issues arise, you are able to avoid the costs and potential disadvantages associated with having to seek legal advice in a different country. It will also avoid potential language barrier issues. This provision is likely to be more contentious if the startup is dealing with a corporate which is multinational or based in a different jurisdiction.

Louise is a partner at Bristows LLP