Contracting for Startups
Starting a company is an exciting venture, but it can also be an overwhelming experience. There are so many details to consider and decisions to make, like those relating to the initial organizational documents, financial and accounting matters, and hiring. The importance of contracting (and the resulting contract management) can also be an afterthought though warrants careful attention.
In the beginning phase, there is simply no way for startup teams to avoid the inevitable inundation. There will be volumes of documents requiring scrutiny, as well as the need to make important decisions quickly, most of which will affect the company in the long run. Although it can be tempting to skip the formality of contracts, this can lead to dire consequences in the future. Here are some key contracts that startups need to think about from the outset:
Even if you start a company with your best friend of ten years, someone whom you trust completely, it is never ever wise to assume that a founding agreement is unnecessary. Whether your founding team comprises two people or twenty people, there must be a formal written agreement outlining the terms of the deal between and among everyone involved with the leadership team.
At a minimum, ownership percentages, individual roles and responsibilities, and an explanation of what will happen in the event of a leadership change (meaning how those percentages and responsibilities will change) must be addressed. The founding agreement is a contract between the founders, and it protects each participant, as well as the company itself in the event of a dispute, no matter how unlikely that may seem.
Just as the founding agreement serves as the contract amongst the leaders, employment contracts serve as agreements between the leaders, the company, and employees. Obviously, early stage companies may not be engaging in much hiring, and it may be tempting to bring on assistive personnel or role-specific staff, such as an administrative assistant or an IT guru, without bothering to draft an actual employment contract for that person.
And, just as failing to draft a founding agreement has the potential to jeopardize the company’s future, bringing on folks without clearly delineating his/her role does as well. If a company skyrockets to success and an employee believes s/he played a substantial role in its ascent, s/he may try to bring a claim for compensation. Thus, by drafting and negotiating employment agreements that clearly explain each employee’s role, responsibilities, and compensation in advance, the potential for such litigation is greatly reduced.
Standard Contract for Potential Vendors and Clients
More than likely, your startup intends to offer a service or product to clients and/or will need to work with vendors to create and deliver that service or product. Thus, as startups are gearing up for launch, the leadership team should be thinking about what types of relationships it hopes to cultivate and how it intends to formalize them.
In general, a startup with a clear vision and purpose will know what it plans to provide to its targeted client base, as well as what it will want from its vendors. This information should be a part of the company’s strategic plan, and it can be used to tailor standard contracts that will later serve as a starting point for negotiations with potential clients and vendors. Obviously, advance preparation is always beneficial, but thinking about future contractual agreements in this way will also help companies assess their strategic plan and objectives and allow for adjustments to be made.
Depending on the type of company you are starting, there may be a lot of other contracts to think about, but these are a few basic ones that any startup should take into consideration.
Additionally, all startups should implement a process to manage their contracts from the outset. Preferably, establish a secure contract repository and at the minimum set alerts for important dates- it's much easier to set a process and take control when you have 10 contracts. If you want until you have 1,000, the task of organizing them becomes much more daunting.