Company agreements are certainly important. They’re legally binding documents that set the tone for your company as it grows and changes over time. But what should you look for when creating or updating your company’s agreement?
If you’re reading this, we can assume that you understand the importance of a company agreement and have decided to take action in order to create one. As such, there are several specific moments in which it is beneficial to update your company’s agreement language to reflect new information or risks.
Updating your company’s agreement language can make a big difference depending on where your business currently stands. There are a number of specific points in which it is beneficial to update your company’s agreement language.
First, we’ll go over the basics of a company agreement to serve as a quick refresher. Then, we’ll discuss when you should update yours.
What Is a Company Agreement?
A company agreement is a binding contract between the shareholders of a company that outlines the rules and regulations governing the company. This includes important decisions such as how the company will be run, how profits will be distributed, and what happens if someone wants to leave the company.
According to Chris Gadek, the Head of Growth at Adquick, “Your company agreement is the foundation of your business relationship with your co-founders. It’s critical that you have a well-drafted agreement in place from the beginning.”
Why Update Your Agreement Language?
As your company grows and changes, it’s important to update your company agreement to reflect these changes. This ensures that everyone is on the same page and that there is no confusion about the rules governing the company. In addition, yearly updates need to occur to keep your agreement valid.
“Every company needs to make some kind of update to their agreement at least once a year,” says Eric Elggren, the co-founder of Andar. “You should update your agreement whenever there are any changes in the ownership structure of the company.”
It’s a good idea to get in the habit of making yearly updates to your company agreement so that you can avoid any potential problems down the road.
Aside from annual changes, there are specific instances that call for updating your company agreement. Let’s explore the most important times when it’s necessary to make such updates.
When to Update Your Agreement Language
When You’re in the Process of Incorporating Your Company
If you’re in the process of incorporating your company, you should create your company’s agreement as soon as possible. While most business agreements aren’t required to be in writing, the vast majority of them include key components that should be documented.
“You always need to update your company agreement to reflect the new ownership structure when incorporating your business,” says Drew Sherman, the VP of Marketing at RPM. “Failure to do so could result in serious legal consequences.”
When You Create a New Product or Service
Companies create new products and services all the time. When this happens, you need to update your Client Agreement to reflect the new product or service. This will help ensure that both you and your client are on the same page with respect to what is being provided.
“Our policy is to update our Client Agreement whenever we introduce a new product or service,” says Juan Pablo Cappello, co-founder and CEO of Nue Life. “This helps ensure that everyone is clear on what is being provided, and helps avoid any misunderstandings later on.”
Depending on how often you release new products or services, you may want to consider specifying in your Agreement how often it will be updated. That way, both you and your client will know when to expect changes and can plan accordingly.
When You’ve Just Filed Your Company’s Articles of Incorporation
If you’ve just filed your company’s Articles of Incorporation, you should create your company’s agreement as soon as possible. As mentioned above, this is the perfect opportunity to make sure that your agreement accurately reflects the newly formed company.
In addition, you should also make sure that your agreement language aligns with the language used to create your Articles of Incorporation. Once you have filed your Articles of Incorporation, you’ll need to make sure that your agreement accurately reflects the new entity.
According to Jae Pak, founder of Jae Pak MD Medical, “Your company’s articles of incorporation set forth your company’s initial shareholders, board members and officers, and establish your company’s purpose. The articles also include your company’s name and registered address. You will need to file your articles with the state in which you intend to do business.”
When You’re Hiring Employees for Critical Roles
Hiring employees for critical roles is another important moment to update your company’s agreement language.
“If you’re hiring employees for critical roles in your company, you should update your agreements to protect your business,” says Steven Vigilante, Head of New Business Development at OLIPOP. “You want to make sure that you’re clear about what they can and can’t do while they’re working for you.”
In other words, you want to make sure you’re protecting your company by including clauses in your agreement language that mitigate this risk. There are a number of risks that you want to take into account when hiring employees for critical roles.
These include the risk of hiring an unqualified candidate, the risk of hiring someone who might be a poor fit, the risk that they won’t stay with the company, and the risk that they will sue the company.
When a New Team Member Joins Your Company
“Any time you bring on a new employee, you should update your agreements,” says Rachel Roff, founder and CEO of Urban Skin Rx. “The goal is to make sure that everyone who joins a company is on the same page; it’s just good business practice.”
Indeed, you always need to update your company’s agreement language when a new team member joins your company. There are a number of clauses that you can update to reflect the new team member, including compensation, equity, and benefits.
In fact, many agreements are structured in a way that allows the company to update the agreement language to reflect new hires. If you’re unsure which clauses should be updated, you should reach out to your company’s attorney. Your attorney will be able to help you understand which clauses you should update and why.
When You Add New Company Stakeholders and/or Investors
Finally, you should update your company’s agreement language when you add new stakeholders and/or investors to your company.
Again, there are a number of clauses that you can update to reflect the new stakeholders and/or investors, including equity and benefits.
“Your investors are going to want to see up-to-date agreement language,” says Sumeer Kaur, CEO of Lashkaraa. “So get in the habit of regularly reviewing and updating your agreements.”
When You Change Your Business Model or Go Through a Rebranding
If your company changes its business model or goes through a rebranding, it’s important to update your company agreement language. This will ensure that your agreement accurately reflects your current business and branding. Failure to do so could result in confusion or legal issues down the road.
“A rebrand usually consists of a change to a company’s name, logo, tagline, and/or identity,” says Ryan Rottman, co-founder and CEO of OSDB. “Sometimes a rebrand can also include changes to a company’s business model or target market. Such radical changes often necessitate updates to company agreements, so that the agreement accurately reflects the current state of the business.”
As Part of an Exit Strategy
Most business agreements contain standard language that allocates risk between the parties in the event something goes wrong. This is essential to protecting your company in the event of a dispute, but it can also create problems down the road if your business needs to update its agreement language.
If you’re planning on selling your company, exiting your business, or otherwise changing the structure of your business, it’s important to review your agreements and update the language accordingly. Failing to do so could result in problems with the transition and potential legal liability for your company.
“Even if you have no plans to sell your company right now, you still need to update your agreement language,” says Ian Heyman, founder of MDP. “It’s important to protect yourself and your company in the event of a future sale or other change in the business.”
These are just a few examples of moments in which it is beneficial to update your company’s agreement language. In each of these situations, it is extremely important to make sure that your agreement accurately reflects the newly formed company.
In addition, you’ll want to make sure that your agreement language aligns with the language used to create your company’s Articles of Incorporation. By updating your company’s agreement language during these key moments, you can be sure that your agreement reflects the current state of your company.
If you’re ever unsure of whether or not you should update your company’s agreement language, it’s always best to consult with an experienced business attorney. They will be able to guide you through the process and help you make the best decision for your business.