As an entrepreneur setting up your business in the US, you will inevitably have to negotiate and enter into commercial contracts at some point. This could be a customer agreement or a distributor agreement for example. For cost reasons, you will probably have to deal with some of this on your own, without hiring a lawyer to help you. The problem is, that even small mistakes can cost you a lot of money further down the road. Here are some things to be particularly careful about.
Exclusivity – Don´t Grant Too Wide Exclusivity
In the U.S., there are not as many restrictions on exclusive grants of rights as there are in Europe. This means you must be very careful about granting exclusivity to a supplier, a partner or anyone else. Make sure you are specific about the geographic area, the time period, the product market etc. where exclusivity shall apply, and try to make it as narrow as possible. In addition, you should make sure that the exclusivity grant can be terminated if your counterparty isn´t performing as desired. You don´t want to end up with an exclusive distributor who is not actively selling your product!
Warranties and Disclaimers – Make Sure you Use the Correct Wording
You will notice that Americans are a big fan of disclaimers, even in consumer relations. If you are on the seller side, this is actually a good thing. What you need to be aware of, however, is that you must be very careful about the actual wording for the limited warranties and disclaimers you want to use. AND, YES, IT´S ACTUALLY TRUE YOU NEED TO WRITE SOME OF THEM IN CAPITAL LETTERS (I know, it looks silly!).
Limitation of Liability – Don´t Accept Uncapped Liability
A nightmare scenario for any founder (and her legal advisor) is to see a potential investor turn in the door after they discovered unacceptable terms in the customer agreements. We know how tempting it can be to sign whatever standard terms an enterprise customer puts in front of you, just to get that ONE supercool reference customer to post on your website, but trust us, it will not be worth it if it comes at the cost of a future investment. There are a few types of liabilities that you cannot legally disclaim under U.S. law, such as liability for gross negligence, willful misconduct, and fraud. In addition, it´s pretty standard that there is an uncapped liability for breach of confidentiality and data protection obligations. But apart from these examples, you should make sure to cap your maximum liability under a customer agreement to a certain amount, or a percentage of the total contract value.
Choice of Law and Dispute Resolution – Don´t End Up in Class Actions or Other Expensive Court Battles
The first thing to consider is what law shall govern the contract. Next thing is how disputes should be solved, whether in court or in arbitration. We have previously posted a blog on this matter, see here. In a consumer contract, you will often see arbitration clauses with class action waivers. Class actions risk becoming very expensive for a company, so this is clearly something to avoid. Class action waivers will only be binding if they are drafted in a specific way.
Intellectual Property – Don´t Give Away Your Core Asset
For many startups, the ownership of the intellectual property that they are developing is the CORE VALUE of their business. If there is one legal area where you CANNOT CUT CORNERS, this is the one. U.S. copyright law is very formalistic. If you enter into a contractor agreement, you need to make sure you clearly regulate who will own the work performed, and if you end up giving away a license, you should make sure it won´t prevent you from developing your business as intended. The correct wording must be used in order for these clauses to be valid and enforceable.
Final Remarks on the Usage of Templates
As is clear from the above, there are certain pitfalls to avoid. If you can´t afford to hire a lawyer to help you, you will likely google for templates, or ask a friend. If you are lucky, you might have an investor or board member who can help you find the template you need. Today, there are many good websites offering free templates, and many law firms do this as well for marketing purposes.
In most cases, “copy pasting” is better than doing nothing at all. However, when using wordings from other contracts it´s important to make sure:
1) that the template was intended for a commercial scenario that is similar to yours, in particular, that the same law governs the contract as in your case
2) to read the whole contract that you´re using as a template, before you start cutting bits and pieces from it, since there could be other paragraphs dealing with the same topic in other parts of the contract
3) you don´t end up using contract clauses from different templates, that contradict each other
4) you understand what the wording means (if you don´t, keep looking)
