8 June, 2007
Unfortunately, this topic tends to be a nasty surprise for some people starting a business. Obviously, you can read my book and get some good information about contracts, but here’s some advice from a practical point of view.
Oh, and I’m not a lawyer, this isn’t legal advice, etc.
Contracts are a bit of a sad reality. In a way, they are saying, “Sure, we’ve agreed to do something, but now we need to write it down in case we need to sue each other in the future.” It’s a bit of a sad way of looking at things, but the reality is that some people are not as scrupulous as you would like. Even if you’re a believer in “enlightened self-interest”, sometimes people don’t always work in their own self-interest and need the contract to keep them honest.
Keep in mind that your lawyer is going to tell you specific things about contracts that they recommend you follow. You are paying them to tell you the strict legalities involved, but there are some practical issues to consider as you think about contracts for your business.
It is important to remember that the contract isn’t a magical piece of paper that makes everything work flawlessly. In some international contracts, suing a person that defaults on the contract involves a suing them in their own country. Even suing someone for breach of contract here in the U.S. can be expensive, and if the person violating the contract has no money, it can be an exercise in spending money for very little benefit.
But, there is the some benefit in working out a contract even if you do not intend to sue someone over it. It can be a good way to think about all the necessary steps in the agreement and it can be a handy reference. “Remember, you need to set up billing for the game before you launch, according to the contract.” It is also useful for defining when the contract can be broken. “You are refusing to deliver our milestone, so we are ending the contract with no penalty.”
Another good point of advice is that you shouldn’t necessarily rely on the law, but you should get every important element written into a contract. For example, if I were to take a full-time position with a company, I would absolutely make certain that the company understands that any work I do to continue supporting Meridian 59 on my own time is my own work and that they have no claim to it. Even if the law already says this, it is important to include it into the contract to not only protect against the law changing, but also to establish expectations.
Sometimes you also have to know when to deal without a contract. In a few situations I’ve seen, we were still been negotiating the contract when the work was supposed to start. In this case, both sides acted like we had a contract in place and we made appropriate payments and delivered the appropriate work as if we had signed the contract, even though the contract was not signed yet. Another time one party in the contract was selling the company and starting a new one, but things had not been set up in the new company yet. In this case, it made sense to start the necessary work even if a contract isn’t in place. Obviously, there are some risks here because one side or the other could violate the contract easily; so, this type of arrangement works best for a long-term contract with regular payments to encourage both sides to work together on establishing the relationship.
In all, contracts are one of the most important things a businessperson will do as they are running a business. So, it is important to make sure that your contracts are organized to the greatest benefit.
Further, if you do consulting or contract work, you will also have to deal with contracts. Everything I said above applies as well, although you need to be cautious. Often as a consultant you will not have an expensive lawyer to look over your contracts, especially as you’re starting out. The company you might be working for will have the expensive lawyers, and some companies will try to work it out so that they derive as many advantages as possible. It is important to get the issues you want included, as I said above. Don’t overlook small issues, either, and expect the company to provide for you out of enlightened self-interest. A big issue is travel, for example. You might want to specify that the company will not fly you on certain airlines if you have had bad experiences in the past, or that the company must find a certain minimum level of quality in a hotel room, for example.
This is a summary of my experiences with contracts. Feel free to ask your own questions and I’ll be happy to provide some non-legal advice. ;)