Australian translation of Y-Combinator's Simple Agreement for Future Equity (SAFE)

We were recently asked to take a look at Y Combinator’s Simple Agreement for Future Equity ("SAFE") for Sparrow Flights, one of our clients and a great new startup based in Sydney.

The SAFE is a fantastic instrument released by Y Combinator to, as much as possible, replace convertible notes. It was prepared by James Riley at Goodwin Proctor. In Y Combinator's own words:

The safe (simple agreement for future equity) is intended to replace convertible notes in most cases, and we think it addresses many of the problems with convertible notes while preserving their flexibility.

An investor makes a cash investment in a company, but gets company stock at a later date, in connection with a specific event. A safe is not a debt instrument, but is intended to be an alternative to convertible notes that is beneficial for both companies and investors.

In our experience at Viridian Lawyers, convertible notes (and related instruments) have had midling uptake in Australia. They are used only occasionally, and even then, usually as bridging finance shortly before a "real" round. In this respect (and a few others), we're lagging behind the rest of the world; fixed size, multi-investor angel rounds are an exhausting way for an early stage startup to raise funding.

The SAFE is a very compelling instrument for startups and investors for exactly this reason, and we think it has a lot of value for the Australian ecosystem. Some key advantages of "future equity" instruments include the ability to:

  1. avoid fundraising deadlocks;
  2. close funding rounds faster, and with less back and forth;
  3. offer higher discount rates to high value or early investors;
  4. avoid premature valuation, or non-sense valuations, of great but early stage businesses.

In translating the SAFE for use in Australia, one of the goals of the exercise was to change as little as possible.

Any changes that we make to the SAFE would be at the expense of consistency, and at the potential expense of industry acceptance. Too many changes would open the door to further amendment and negotiation - and that defeats the purpose of these documents. These documents are standard, a standard that is supported by Y Combinator's reputation. The role the SAFE serves is to set a base line that can be agreed upon broadly, and that standard has now been imported into Australia.

We believe that an Australian startup can now have a multiple SAFEs on their books with investors in Australia and the US, and for nearly all intents an purposes, treat those relationships as functionally the same.

For these reasons, we like to think that as much as possible, this is not a Viridian Lawyers document, this is a Y Combinator document, we just helped it along.

We'll have a blog post up in the next few days detailing our methodology, including some of our reasoning, and we'll include a clear comparison of Australian and Original version of the SAFE Agreements - until then,

  1. Safe: Cap, no Discount
  2. Safe: Discount, no Cap
  3. Safe: Cap and Discount
  4. Safe: MFN, no Cap, no Discount

A copy of the original SAFEs can be found at Y Combinator's website, and the SAFE Primer document can be found here.

Disclaimer

You should also know that these documents are provided without any warranty, express or implied, to the fullest extent possible.

Because Viridian Lawyers hasn't had the opportunity to meet with you and discuss your needs, this document should not be considered legal advice, or advice specific to your circumstances.

Please read these documents very carefully before using them. We suggest that you seek professional legal advice to assist with implementing these documents.

Terms of Service

Can I copy another website’s terms of service?

Being an entrepreneur is all about innovation and efficiency. What some people call "shortcuts" you would call "smart business". That's part of what makes launching a business so exciting – but also risky.

So when the day finally comes to launch online, in an attempt to be more efficient it might be tempting to just copy another website's terms of service. It saves time, and anyway, no one really reads them.

Right?

Wrong. While it might seems like a time-saver in the short-term, copying another website's terms of service can have serious legal consequences down the track. This post will outline why it's a bad idea to take this particular shortcut, and why it's well worth the investment of getting legal advice on your Terms of Service.

1. "Terms of Service" are legal documents

The terms of service are a legal agreement between you and the user. That's why it is always important to know what clauses are in there – no matter which side of the agreement you are on. Once you've had to write your own, it's likely that you'll start to read other Terms of Service agreements a lot more closely.

As a contract between you and the user, it will outline things like:

  • Data collection
  • Responsibility for the data you store
  • How you will use the data
  • Payment terms

If anything goes wrong and you face legal action from a user, the Terms of Service document becomes crucial to show what each party agreed to in advance.

2. Breaching copyright

Another reason not to copy is pretty obvious – you are breaching the other website's copyright. Just like other written content, you retain copyright in terms of service, even if they all look pretty similar at a glance. It's possible to find some open-source terms of service, but it's always best to consult a lawyer to look into using one of these or drafting an original one.

3. Data Use

It's common practise for websites to collect and store, or even on-sell, user data. However, unless there is consent from the user this collection could be in breach of the Australian Privacy Principles.

Clearly, a website that sells clothing will need to have different terms of service to that of a ride-sharing app, for example. It's important to make sure your Terms of Service are specific enough that the user knows what is really happening to their data. Otherwise, they are not consenting to the use you intended.

If you are collecting large amounts of data, it's also worth looking into having a separate privacy policy. Some businesses need to have privacy policies simply because of the other applications and software they use. 

So there you have the main reasons it is well worth the time and effort of drafting your own Terms of Service. Like all legal documents, it's best to have these done or at least vetted by a lawyer. It's an up-front investment that can save you time, money and liability down the track.

New Australian Employee Share Schemes

Briefing on the New Australian Employee Share Schemes

From July 1, 2015 the Australian Taxation Office brought in new rules for Employee Share Schemes (ESS). The reforms have brought Australia in line with other developed nations, and are especially great news for start-ups who want to reward or incentivise talented employees with a stake in the company.

What is an ESS?

Employee Share Schemes (ESS) are formal written policies. They allow employees to purchase shares in the company they work for at a discounted price, and/or the opportunity to buy shares in the company in the future (a right or option).

Note: Employee Share Option Plans (ESOP) is a term commonly used for these schemes, especially internationally. However, in the Australian legislation they are called "Employee Share Schemes".

Changes to the existing rules

There are a number of changes that will apply to all ESS interests – that is, shares, stapled securities and rights to acquire them.

The main changes are:

  • Deferred taxing point for ESS interests (in certain tax-deferred schemes)
  • Changes to the test for significant ownership or voting rights limitations
  • A tax refund will now be possible if an employee does not exercise the rights they acquire

Start-up tax concessions

The main benefit for start-ups is a new tax concession. This is an exciting development that finally makes these plans usable for start-up companies.

Prior to these reforms, when you received equity "for free", the market value of that equity was taxable when you received it. Now it can be taxed when you sell that equity instead – a much more favourable tax treatment for start-ups, as long as certain conditions are met.

The term "start-up" is not defined in the legislation and it's not limited to any one particular type of business. However, in order to be an "eligible" start-up, there are strict requirements your company will need to meet.

The most notable thing about implementing an ESS, is that the tax concessions will not apply to someone who owns more than a 10% stake in the company. In other words, these are designed for new team members rather than company founders.

Requirements

There are strict requirements that need to be met to qualify as a start-up company that is eligible for the concession:

Start-up company:

  • The company must be an Australian tax resident and not listed on a stock exchange
  • The company (and all companies in a group) must have been incorporated for less than 10 years
  • There must be an annual turnover of less than $50 million per annum in the year the securities are issued

Scheme:

  • It must be a requirement of the ESS that the securities are held for at least three years, or until the holder is no longer employed by the company

ESS Interests:

  • If the ESS grants shares as well as options, it needs to be available to at least 75% of employees that have been of service for three or more years
  • Any options that the company is offering must have a value that is equal to, or higher, than the current market value of an ordinary share (these will still be considered as shares offered "at a discount" for tax purposes)
  • Any shares that the company issues must have a discount of less than 15% of the market value

When the shares or options are exercised by the employees, and the resulting shares are sold by the company, any capital gains by the employees will be subject to capital gains tax (CGT).

This is where the discount for start-ups really helps out. For eligible start-ups, if the share has been held by the employee for more than 12 months (with other requirements) then they can get the 50% CGT relief – that is, they can potentially halve their effective tax rate.

 

What is an End User Licence Agreement?

What is an End User Licence Agreement?

For those working in software development, it can be hard to know how to protect your intellectual property. On the one hand, it is in your interest to make your product available for users online. Yet on the other is the risk of unauthorised distribution, use and even reverse-engineering by a competitor.

There is no complete fix for these problems. However, from a legal perspective, you can protect yourself in a number of ways. The most common way, particularly for software, is through an End User Licence Agreement ("EULA").

Essentially, this is a contract between you (the developer) and the user. It allows the purchaser to use the software, but places restrictions on exactly how it can be used. It is particularly useful to protect your copyright in any software you develop and then make available for purchase.

Unlike other forms of property, software is more often licensed than sold. Users rent the software subject to the terms of a EULA. This ensures that the consumer gets to use the product, but that you as a developer retain control over it.

Click-wrapped EULAs

You have probably encountered many EULAs online before, as they are almost a standard part of any closed-source software. You know those long documents that pop up before you install a new program? Those are click-wrapped agreements. When you click "I agree" you are agreeing to the terms in the EULA.

This is a pretty handy form of contract. It's much quicker and easier than mailing a copy to each user and having them send a signed copy back (though this is an alternative option).

Common terms and restrictions

Some common restrictions on software use include preventing:

  • Copying of the software
  • Modification
  • Reverse-engineering
  • Unauthorised distribution
  • Using the software for unlawful purposes
  • Using deep-links, robots, spiders or page-scraping 

Of course, simply having these terms in a contract doesn't magically mean you will be able to prevent people from doing these things. Often companies rely on a legal contract as well as the architecture of the software to prevent such activity.

But what the EULA can do is provide a way of enforcing your rights after something goes wrong. It's well worth ensuring you are protected from the outset by drafting a EULA before making the software available to users.

Issues with click-wrapped agreements

The downside to these kinds of EULAs is that most people don't read those boxes when they pop up. They just click "agree" and move on – which is not the best idea.

But software companies also share part of the responsibility for ensuring that their agreements are easy to understand and not arduous in length. Companies like Paypal and iTunes have been criticised for their extremely complex, long and intimidating EULAs.

At the end of the day, if the user has clicked "agree" they have agreed. But if you want to stop them from infringing a term in the first place, it's a good (not to mention, ethical) idea to make those terms clear.

Protecting yourself, as well as your software

While this article has mainly discussed how EULAs can protect your interest in your software, there is a flipside as well. Namely, they can be necessary to protect yourself if the software is used for unlawful purposes – for example, the unauthorised copying of sound recordings.

However, the Federal Court of Australia have made it clear that simply having this kind of term in your EULA is not enough. As the court held in Universal Music v Sharman Networking, if there is a term in the agreement that is being ignored by users, and no further action is being taken to prevent the unlawful use of the software, you might be liable for that use.  This will depend on whether you have "authorised" copyright infringement, which can be difficult to establish, but is still a risk for certain software developers.

 

Who needs a privacy policy?

Who needs a privacy policy?

Privacy Policies. They sound like a pain – and if you've ever tried to read (or decode) one, you'll know that they can be pretty arduous to make sense of.

But for many small companies, they are essential – especially if you're start-up is an app or an online service that handles personal information. Under the Australian Privacy Principles, if you are an APP Entity, you need to have a Privacy Policy.

APP Entities include:

  • Businesses with an annual turnover of more than $3million (not including assets held, capital gains or proceeds of capital sales)  
  • Small businesses with a turnover of less than $3 million are not considered APP Entities. However, it will still need a privacy policy if:
    • Your business collects and trade personal information without the consent of the individual
    • Your small business is a health service provider
    • Your small business is required to comply with the data retention provisions under Part 5-1A of the Telecommunications (Interception and Access) Act 1979

No matter which category you fall into, it is still a good idea to have a Privacy Policy in place. It increases consumer trust in your business and how it handles and protects personal information.

Similarly, if you your business uses external services, you may be required to have a privacy policy under their terms. For example, section 7 of Google Analytics' terms of service requires that you have a privacy policy in place.

What is a privacy policy, exactly?

A privacy policy is a document that outlines how your company collects and uses personal information. There are topics that it needs to cover under Australian privacy laws, and should be easily accessible to anyone – the idea is that you show how you manage personal information in a transparent way.

On that note, it's not a document that should be drafted to mitigate risk in heavy legalese. It's something that should build trust between the company and people whose information you are collecting. It should be easy to read and reflect the company and its values.

Topics that a Privacy Policy must cover include:

  1. The kinds of information you collect and hold
  2. How you collect personal information
  3. How you hold personal information
  4. The purposes for which you collect, hold, use and disclose personal information
  5. How an individual may access and correct their personal information
  6. How an individual can complain if you, or a contractor, breaches the apps or a binding registered app code
  7. Whether you are likely to disclose information to an overseas recipient

The best way to present this information is in layers. Use headings such as "scope", "collection of personal information" and "disclosure" to make it easier to understand for the user.

Personal Information

So what is personal information? It's a very broad term, and captures any information (or opinion) about a person who is reasonably identifiable, or is identified.

Examples include:

  • Name
  • Address
  • Phone number
  • Bank account details
  • Opinions

What happens if I don't have a Privacy Policy?

If you don't comply with the Privacy Act 1988 as required by law, an individual can make a complaint about your company to the OAIC. They have the power to investigate, conciliate and make determinations based on the complaint.

Breaches of the Australian Privacy Principles can result in civil penalties, and repeated breaches of the law in large fines. This can be $360,000 for individuals and up to $1.8 million for corporations.

So even though it might take a little time or initial cost to produce a great privacy policy, it's clear that the effort is well worth it. It's not just about avoiding penalties, but making your company trusted and transparent in it's information dealings. 

 

What is a Shareholders' Agreement?

It's a pretty simple question, and it has a pretty simple answer: as the name suggests, it's an agreement between shareholders in a company.

Perhaps the more important question, particularly for tech companies and start-ups, is: why should I have one?

Setting up a company is all about risk. Usually in the start-up and small business space, people talk about risks related to finance, their intellectual property and their business relationships. But what about mitigating risk at certain stages in the natural life of a company, such as when you have to make a crucial decision that your co-owner doesn't agree with, or if one of you wants to leave the company?

If you're a start-up looking for funding, having a shareholders agreement in place will also signal to investors that you've considered and handled your business affairs in advance, and improve your bargaining position.

These are the situations where a shareholders' agreement can protect you, and your company. It's a set of rules to follow when things change, grow, or go wrong.

Do I need a shareholders' agreement?

There is no requirement under Australian law that companies have a shareholders' agreement. They are treated as a private contract between parties. This means there are a number of benefits for companies, particularly small ones where the owners are also the shareholders. These include: • Protecting shareholders in a wide variety of situations • Flexibility in crafting terms to suit the company's needs • Contract remedies for breach of terms • Ability to keep the terms of the agreement confidential

Common terms that go into an agreement

There is no one-size fits all shareholders' agreement, which is part of what makes them so appealing for dynamic and innovative companies. The most important part is that the agreement is drafted clearly, to remove any ambiguity. This is where having a lawyer involved is helpful.

Having said that, there are a number of common provisions that go into a shareholders' agreement. They can roughly divided according to the life cycle of a company:

STARTING OUT

  1. Ownership of the company/recording shareholdings – who owns which shares, and are there any special rights that attach?

  2. Sharing profits/dividends - When and how will dividends be paid, if at all?

MAKING DECISIONS

  1. Control and management of the company –

    1. Who can be elected to the board of directors

    2. Right of shareholders to appoint/remove nominee directors

    3. Circumstances under which directors can be removed or held personally liable for their decisions

  2. Issuing new shares

  3. Class rights – Creating different classes of shares, enabling founding shareholders to retain greater control of the company.

  4. Transferring shares – Mechanism for the transfer of shares, and events that give a party the right to call for a transfer of shares.

LEAVING OR ENDING THE COMPANY

  1. Rights of First Refusal - Exiting shareholders are obliged to offer to sell their shares to one of the other shareholders first before placing them on the market.

  2. Non-compete clause – A shareholder who wants to leave the company can be prevented from working for a competitor. This is particularly important for those who have a few different business ventures happening at once, and when knowledge of business plans and clients lists is highly valuable.

It's hard to imagine things going wrong when starting a new company. However, having a way to navigate tricky territory from the outset is always better than trying to fix things retrospectively. It'll also be far less expensive to have a well-drafted set of rules now than to litigate if things take a turn for the worse.

Viridian Lawyers Open Source Privacy Policy on GitHub

Today, we at Viridian Lawyers are introducing what we hope will be the first part of a suite of documents known as the Open Source Suite for Australian Startups.

The document being launched, a Privacy Policy, is intended to help technology businesses who operate in Australia to comply with the Privacy Act 1988 (Cth), and has been released under the permissive MIT Licence.

We hope that by launching this document under an MIT Licence, and on GitHub, we can not only make the work of technologists easier, but also to encourage others to contribute to the project, suggest pull requests and improve compliance outcomes for startups.

While GitHub is perhaps not the perfect tool for this task, it is the best tool we have on hand - and will no doubt, be a great starting place for innovation.

Australia has a long history of democratising the legal process. Most notably, Australia was a pioneer of the free access to law initiative around the world, and technical innovation in this space over the past few years has ramped up considerably. Continuing this tradition is important to the efficiency of our business and social landscape.

The Open Source Privacy Policy, the first element of the Viridian Lawyers Open Source Suite for Startups can be found on GitHub here.