Do's and Don'ts of Legal Contracts
Published in May 2023
Please raise your hand if you run your own business or have your own start-up.
Please keep it raised… if you understood every single word in the last contract you signed.
You no longer have your hand raised?!… Then this blog post is for you :)
While I’m not a lawyer – but a consultant who runs her own business – I do spend about a third of my time navigating and negotiating these contracts, with the help of a lawyer.
For start-ups (and small businesses) that are starting out, or who are trying to make their runway last as long as possible, legal advice seems like a luxury that can be cut. I’m here to tell you otherwise – along with what else to watch out for, when drafting/evaluating contracts, so that we all spend less time on legal fees and more time collaborating.
None of this is legal advice. This post was not sponsored or affiliated with my lawyer (or any lawyer). Please consult your own attorney for help with contracts that are specific to your needs.
These are my lessons learned, which are specific to the nature of my business. This advice may not work for you.
Why do we need contracts?
Contracts outline terms and conditions around what the relationship is, to help each side manage expectations. I’ll go a step further and say that they outline edge cases – along with who will be responsible for what (e.g. indemnified) and the consequences for what happens in the case of things going south. Essentially contracts are used to de-risk the collaboration.
DO get a lawyer ASAP – like yesterday! Ask your network for a recommendation. You’re looking for someone that not only:
understands the nuances of the law around: contracts, employment, equity and stock guidelines, issue and sale (including Rule 701) – but who also
has attention to detail, and
is licensed to practice in the state that the governing law of your contracts will be,
(promptly) replies to your requests, and
can help you navigate incorporating in Delaware for your start-up (where applicable) and VC term sheets, and
understands your (low/medium/high) risk tolerance.
DO use your lawyer to help you understand all the terms of the contract you’re signing, along with what risk remains, and how you define what it means that “something goes wrong” – and what happens then.
I’ve found that even one missing word will change the meaning of the contract completely. For instance scoping out "negligence" as "gross negligence", will help clarify that consequences are for malicious intent, not accidents.
DO design your contracts to be mutually beneficial, e.g. they benefit both sides. If not, you and the other party will end up spending their own time – and each of your lawyer’s time – making it so. For example, if one side needs a 2-week notice to terminate the contract, then the other side should get a 2-week notice also.
DO compare contract versions side-by-side (e.g.do a “document diff”) with the help of Google Docs, to visually help you see who added what and to make sure that the latest redlined document correctly captures all the redlines.
For example, one prospective client (that I turned down), sent me a version that they claimed only had very minor suggested changes redlined; when I compared the documents using the “document diff in Google docs”, I saw that they tried to sneak in changes that I didn’t agree with.
DO partner with your lawyer to help you reduce risk based on things you care about, and scope down the consequences should the unlikely scenario happen.
For example, when I was considering exercising options, without my lawyer’s help, I wouldn’t have known to ask to see the equity plan which outlined what steps I was required to do, to exercise them.
DO figure out how you work best together.
For example, I now convert any 3rd-party contracts into a Google doc (if they’re not in that version already), then leave comments with questions and requests for clarifications, along with an ask of “please let me know if there’s anything I missed or should know about”, before having my lawyer redline the contract to help me reduce risk to match my low risk profile.
DON’T forget that you can negotiate/redline any term in the contract.
I’ve walked away from prospects because of clauses in their contracts that I didn’t agree with, but that they did not want to negotiate; this was especially true in cases when the contact was not mutually beneficial.
DON’T forget that both sides need to benefit from the collaboration that’s outlined in the contract (even at a high-level), otherwise the contract may be deemed invalid.
DON’T forget that lawyers tend to bill in 6-minute increments. Use their time wisely!
For example, I lean on my lawyer to help me understand the nuances of a contract. But that’s after I ask the other side to clarify “interesting”, major clauses in their contract.
DO specify that someone is an independent contractor in the contract, if you’re planning to issue them a 1099.
DON’T forget to have them fill-out a W-9.
DON’T forget that when you hire contractors, you can’t dictate when, where, or how they work – or that they do the exactly the same role as your employees. Otherwise, you risk misclassifying the employee as an independent contractor, and facing costly violations.
For example, one prospective client (that I turned down) wanted me to get their permission ahead of hosting any (complementary) office hours for accelerators that I mentor at – or even when asked to speak on any panels – in case one of their clients/competitors would be attending. (Not only would this violate California law around independent contracting, I also have no control over who's in the accelerator cohort, or who’s planning on attending office hours or a panel session.)
DO specify clauses around this in your contact with collaborators, including employees and contractors.
DON’T ask VCs or anyone else to sign one before hearing your idea/pitch; I share why in this blog post.
DO scope out what IP belongs to the company, as part of doing business together.
DON’T make the clause too vague, such that you try to claim that anything developed for anyone, at any time, on any machine is IP that you own. You’ll end up spending a lot of your own time – and each of your lawyer’s time – scoping this down to something more realistic.
DO scope out what specific industry segments and/or clients are your true competitors – and why this noncompete is “necessary to protect a legitimate business interest” [FTC].
DON’T make the clause too limiting, so that the other side seemingly can’t work anywhere else afterwards, even if they were not a high-ranking employee at the company.
For example, one prospective client (that I turned down) wanted me to sign an indefinite non-compete from consulting for any company with a Sales team (department name changed), because of their loose affiliation with providing CRM services to Sales teams – with no compensation for doing so.
DON’T offer one in California, as they are not enforceable and consult your lawyer on weather you should offer one at all, as the FTC recently ruled against them as well (Feb 2023).
Hope this helps you save time and money the next time you're collaborating on a contract with a prospective client, employee and/or lawyer! Good luck!
For more fun stories of contract clauses I’ve navigated – and the many lessons learned, please see this blog post.