I have been in close contact with several startups throughout the years, and unfortunately, more than often, I have witnessed a systematic disregard for legal aspects of the operations. For instance, some people are under the impression that the notion of having any contracts for startups is a mere matter of formality and a waste of time. I think, on the contrary, that utilizing contracts is a must for startups.
In this piece, I would like to explore first the reasons behind the disregard towards contracts for startups and debunk them by showing how contracts can help in various situations. Then we shall go through some key questions to make you think about what a contract entails and to highlight the importance of well thought out contracts for startups.
Contracts Are too Complicated!
The formal language of legal documents and the abundance of ever-changing laws create a complicated fog that we choose to ignore. However, you would agree that ignoring potential problems does not make them disappear.
Experience is a testimony to the fact that human interactions in a business setting tend to create confrontation. It might be due to selfishness, or the occurrence of some simple mistakes and misunderstandings. In any case, transparently communicating bilateral expectations upfront is a logical way of countering the probable rise of any future problems. Having in place the necessary contracts for startups is a convenient method for communicating these expectations.
Nothing Bad Happens to Us!
The uplifting novels and success stories are being shared in social media every day. They are advocating the invincibility of the traveler in pursuit of his/her dream. They are saying that the universe is looking out for good people. I would like to point out that I am not against this premise, but it is never a good idea to throw the caution away. Optimism is a good quality to have, but the judicial system would have been long obsolete if the world shared your optimism.
You would need protection against the parties who set out to cheat you and hurt you. Contracts are effective tools for shielding you from any hostile intention.
The whole premise of risk management is the consideration of any probable setbacks and planning ahead for them. From this perspective, having the proper contracts for startups could be considered a method for minimizing the risk of fraud, non-commitment, and further waste of valuable time and resources.
Nothing Can Replace Trust!
You are most likely a moral person who places truth and ethical values above your personal gain. You might have also partnered with friends and family members who share the same values. You have concluded that there is no need for any contracts for startups of this kind.
Devising contracts between friends is not a sign of mistrust. Contracts can help clarify rights and responsibilities and manage those gray areas along the way, where there is no clear right choice to make. I have met very kind and well-hearted people who feel cheated, even when they are, in fact, not. By utilizing contracts for startups, we can create a set of standards to help us decide what the right decision is in case of a dispute.
The Benefits of Contracts for Startups
Now that we have justified the importance of contracts for startups, it is time to take a step back and get a bit beyond the surface.
There are more than a few ways to classify contracts; It can be done using factors like function, services, terms, etc. We shall choose the most straightforward path and focus on people with whom a startup could interact. A number of key questions have been provided in each section to help you get a basic idea of what a contract has to offer in that area. Failing to address any of these questions in a contract would most likely result in a future dispute.
Contracts for Startups: Co-Founders
- Who are the co-founders and what value do they bring to the team?
- Do all co-founders get to be shareholders?
- Is a co-founder allowed to transfer part of the shares to a third party?
- Are they to be paid for the hours of work they put on the startup ar they get a share of profit?
- Are they allowed to collaborate with a separate startup working in the same industry?
- Who is in charge of creative decisions?
- Who is in charge of hiring and firing new employees?
- Who can sign financial documents?
- Who can negotiate partnerships?
- What happens if someone violates the agreement?
Contracts for Startups: Partners
- Who are the partners and what services do they provide for the startup?
- Is the payment fixed or varied based on the quality of service?
- What is the payment method, and at which time-frame should it be performed?
- Could they stop their services at any time they see fit?
- What happens if a delay on the part of a partner causes damages to your operations?
- Is your partner allowed to also provide services/products to other competing startups?
- What happens if a partner violates the terms of your agreement?
Contracts for Startups: Financiers
- Who is the investor, and what is the type and amount of investment?
- Is the investor allowed to also invest in competing startups?
- What types of information must be shared with the investor and with whom they are allowed to divulge that information?
- What types of shares do investors get in return for their contributions?
- Does the investor get to make choices about the design and operations?
- Can an investor prevent a new partnership?
- What happens if an investor violates the terms of your agreement?
Contracts for Startups: Employees
- Who is the employee, and what is their job description?
- Can either of you end the employment at any time you see fit?
- What is the form and amount of payments?
- Is the employee entitled to shares?
- Is the employee entitled to a part of profits?
- Can an employee hide their work result?
- Can an employee choose to quit showing up to work and work from home?
- What happens if a delay on the part of an employee causes damages to your operations?
- Is the startup liable in case of a mistake made by an employee?
- Can a former employee of the startup start their own competing startup?
- What happens if an employee violates the terms of your agreement?
Contracts for Startups: Customers
- Are there any limitations regarding the age or location of the customers?
- Is there a warranty included? What are the terms of the said warranty?
- Can you stop your services any time you see fit?
- Are customers allowed to share or resell your products/services?
- Can you use their personal information for marketing purposes?
- Can you share their personal information with your partners?
I am an avid advocate of the importance of educating oneself on legal matters. I would recommend to anyone involved in a startup to seek legal help before making big decisions.
The art of developing the right type of contracts for startups is not a light subject. A good contract can make life easier for all the parties involved. The absence of a good contract would, in most likelihood, flame disputes that would consume valuable resources most needed by your startup. The aim of this piece was to shed light on the importance of the subject and to provide you with some good questions.
To be honest, we have not even scratched the surface. I promise to write more on the subject of contracts and discuss in more depth the most important aspects of this subject.