Contracts: The Clauses That Define Your Risk

This article covers the contracts a startup needs, and the clauses in each that deserve careful reading.

1. Core contracts

• Customer agreements: a service agreement or licence, plus terms of use and a privacy policy for digital products.
• Employment contracts: for everyone working in the company, founders included.
• Independent contractor agreements: with an express IP assignment clause.
• Supplier and service provider agreements.
• Confidentiality agreements.
• Partnership and distribution agreements.

2. The decisive clauses

Scope of work and deliverables. Ambiguity here is the source of most commercial disputes. Define expressly what is in scope and what is out, and how change requests are handled.

Intellectual property. Who owns what is produced? In development agreements for customers particularly, distinguish between what the company retains as reusable tools and components and what is delivered to the customer.

Limitation of liability. The cap on compensation and its scope, and exclusion of indirect damages. The absence of a liability cap in a contract with a large customer is an existential risk for a small company.

Service levels and remedies. Availability and support commitments and the consequences of breach.

Termination. On what notice? For what cause? And what happens to data and prepaid amounts on termination?

Change of control. A clause giving the other party the right to terminate if your company is sold or its ownership changes. Its presence in your major customer contracts reduces your company's value at exit — review it carefully.

Exclusivity. An undertaking not to deal with the customer's competitors. Sometimes acceptable in exchange for a genuine commercial commitment, and dangerous if open-ended in duration or scope.

Confidentiality and data protection. Particularly where you process personal data on a customer's behalf — see Regulatory Compliance.

Dispute resolution. Governing law and competent forum or arbitration. Don't accept jurisdiction in a distant forum without assessing the cost of litigating there.

3. Employment contracts

• Form and term consistent with the Labour Law and statutory obligations.
• Compensation and benefits and the review mechanism.
• IP assignment for work produced within the scope of employment.
• Confidentiality extending beyond the end of the relationship.
• Non-solicitation with reasonable time limits.
• Equity or incentives where granted — documented in a separate instrument consistent with the incentive plan.

4. Recurring mistakes

• Working with no contract on the strength of trust, then disputing scope.
• Accepting unlimited liability.
• Overlooking change-of-control provisions and their effect on company value.
• Open-ended exclusivity that closes the market to you.
• Copying a foreign contract inconsistent with local law.
• Failing to document subsequent verbal amendments.
• Omitting a change-request mechanism in development agreements, so deliverables expand without compensation.

5. Simple operational practices

• A standard contract library: your templates, not always the other side's.
• A contract register recording parties, terms, renewal dates, and notice deadlines.
• Annual review of automatically renewing contracts.
• Defined signing authority: who may bind the company, and up to what limit.

Pre-signing checklist

• Scope of work and deliverables precisely defined
• Ownership of deliverables and reuse rights clear
• A reasonable liability cap and exclusion of indirect damages
• Termination terms and the fate of data and payments
• Change-of-control provision reviewed
• Time and scope limits on any exclusivity
• Data protection obligations
• Dispute resolution mechanism and governing law
• Signing authority documented
• Legal review for high-value contracts

FAQ

Is a template enough?
For low-value contracts perhaps, provided it is adapted to local law. Large or long-term contracts need specialist review.

Which clause is most often overlooked?
The absence of a liability cap, followed by change of control for its later effect on company value.

Are electronic signatures valid?
Electronic transactions are recognised under statute within defined controls; verify the method used and its evidentiary weight with your counsel.