What terms are typically found in a commercial contract for a tech startup?
Contracts will vary depending on circumstance, and the best ones are always specifically tailored for you. Early stage startups will be tempted to use templates — they’re cheap and as far as the average joe is concerned, it does the job to get the deal going.
But because these are templates — available to anyone and quite predictable — you leave yourself vulnerable. Some template terms favour one side over the other while others leave plenty up for debate. Every template you use is also a missed opportunity to protect yourself and ensure a good position in later negotiations.
More importantly, in the later stages of your company, whether you’re looking to raise capital or sell your business, investors will review your contracts and agreements to see if there are any issues or unrealised threats. Having an unfavourable contract on foot when you’re trying to make your company look like the best thing that the investor’s ever come across really won’t help your case.
So what makes for a good contract? For the very early stage founder, this is just a few key provisions that you want to keep an eye out for.
Contracts are generally between two parties and are only enforceable on the parties that sign them. This means that you can’t chase up someone else who didn’t agree to the contract terms, even in circumstances where they benefit from the contract. The only parties who can be obliged by the terms of the contract will be the parties (or their representatives) who signed the dotted line.
However, there are some ways to bring in third parties via the contract. For example, some contracts have a subcontracting clause which can create a positive obligation on the signing party to subsequently bind their subcontractors to the same terms. This is one way to ensure that subcontractors perform to the same standards or policies that you set. If you’re particularly concerned about privacy or confidentiality for example, you can make sure any subcontractors working on your project will comply with your policies.
For most tech startups Intellectual Property is one of (if not the) most valuable asset in your arsenal. Ensuring that all IP developed as part of the contract belongs to you is absolutely critical. Investors will be particularly interested in scrutinising IP clauses and confirming effective ownership!
Generally, the IP developed by your employee will by default be owned by the company. The contract will determine whether this extends to IP developed outside of normal work hours too. The opposite is true for contractors and consultants. By default, any IP they develop belongs to them unless the contract says otherwise. Most independent contractor agreements will have a clause that ensures the IP belongs to you, but you can never be too careful!
Finally, you should ensure that there is a clause that will require the other party to disclose any potential IP that they create, whether registrable or not, developed or otherwise. While you can never be sure if someone’s developing IP (competing or otherwise) under your nose, this clause will at least give you recourse after the fact – and make the developer think twice!
When you’re dealing with something important, it’s essential to make sure that anyone and everyone involved maintains confidentiality. Some information cannot be kept confidential (as a result of statutory disclosure requirements for example), but you can still have contractual terms ensuring that you are notified before any disclosure is made.
Confidential information can sometimes be defined in a different part of the contract (in a schedule or in the definitions section for example) where you might overlook it! Take care to check if confidentiality is appropriately defined to suit your needs — and if you’re on the other side of this agreement, make sure you review the definition, so you’re not caught off guard.
It’s standard practice for ‘confidential information’ to cover any information relating to the business of the company (and its related organisations) whether or not it is designated as confidential. This includes financial information, business strategies, computer programs, research projective, customer or prospective customer lists, ideas, concepts and more.
Most disputes faced by startups will relate to employment, co-founder conflicts, or IP matters. The industry you operate in will also affect the nature of your disputes, particularly in heavily regulated industries. It is not worth getting caught out after the fact when it will cost more time and money to fix than it would to set things right in the first place.