Most startups are short on both money and time. As a result, they tend not to spend a lot of time proofreading and refining the contracts that they send to clients . While this seems logical in the short term, the reality is that using a bad contract can come back to haunt you in a big way. This is especially true for small businesses that use the same contract template for all their clients – which, in my experience, is quite common.
Shockingly, I have spoken to a few entrepreneurs who don’t have their clients sign contracts at all. I don’t have to tell you that this is a bad idea: if you ever have a client who refuses to pay you or says you agreed to do extra work, you’ll have a hard time proving your case without a signed written agreement.
So, having a contract is a good first step. But a much more common mistake – and one that’s almost as bad – is having a poorly drafted or incomplete contract.
There are so many things that go into a well-drafted contract. And what is required depends largely upon the particulars of the agreement: who the client is, what you’re promising them, and what they’re agreeing to in return.
What goes into a good contract?
Here are just a few clauses that you may want to consider putting into your contracts:
- Intellectual property: This one is crucially important, especially if you’re sharing intellectual property with the other party. For example, let’s say you allow the other party to feature your company logo in a catalog. You’ll want to clearly spell out who owns the rights to the logo, and what type of license you’re granting to the other party in permitting them to use it. This will prevent them from saying that you gave them permission to use it indefinitely into the future.
- Forum selection: A forum selection clause governs where any case brought against you will be heard. If your business is in Manhattan, for example, you may want to specify that any case will be heard in New York County, so that you won’t have to travel across the country (resulting in lots of lost time and money) if you get sued.
- Severability: A severability clause says that if a court ever finds one part of your contract unenforceable, the rest of the contract will still be valid and in effect. Without a severability clause, you run the risk that your entire contract will be thrown out because one portion was poorly drafted.
These are just a few of the many clauses that you should consider putting into your contract. Again, each contract is different and will require different things to be optimally drafted. Unfortunately for small business owners, there is no “one-size-fits-all” strategy when it comes to contract drafting.
Reviewing contracts you sign
Of course, it’s also important to thoroughly review the contracts you sign. If you aren’t sure about the meaning or the implications of a clause in a contract, it’s imperative that you talk to your lawyer about it before you sign. Signing a contract that you don’t fully read or understand is a recipe for disaster.