Running a start-up can be a daunting task. Between implementing a business plan, raising equity, running the business and keeping all stakeholders informed and on board, an entrepreneur or management team has enough to worry about. Due to these competing draws on management’s time and resources, all too often we see emerging companies fail to focus on the commercial contracts that will serve as the basis for their emerging company. In subsequent blog posts, we’ll explore some key considerations for various commercial contracts, but let’s start with two fundamental rules of commercial drafting applicable to all contracts:
The Golden Rule: Never sign an agreement containing a provision you don’t understand.
Being presented with an agreement that you don’t understand, or that contains provisions that are not applicable to your deal, is usually a sign of deeper issues: either your counterparty has pulled the wrong “form” document (which happens with troubling regularity) or the business principals have not reached a true meeting of the minds. In the case of the former, this presents an opportunity for the emerging company to redraft the agreement to its liking without going through a battle of the forms with an oftentimes larger counterparty, or the emerging company needs to request that its counterparty produce the correct agreement to serve as the starting point for their negotiation. In the case of the latter, both parties are often best served reconvening the business principals to discuss expectations before proceeding to a document negotiation. In both cases the emerging company should seek reassurances that its counterparty is dealing in good faith. Counsel should also be consulted to assist in reviewing and advising with respect to the mechanics and implications of legal terms such as limitations of liability and indemnification.
The Judge Rule: If you couldn’t point a judge to a provision in your agreement governing the other party’s obligation for a specific occurrence, your agreement is likely incomplete.
Stated another way, each agreement needs to accurately and completely set forth the parties’ rights and obligations. Further, most commercial agreements will contain integration clauses stating that the contract constitutes the entire agreement of the parties respecting the subject matter at hand, so to the extent your counterparty has made promises regarding performance or assurances with respect to the quality of its performance, these promises and assurances need to be in the agreement. You should also consider whether a statement of work is appropriate (if for instance, the agreement is a master agreement and the parties require stand-alone provisions applicable to a discrete project), or whether service levels respecting the quality of a party’s performance are appropriate for the agreement.