Contracts are the basis of business: one party offers goods or services for a price and the other party accepts the offer and pays.
Valid contracts can usually be oral or written. For a few types of transactions, like the sale of land, the agreement must be in writing.
Many tiny companies rely on oral agreements. And many bootstrapping startups tend to wing it and try to get by without formal, written contracts. Sometimes they rely on verbal agreements and conversations, e-mails or short, written summaries of proposed work.
Many startups don’t want to spend the money for an attorney to draft a custom contract and many don’t know the first place to start or want to take the time to research what they need. Many startup CEOs don’t understand that they may be putting key parts of their business at risk when they operate with a fly-by-the-seat-of-your-pants approach when it comes to formal contracts.
For a startup, is it really necessary for contracts to be formal and written?
Frankly, without formal, written contracts a startup may become a big, hot mess. From my perspective from cleaning up business messes and practicing litigation for over a decade, I think formal, written agreements are necessary if you want to do any of the following:
- Grow big
- Get major funding from Angels or VCs
- Decrease your liability and manage your risk
- Decrease confusion and misunderstandings
- Increase the odds that you will get paid for your work
- Protect and own your IP, especially trade secrets
- Have evidence that you are taking reasonable measures to protect your trade secrets to increase the odds of getting legal protection for them and
- Protect the integrity of your business
In my next post, I will discuss some of the major types of business contracts that relate to operations and intellectual property. Understanding what types of contracts you need is the first step for a successful startup.
More posts about contracts:
- The Elements of Contract Formation
- The Biggest Startup Blunder: Failing to Secure Protection of Your Startup’s IP
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