What Do Your Company Contracts Say About Your Business?

To get funding and customers, most startups want to appear professional, polished and trustworthy.

Many startups who are trying to entice customers spend their precious time and capital on marketing.  They may have fancy websites and glossy brochures.  They understand that outward appearances matter.

But how many entrepreneurs have considered what the appearance of their company contracts says about their company?

What contracts you may ask?

For startups who rely on oral agreements and sketchy emails — essentially handshake deals — their company may appear casual and laid back.

One problem with this approach is that their customers may act act equally casual when it comes time to pay their bill.   The customer may also be furious when they pay a web, logo or software designer for custom work and fail to actually own the intellectual property.  A full IP ownership transfer requires a signed, written agreement.

Similarly to save costs, some startups draft their own contracts by cutting and pasting from random agreements between other parties that they find on the Web — agreements that they sometimes don’t read and frequently don’t understand.   They may end up with a wack-a-doodle mess.  They may have a contract that doesn’t even reflect the nature of the deal or have the proper terms.

Worse yet, they may choose to follow a contract that favors the opposing side!

Frequently, they leave out key terms like personal jurisdiction or choice of law because they don’t understand the significance and the language sounds like so much mumbo jumbo.  But later when a dispute erupts they may be unpleasantly surprised to learn that they have failed to give their local court power and authority over the opposing side to resolve the dispute.

Additionally, amateur drafters frequently leave out critical disclaimers.  They may not know that there are statutory warranties that automatically apply to the sale of goods, including software, unless they are explicitly disclaimed in a very obvious way in the contract.  Resulting unintended liability may far outweigh the benefits of the deal.

Critically, poorly drafted contracts may not use the proper language to specify ownership of intellectual property rights and may not transfer intellectual property rights, even when that is the intent of the parties.

Language that mentions who owns the intellectual property is not the same as language that actually transfers ownership.

When a potential customer sees a bizarre contract from the potential vendor, they may think that the company is sloppy, incompetent or untrustworthy.

Most importantly, attorneys who conduct due diligence for an investor will see such problematic contracts as a very, very bad sign.  For example, it can be lethal to a round of funding or an acquisition if the inquiring attorney finds that the company doesn’t actually own the IP it claims to own and it has set itself up for a high degree of potential liability because of missing or poorly drafted contracts.

In contrast, a professional, well drafted contract that clearly and cleanly explains the terms of the deal and what they are getting for their money will likely give the impression that the company is professional, serious and competent — even if they are only a small startup.  Well drafted contracts will also make due diligence by an investor’s attorneys a much smoother and pleasant process.

To look polished, professional and trustworthy, it is worth the time to understand contract law so you can draft proper contracts or alternatively it is worth the money to hire a competent attorney to clarify the deal, protect your interests, and limit your company’s liability.