Yes I know what you’re thinking…yawn, yawn, not another article on a very dry subject from a boring lawyer. But what if I were to tell you that this ‘very dry subject’ could well affect the value of your business and also determine how attractive you are to investors.
Emma Shipp, consultant at Russell-Cooke takes you through some crucial terms of business for start-ups.
All businesses at every stage of their growth need to enter into contracts – contracts with customers that bring in the money, contracts with suppliers that keep your business stocked, contracts with staff who can take your business to the next level and not forgetting contracts that keep your unique business idea safer from copycats.
If you get these contracts wrong or you cut corners at an early stage then I can guarantee that, sooner or later, it will come back to bite you. So read on if you want to know more…
Terms of business
Some businesses need to negotiate individual contracts with each customer, particularly where they have a small number of high value contracts.
Or maybe you have to contract on terms presented to you by your significant customers. But most businesses will want to have standard T&Cs in place that apply equally for every customer. These terms will cover a range of topics such as:
- the scope of what is to be supplied, whether goods or services
- price and payment terms
- length of contract
- insurance and risk, and
- liability for loss or damage (insurers may insist this is limited before offering cover).
Contracting with consumers
If you are providing goods or services to consumers (i.e. individuals acting in their private capacity rather than businesses) then additional regulations need to be taken into account when drawing up your standard terms of business. In essence, the terms with consumers must be ‘fair’ in all the circumstances.
Layered on top of this are more regulations if you are dealing with consumers at a distance, which usually means online, and this requires certain information to be provided to them and your cancellation and returns policy to be compliant.
It’s a lot to think about and it’s quite disastrous to get it wrong at this stage as the mistake will be replicated every time you make a sale and enter into a new contract. So it’s worth spending some time and effort to get your standard terms right.
Enforcing your terms of business
One issue you need to think about is how your customers will read and acknowledge their agreement to your terms of business. Thankfully, gone are the days where a business could hide away pages and pages of terms detrimental to consumers and then roll them out when a customer complained.
Now you need to be really careful to ensure that customers have had a chance to read the terms, that you have brought any unusual or onerous terms to their attention (often in relation to limits of liability) and that they have specifically indicated their acceptance for example by clicking a button.
This particularly applies where the consumers have had no chance to negotiate terms specific to their own dealings with you.
There are other types of contract that you may have to enter into and these include standard terms that are presented to you such as for Microsoft licences.
It’s worth reviewing these but they are very unlikely to be changed so it’s more an information exercise. There may be other contracts such as software development agreements which need greater scrutiny and possibly negotiation.
Here there are some key terms to look for beyond the price and these include ownership of intellectual property as well as liability for poor workmanship.
Again, it’s very important for a start-up business to get these right. If, for example, it transpires your software developer owns the rights in all developments they have made to your software then your business will be worth less and investors are less likely to be interested.
Confidentiality and non-disclosure agreements
Finally, I want to touch on a particular type of commercial agreement that start-ups may need and these are confidentiality and non-disclosure agreements. You may have come up with a unique idea but, until you’re ready to launch, you don’t want potential competitors getting wind of it.
Although it’s difficult to stop copycats you will stand a better chance if everyone involved in your business from investors to contractors to staff are asked to provide confidentiality and non-disclosure undertakings to you.
You don’t need to ask everyone to do this – lawyers and accountants are bound by professional rules relating to confidentiality and you can confide in them with assurance. For everyone else (including family and friends, I’m afraid to say) an agreement protecting your idea is a very useful tool.
Having said that, these types of agreement are notoriously hard to enforce so information should still only be provided on a ‘need to know’ basis.
Obviously, the better the agreement is drafted the more likely it is that you can enforce it. Legal advice is money well spent at this early stage.
Often it is the psychological impact of someone having signed a well drafted confidentiality agreement that will stop them stealing your idea rather than your ability to pursue them through the courts.
In addition, it is another agreement that investors will look carefully at. If you have engaged a number of contractors without insisting on confidentiality then an investor may think your business is more likely to face competition than if you have insisted on tight confidentiality undertakings from the start.
In conclusion this stage, where you start to enter into commercial agreements, is a crucial point in the growth trajectory of a start-up business. If you get it right then it will make securing investment, fighting off competitors and attracting repeat business that much easier. Get it wrong and the business could be reaping the consequences for many years to come.
Not so boring now eh?
The Russell-Cooke legal team is offering any member of the Fresh Business Thinking and Great British Entrepreneur Awards communities a free 30-minute online consultation with one of their start-up legal advisors to discuss your legal questions and issues. This offer is available until 1 May 2022.
Get in touch here!