Most startups fail because of product or market problems. But the startups that fail because of legal problems — co-founder disputes, IP ownership conflicts, contractor claims on equity — fail in ways that are completely preventable.
The cost of setting up proper contracts on day one is a few hours of founder time. The cost of not having them is measured in lawsuits, lost equity, and dead companies.
Here are the five contracts every startup needs before generating its first dollar of revenue — and in many cases, before writing its first line of code.
1. Co-founder agreement
When you need it: Before any co-founder contributes meaningful work, capital, or ideas to the venture.
The co-founder agreement is the most important and most commonly skipped startup document. Founders assume they are aligned on equity, responsibilities, and decision-making because they have discussed it verbally. Then circumstances change — someone wants to leave, someone is not contributing equally, or the company receives an acquisition offer — and the verbal understanding falls apart.
What your co-founder agreement must cover:
Equity split and vesting
- Initial equity allocation — Who gets what percentage and the rationale for the split. Equal splits are common but not always appropriate. If one founder contributed the initial product, capital, or IP, the split should reflect that.
- Vesting schedule — The industry standard is four-year vesting with a one-year cliff. This means no equity vests until the first anniversary, then it vests monthly or quarterly over the remaining three years. Vesting protects the company if a co-founder leaves early.
- Cliff provisions — If a co-founder leaves before the cliff (one year), they forfeit all equity. This prevents someone from contributing for three months and walking away with 25% of the company.
- Acceleration clauses — Define what happens to vesting upon acquisition (single trigger: vesting accelerates on acquisition; double trigger: vesting accelerates only if the founder is also terminated post-acquisition).
Roles and responsibilities
- Who does what — Define each founder's primary responsibilities. "CEO handles business development and fundraising. CTO handles product development and engineering." Vague enough to allow flexibility, specific enough to set expectations.
- Time commitment — Is this full-time for all founders? If any founder has another job, consulting engagement, or business interest, disclose it and define when full-time commitment begins.
- Decision-making authority — How are decisions made? Unanimous consent for major decisions (fundraising, acquisitions, pivots), individual authority for day-to-day operations within each founder's domain.
Departure and dissolution
- Voluntary departure — If a co-founder chooses to leave, what happens to their vested and unvested equity? Unvested equity typically returns to the company pool. Vested equity may be subject to a buyback right at fair market value.
- Involuntary removal — Under what circumstances can a co-founder be removed (prolonged inactivity, breach of duties, criminal conduct)? What is the process and vote requirement?
- Non-compete and non-solicit — Can a departing co-founder immediately start a competing company or recruit from the team? Define reasonable restrictions (typically 12–24 months and geographically limited).
Create a partnership agreement →
2. Non-disclosure agreement (NDA)
When you need it: Before sharing your idea, product plans, business model, financial projections, or customer data with anyone — co-founders, advisors, potential investors, contractors, or enterprise prospects.
Startups share confidential information constantly: pitching investors, interviewing hires, onboarding contractors, and courting enterprise customers. An NDA ensures that the information shared in these conversations remains confidential.
Two types you need
Mutual NDA — For conversations where both parties share confidential information. Use this with potential investors, strategic partners, and enterprise prospects during sales conversations.
One-way NDA — For conversations where only one party shares confidential information. Use this with contractors, freelancers, and employees who will access your proprietary information but are not sharing their own.
Key clauses
- Definition of confidential information — Be specific but comprehensive: business plans, financial data, customer lists, product roadmaps, source code, algorithms, trade secrets, and any information marked as confidential.
- Obligations — The receiving party must protect the information with the same degree of care they use for their own confidential information, and must not disclose it to third parties without consent.
- Duration — Two to five years for most startup engagements. Trade secrets should be protected indefinitely.
- Carve-outs — Information that becomes publicly available, is independently developed, or must be disclosed by law is excluded.
3. Contractor IP assignment agreement
When you need it: Before any contractor, freelancer, or advisor writes code, creates designs, produces content, or develops any other intellectual property for your startup.
This is the agreement that ensures your company — not the individual contractor — owns the work product. Without it, contractors in many jurisdictions retain ownership of the intellectual property they create, even if you paid for it.
Why this is critical for startups
Your product is your primary asset. If a contractor developed your MVP, designed your brand identity, or wrote your core algorithms without signing an IP assignment, they have a legal claim to ownership of that work. This creates existential risk: the contractor could demand additional compensation, license the work to competitors, or block your ability to use your own product.
Essential clauses
- Work-for-hire declaration — All work created by the contractor in connection with the engagement is "work made for hire" under copyright law. Where work-for-hire does not apply (it has specific legal limitations), the contractor assigns all rights to the company.
- IP assignment — The contractor irrevocably assigns all intellectual property rights — copyright, patent, trade secret, and trademark — to the company. This includes the right to modify, distribute, and sublicense the work.
- Moral rights waiver — In jurisdictions that recognize moral rights (right of attribution, right of integrity), the contractor waives these rights to the extent permitted by law.
- Pre-existing IP — Any tools, libraries, or materials the contractor brings to the engagement that existed before the project remain the contractor's property. The contractor grants the company a perpetual, royalty-free license to use these materials as part of the delivered work.
- Representations — The contractor represents that the work is original, does not infringe third-party IP, and that the contractor has the authority to assign the rights.
Create a contractor agreement →
4. Service agreement (for clients and customers)
When you need it: Before your first paying customer uses your product or service.
Whether you are selling software, consulting services, or a physical product, you need a written agreement with your customers. This defines what they are buying, how they pay, what happens when something goes wrong, and how either party can end the relationship.
For product startups (SaaS, apps, platforms)
Your service agreement functions as a subscription or license agreement:
- Service description — What the customer gets access to, including feature tiers, usage limits, and any restrictions.
- Payment terms — Pricing, billing frequency, accepted payment methods, auto-renewal policies, and refund terms.
- Service level commitments — Uptime targets, support response times, and remedies for service failures.
- Data handling — How customer data is collected, stored, processed, and deleted. Critical for B2B customers and any jurisdiction with privacy regulations.
- Limitation of liability — Cap your exposure to fees paid in the preceding 12 months. Exclude indirect and consequential damages.
For service startups (consulting, agencies, professional services)
Your service agreement defines the engagement:
- Scope of work — Specific deliverables, milestones, and acceptance criteria.
- Payment schedule — Tied to milestones or monthly retainer.
- Change order process — How scope changes are documented and priced.
- IP ownership — Whether client-specific work transfers to the client upon payment or remains with the company.
5. Employment agreement
When you need it: Before your first employee's first day of work. This includes co-founders who are also employees of the company.
Essential clauses
- Position and duties — Title, reporting structure, and primary responsibilities. Keep duties broad enough to adapt as the startup evolves.
- Compensation — Base salary, equity (stock options or restricted stock), bonus structure (if applicable), and benefits.
- Equity terms — Vesting schedule (typically four years with a one-year cliff), exercise price, exercise window after departure, and what happens to unvested shares upon termination.
- IP assignment — All intellectual property created by the employee in the course of employment belongs to the company. This is distinct from the contractor IP assignment — employees in most jurisdictions already have implied IP obligations, but explicit contractual language removes ambiguity.
- Confidentiality — The employee agrees to protect company confidential information during and after employment. Define what qualifies as confidential.
- Non-compete and non-solicit — Restrict the employee from competing or soliciting clients/employees for a defined period after departure. Note: non-compete enforceability varies significantly by jurisdiction (unenforceable in California, for example).
- Termination — At-will or for-cause provisions, notice period requirements, severance terms, and post-termination obligations (return of materials, ongoing confidentiality, non-compete duration).
Create an employment contract →
The order matters
Startups should implement these contracts in this sequence:
- Co-founder agreement — Before any work begins
- NDA — Before sharing confidential information with anyone
- Contractor IP assignment — Before any contractor writes a line of code
- Service agreement — Before your first customer
- Employment agreement — Before your first employee's first day
Each agreement builds on the previous ones. The co-founder agreement establishes who owns the company. The NDA protects its secrets. The IP assignment ensures it owns its product. The service agreement generates its revenue. The employment agreement protects its team.
What happens without these contracts
- No co-founder agreement: A departing co-founder claims 50% ownership of the company with no vesting and no buyback rights. The remaining founders cannot raise money, sell the company, or make major decisions without the departed founder's consent.
- No IP assignment: A contractor who built the MVP demands additional compensation or threatens to license the code to a competitor. The startup cannot prove it owns its own product.
- No employment agreement: A former employee joins a competitor and recruits three team members. Without a non-solicit clause, there is no legal recourse.
These scenarios are not hypothetical. They happen to startups every day. The contracts take hours to set up. The lawsuits take years.
Start with your first contract →
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