In this article, I summarize 10 key contracts for small and growing businesses. These contracts need to be well thought out and well drafted and can be crucial to the success of a business.
Sample forms can be found in the Forms and Agreements section of AllBusiness.com.
Employment Offer Letters
One of the best ways to protect your business from legal liability and misunderstanding with an employee is to have an employment offer letter issued and sent to the prospective employee. The employee should then be required to sign it, evidencing the scope of the employment relationship between the parties.
A good employment offer letter covers the following points:
- The particular job offer
- The responsibilities of the job
- The salary and the benefits
- That the employment is “at will,” meaning the employee can quit or the employer can terminate him or her at any time
- That the employee is required to sign a Confidentiality and Invention Assignment Agreement (discussed below)
- That the letter constitutes the entire agreement of the parties, and can only be amended in the future in writing, signed by the employer and the employee
- That any disputes will be handled exclusively by confidential binding arbitration (other than certain designated types of disputes, such as those related to worker’s compensation)
Confidentiality and Invention Assignment Agreements
Employees have access to a company’s confidential information. Moreover, many businesses expect their employees to come up with ideas, products, business strategies, and inventions.
To make sure the employees keep the proprietary information of the company confidential, you should require them to sign a Confidentiality and Invention Assignment Agreement. This agreement deals with the confidentiality issue, but it can also provide that the ideas, business strategies, and other work product developed by the employee belong to the company, and not to the employee.
If you expect to have venture capitalists or other professional investors invest in your company, they will expect that you have these agreements in place for all of your employees.
If your company provides professional services as opposed to selling a product, it needs to have its own good, standard form Services Contract (which can be labeled many things, including an Agreement for Professional Services). This type of agreement lays out the terms and conditions under which you provide services and specifically spells out your responsibilities and liabilities.
Having a good contract here is important. You want to avoid misunderstandings and undue liability. Ideally, this agreement gives you flexibility in completing the services, lists the fees for the job (and additional fees if you encounter unforeseen circumstances), and sets limitations on your liability (such as limiting that liability to the amount of the services fee).
Many businesses sell products, and therefore need a good Sales Contract. The Sales Contract lays out the price, terms, and conditions for the sale of goods, equipment, or other products. Of course, some businesses (like the corner grocery store) don’t need Sales Contracts, but if your products sell for significant dollars, then you likely need a Sales Contract.
The actual Sales Contract can take the form of fine print on an order form or an invoice, or it can be tailor-made for a particular sale. You always want to start with your own form of contract. The key terms in Sales Contracts include price, price adjustments in certain events, responsibility for taxes, payment and credit terms, warranties to be given, disclaimers of various warranties, and liability limitations.
Numerous instances arise in which you want to share confidential or proprietary information with another party. You may want to show the information to get them interested in doing a deal with you, investing in your company, or working together on some strategic arrangement. Producing an agreement to prevent the other side from stealing or using your ideas is very important in these situations.
The Confidentiality Agreement (also referred to as a “Non-Disclosure Agreement” or “NDA”) provides that the recipient of proprietary information holds the information in strict confidence and will only use the information for the purposes of evaluating whether or not to enter into a business relationship with you. The key to this agreement is that you should enter into the agreement before any disclosure.
A good Confidentiality Agreement lays out the recipient’s confidentiality obligations, the exclusions from the confidentiality (such as information already in the public domain), how long the confidentiality obligation lasts, limitations on the use of the information, and the right of the disclosing party to seek injunctive relief to stop the other side from disclosing the information.
Letters of Intent
A letter of intent can be a very advantageous and quick way to get momentum for a deal. The idea for a Letter of Intent is for the parties to get a “handshake” deal on the major points, and then move to creating definitive legal agreements.
You need to be very careful about what you want to be binding or nonbinding in the letter. Most Letters of Intent are nonbinding and are merely expressions that the parties have a particular deal in mind and want to further negotiate to a definitive complete agreement. Letters of Intent can also be binding contracts, however, so be careful what you say in these letters.
Stock Purchase Agreements
Start-up and emerging businesses often need to raise capital to fund their business. They often do this by selling stock in the company.
Stock Purchase Agreements are the vehicle where stock sales can be effected. Such agreements can run from a few pages to 50 or more, depending on the investors and the complexity of the deal.
In most agreements, you need to carefully lay out the following: the type of the stock sold, the price and number of shares, the representations and warranties of the investors, the representations and warranties of the company, the conditions to closing, the rights of the investors, and potentially much more. This is an agreement on which you typically need advice from an experienced corporate counsel.
A business lease for office or retail space is often one of the most significant contracts for a business. The starting place for most lease negotiations is the landlords allegedly “standard” lease, which tends to be incredibly one-sided in favor of the landlord.
Because the lease can constitute a major commitment for the business, you have to watch out for all the “gotchas.” Most important, you have to ensure that:
- The space fits your needs.
- The uses the landlord permits for the space are broad enough for your business.
- The lease term is sufficient, with a right to extend if possible.
- The economic terms are competitive.
- The lease clearly spells out the landlord’s obligations.
- You have some flexibility in assigning or subletting the lease.
- There is a limitation on pass-through operating expense and tax increases.
Many businesses enter Loan Agreements with banks or financial institutions and simply sign the lender’s “standard” form. The standard form tends to be very one-sided in favor of the lender, with various restrictions on the borrower.
The borrower under a Loan Agreement needs to fully understand (and negotiate better terms than those contained in the standard form) a number of key issues, including the following:
- The total cost of the loan
- The payment schedule
- The right to prepay the loan without penalty
- The flexibility on use of the loan proceeds
- The right to cure defaults
- The appropriate representations and warranties of the borrower
- The covenants that can trigger a default
To download samples of these important business contracts and other forms, contracts, and checklists, visit the Forms and Agreements section of AllBusiness.com.
Copyright © by Richard Harroch. All Rights Reserved.