Business attorneys negotiate and analyze contracts on a daily basis. However, we know from years of experience dealing with parties who are both agreeable and adverse, trying to resolve disputes regarding meaning and interpretation, and litigating over contracts when necessary, it can often be difficult for entrepreneurs and small business owners to know what to focus on.
Below are four of the most important strategies to manage your risk in upcoming business engagements as a startup founder.
Put it in writing. The right way
While handshake agreements present a charming picture, verbal agreements are inherently problematic. Most people prefer to be honorable and abide by the terms of their deals, and verbal agreements interfere with their ability to do so. When deal terms are not in writing, it can lead to confusion and misunderstanding, simply because memories fade, the mind naturally wants to fill in the gaps (sometimes inaccurately) and hope springs eternal.
The good news is that avoiding miscommunication, misunderstanding and failure of memory is easy: Whatever the terms of your agreement, commit it to writing, signed by all parties involved. That way, everyone starts off on the same page, and can refer to documentation memorializing the agreement to remind them of their obligations before faulty memories and wishful thinking fill in the blanks.
Related: How Vesting Provides Upside Potential for Team Members and Downside Protection for Your Startup
Be clear, concise and consistent
To ensure that all material provisions are included in the written agreement, it is generally advisable to begin by identifying the parties, their roles, their respective obligations, payment terms and any other expectations (including confidentiality, non-disclosure and any intellectual property assignments) in plain English.
In my experience, parties typically want to comply with agreements. In fact, I have found that breaches typically occur because the parties simply didn’t understand what their obligations or the expectations of the other party to the agreement. The language commonly referred to as “legalese” typically adds little to the contract, and only muddies the waters, particularly when not used correctly or in the appropriate context. There are benefits to keeping things simple.
Anticipate breach
It’s hard to imagine your co-founder entering into an agreement with the intention of breaching your contract, but as time goes on, circumstances change, your company continues to evolve and the arrangement may not have delivered the benefits that one or more parties had hoped it might. A breach may suddenly make good business sense or a way to stop the hemorrhaging. Anticipating the breach means planning for the eventuality where the relationship no longer works for both parties, and devising means for both sides to move on without hard feelings. A breach is not personal – it’s simply a cost of doing business.
When the parties see eye to eye, it is difficult to imagine that they would behave anything other than cooperatively, but as people look for excuses and “outs” from the deal, the spirit of cooperation can dissipate quickly, and the parties quickly begin to posture. To prevent termination talks from becoming contentious (and, as a result, unnecessarily costly), I have found it beneficial to include the consequences of breach in all of my contracts. Setting forth the penalties for breach upfront provides the parties the opportunity to thoughtfully weigh the termination options without the need for finger-pointing or animosity. And as a practical matter, this is not a question that is best left for a judge or jury that may not fully understand their business or the deal; damages really are best determined by the parties (i.e. you and your co-founder) themselves.
The parties should also determine whether the parties must attend mediation prior to filing a lawsuit, whether the prevailing party in any ensuing litigation is entitled to its attorneys’ fees and costs, and whether to require that disputes be arbitrated – and memorialize these agreements, as well. When the costs of breach are clearly set forth, the breaching company can weigh its options before making a decision regarding terminating the agreement, and the parties will have clear expectations on what happens next.
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Talk to your attorney. There is no substitute
There are times you can scrimp and save. Entrepreneurs are keen to do this because they know every dollar saved is a dollar that drops down to the bottom line. But when it comes to contracts, beware of doing it on the cheap by using a form or a free template unless you can be certain that the template works for you, considering (among other things) context and state law. Templates are imprecise, and are often missing key terms from which your business can benefit.
For this, there is simply no substitute for consulting an attorney. It may be that the agreements are generally fine or that they only require minor tweaks; or it could be that there are serious defects that could result in lengthy, protracted litigation, or which could otherwise cripple the business. What you spend upfront can (and often does) more than pay for the problems you can avoid on the back end, whether with respect to liability, problems with contracting parties, or exposure. Whatever your risk tolerance, the relative affordability of getting it right, with counsel, doesn’t warrant rolling the dice with the success of your enterprise. While no contract will insulate your business 100 percent, an attorney can help manage your risk and protect your business in the long run.
The foregoing is provided for informational purposes only, is not an advertisement, does not constitute legal advice or legal opinion, and does not create an attorney-client relationship. The content may not apply to the specific facts or a particular matter. You should not act or rely on any information contained in this article without first seeking the advice of an attorney licensed to practice in your jurisdiction.
