How Not to Blow Up Your Startup with Bad Contracts
Contracts may not be the most exciting part of building your startup, but they are the glue that holds everything together. Think of them as the framework that keeps your business from spiraling into chaos when things don’t go as planned.
Let’s dive into the basics of contracts and how you can use them to protect your startup from going up in smoke. If you’ve ever signed a contract and immediately thought, “Wait, what did I just agree to?” – you’re not alone.
Many founders find contracts confusing or frustrating, and as a result, often treat them as mere formalities. But the truth is, contracts are your best defense against the unexpected twists and turns that come with startup life. Whether it’s an agreement with a co-founder, a supplier, or a client, a well-drafted contract significantly reduces the likelihood of a dispute and gives a leg up if, despite your best efforts, things go sideways.
What is a Contract, and Why Should You Care?
At it’s core, a contract is a technical term of a legally enforceable promise. A good contract will spell out who’s doing what and who’s on the hook if something goes wrong. So next time you’re about to sign on the dotted line, remember: you’re not just scribbling your name on paper—you’re making a legally binding commitment.
A handshake deal without anything in writing is still a contract – just a bad one. If the other side doesn’t live up to their end of the bargain, you may be stuck having to convince a judge what you really meant without a lot of evidence to back you up.
The Building Blocks of a Contract
A contract has three main components:
Offer: One party proposes a deal—“I’ll provide marketing services for $5,000.”
Acceptance: The other party agrees to accept the offer, often conveyed by a signature.
Consideration: This is the value exchanged, whether it’s money, services, or goods. No consideration = no contract.
Common Types of Contracts for Startups
Here are several types of contracts you’ll likely encounter as a founder:
Partnership Agreements: The prenup for you and your co-founders. It outlines roles, responsibilities, and what happens if someone wants out. Without this in place, a co-founder dispute can quickly spiral into a legal nightmare.
Non-Disclosure Agreements (NDAs): NDAs are essential when you’re sharing confidential info with potential investors, employees, or partners.
Service Agreements: When working with freelancers, contractors, or vendors, it defines the scope of work, deadlines, and payment terms. A strong service agreement prevents miscommunication and ensures everyone’s on the same page.
Employment Contracts: As you expand your team, it’s important to set clear expectations around salary, job duties, and confidentiality.
Investment Agreements: SAFEs, convertible notes, stock purchase agreements are all various ways to document your company’s relationships with investors and anyone else with an equity stake.
Common Types of Contracts for Startups
Negotiate Like a Pro
Contracts can be overwhelming, especially when you’re negotiating for the first time. Here’s how to stay on top of things:
Do Your Homework: Understand what’s standard in your industry. The more you know going in, the stronger your position.
Keep It Simple: Avoid complicated legal jargon. A 30-page document might look impressive but straightforward language reduces misunderstandings.
Get It in Writing: Handshake deals are tempting – especially when things move quickly – but taking the time to get it write pays huge dividends.
Consult a Lawyer: Don’t try to do this yourself. A good lawyer can see the red flags in your blind spot and come up with creative solutions when negotiations stall.
Essentials Steps for Negotiating Business Contracts
Common Contract Pitfalls to Avoid
Vague Terms: Ambiguous phrases like “as soon as possible” are open to interpretation and can lead to disputes. Define terms clearly with specific deadlines and deliverables.
Missing Clauses: Make sure your contracts include details on dispute resolution, termination, and penalties for breaches. These clauses are essential when things go south.
Not Updating Contracts: As your startup grows, your contracts should evolve too. Regularly review and update agreements to ensure they still align with your business needs.
Wrapping Up: Contracts Are Your Startup’s Seatbelt
A contract is more than just a piece of paper—it’s a tool that helps you manage risk and lay a solid foundation for growth. It’s easy to get swept up in the excitement of building a business, but without solid contracts, you’re setting yourself up for legal headaches down the road.
The next time you’re faced with a contract, don’t panic. Take a deep breath, keep these tips in mind, and remember you’re not alone.