When you’re in boot-strapped startup mode, some issues will take priority. Working with the capital you have – and seeking to gain access to more – can be the dominant factor. Staffing, premises, resources, and growth plans also factor high on the list of things that keep you awake at night. With so many other challenges to address, many founders regard using a lawyer to draft bespoke commercial contracts as a luxury rather than a necessity.
And in certain situations, the low-cost approach makes perfect sense… A template NDA may fit the bill for early discussions with third parties, while a fairly generic employment contract may mean that enough is being done to ensure legal compliance.
However, While this approach may be an easy way to tick a few of the “tedious legals” off the to-do list, some contracts need to be viewed as more than a boring piece of paper (or online equivalent). There are a few situations where cutting corners, even in the early stages, can cause big headaches (and significant real money costs) in the future.
Protecting your “secret sauce”
Standard NDAs are usually fine for high-level discussions (although do check for any sneaky words that try to restrict your future activities), but if you’re letting anyone into the secret of an invention you should take extra care over the confidentiality provisions. Failing to do so could mean that you can’t obtain a patent in the future.
Intellectual property rights
When it comes to intellectual property rights (IPR), it’s essential that your contracts properly reflect your intentions. Whether you’re working with developers, suppliers or customers, if the IPR ends up in the wrong place, you will struggle to exploit it in the future.
In particular, if a company is looking to sell or obtain investment in the future, it needs to be sure that it owns the IPR that it thinks it owns. This means that founders and third party developers and suppliers (including freelancers) need to have assigned the IPR to the business in writing. No contracts, or a one-size-fits-all contract, can mean that you’re reliant on these early stage stakeholders agreeing to the assignment retrospectively, which is not where you want to be when your potential buyers or investors are making enquiries.
Accidentally assigning IPR to your early customers is also more common than you might imagine – customer standard terms of supply, or sometimes attached to a Purchase Order, will often sneak in an IPR assignment clause. Again, this isn’t something that you’ll want to discover during due diligence…
Limitation of liability
A well drafted commercial contract should include a limitation of liability clause. This is a “worst-case-scenario” fall back, which would protect you from claims that could wipe out your business entirely. No written contract = no limit on liability. A badly drafted contract could also fail to include a limit, or could include a limit, but one which is deemed unenforceable and would be struck out of the contract if you even needed to rely on it. Either way, you won’t be protected if the worst happens.
This is, in my experience, the most commonly disputed provision in any contract. It’s vital to be clear about who can terminate, and under what circumstances. A key customer who can change their mind on a whim can pull the rug out from under the feet of a startup. Similarly, a contractor can leave you high and dry if not locked in to deliver a vital service. Either scenario can kill off a startup.
Beyond the “nuts and bolts’’ of the contents of any contract, there are also other less immediately obvious benefits to bespoke contracts.
One of these is that bespoke commercial contracts ensure clarity for all concerned which, in turn, reduces the likelihood of misunderstandings and disputes. Setting out in writing things such as a detailed scope of the work, and having a clear understanding of delivery schedules, payment terms, termination and any other key factors can really help set you up for success. This is true whether the contract is with customers, suppliers or any other important business relationship.
Bespoke contracts can also be of value when it comes to instilling confidence in your business associates.
Many startups need external funding for their creation and subsequent growth. It is likely that any potential investor will be more impressed (and more likely to invest) by a company that has had the awareness and foresight to have robust commercial contracts put in place to cover the most likely problems.
Conversely, a would-be investor may be reluctant to put money into any venture where they see signs that their investment could be at risk due to poor attention to detail, a lack of professionalism or inadequate risk management.
Bespoke bulletproof contracts show maturity, which can only help a company’s reputation. This will not only be beneficial in terms of investors, it can reassure customers and partners, in turn furthering opportunities for growth, collaboration and even diversification.
So, while shortcuts are inevitable when you’re strapped for cash, some commercial contracts should be considered essential – even in those exciting, unpredictable early days of a tech startup. They can make the future, and the success of your budding business idea, that much more certain.
Alison Berryman is a Senior Managing Lawyer at Biztech Lawyers.