For many of my clients, I’ll review or develop sales contracts, but the CEO of the company is the one who signs.  In these situations, I’m always asked, “How do I know the contract is good for me?”  Here’s what I look for to make sure a contract is worthy of a signature:

1.      Mutual risk-sharing – Contracts exist to define the relationship between two parties.  Early-stage companies will usually be making contracts with companies much bigger than they are, so there is no point in trying to “win” the contract negotiation – you won’t.  However, you can push to ensure that all the provisions that put some responsibility on you are mirrored for the other party.  Typical examples of mutual provisions you’ll want to see are around indemnity, confidentiality and respecting each other’s brands.

2.      Protect your options – In the early years of your business, you know there will be a lot of changes, many of which you can’t predict.  Accordingly, you don’t want clauses that limit your ability as an organization to respond to opportunities as they arise.  Some common things you’ll want to look at include:

a.      Right to assign – Many software buyers misunderstand this critical clause.  As you grow, you may want to reorganize your company or to sell it – being able to move the customer contract to a new subsidiary or to the buyer of your company is critical to growing and maintaining your value.  This one is a deal-breaker for me – you must be able, at least, to assign the contract to a buyer of your company.

b.      Data ownership – Your software solution will collect data.  It may also use third-party data or data provided by the customer (or their users, if the customer is an organization).  You want to clearly define who owns which data and keep your ownership of data as broad as possible.  This gives you the option to use that data as your company grows – today’s “noise” can be tomorrow’s valuable asset.

                                                              i.      Note – sometimes, your customer can’t allow you to own certain data (Personally-identifiable information, medical information, or other sensitive data).  If that is the case, you’ll need to develop language in the agreement that gives you full rights to use that data.  You have a particularly strong argument in favour of that position for any data you are storing.

3.      Define & protect your intellectual property – There are three main places in the agreement that will define your IP. 

The first is in the definition of your solution (which may be in the definitions section of the agreement or, more commonly, in an attached Schedule.  The definition of your solution should not be taken from the marketing description on your website; the contract needs a  legal definition which identifies exactly what the client will receive.  Good marketing focuses on benefits, not features – good contracts focus on features, not benefits.  As your product grows and morphs, keep this definition fresh.

For broader corporate secrets we have the Confidentiality section.  There are usually 4 paragraphs here.  The basic assumption behind this section is that anything you share with the customer is NOT confidential, except to the extent that you define it (and limit it) in this section.  One thing to be careful of – many confidentiality sections require that information shared must be LABELLED as confidential; confidentiality is not assumed.  So make sure the next marketing ideas you share with your customer are marked “Confidential”, just to be sure.

On top of these two you must have a clause in the main body of your sales contract that clearly states that every part of your solution is yours, and may only be used for the intended purpose and may not be reverse-engineered, copied, or otherwise repurposed.    

4.      Make sure your liability is limited – There will be a liability section in your contract, to identify how much you will protect the buyer in case of damage caused to the buyer by your solution. 

Many large buyers will start with unlimited liability.  The clause can look very simple, and you may even agree with it in principal (“Sure, if you are hurt by our software, we’ll take that responsibility”).  However, the degree of damage can often be madly inflated beyond what you might think reasonable.  Also, if you regularly accept unlimited liability, your insurance costs will go up or you may not be able to get insurance.  So, keep the liability limited to some multiple of what the customer has paid.  Typical multiples are 1x or 2x of the actual amount paid (to date) by the customer. 

5.      What if something goes wrong? – Since all software has bugs, there will be times when your solution won’t work as intended.  A good contract will outline what the customer can expect from you – this keeps expectations in-line and protects both parties with clarity of what will happen.  These clauses are often called “SLAs” (Service Level Agreements, pronounced “slays”). 

The specifics of your SLA can vary, so I won’t provide any details here, but most SLAs will differentiate their response based on the criticality or impact of the outage; mission-critical outages will get a higher level of response than those that are merely inconvenient.  Also, the standard is to outline how quickly you will respond to an issue, NOT how quickly the issue will be resolved.  You can control how quickly your respond, but a fix time may be widely variant.  Of course, it may also be the case that a final fix may rely on a third party (maybe your hosting provider or an integrated product partner) so you can’t reliably set a time limit on how quick the fix will be.

6.      Show me the money! – So far we’ve looked at limiting your risk; this section looks at making sure you’re getting the value you expect from the agreement.  Usually in a schedule as opposed to the body of the agreement, the payment terms will outline how much you get paid, when payments are made, impact of late payments, and how payments are to be made.  This is probably the most-negotiated part of the agreement and needs to be agreed to before the contract is written.  You don’t want surprises here.

Specific situations can call for other critical clauses, but these few are the main ones I run into on a regular basis.  You now know the basics of what to look for – make sure you have a professional helping you to make sure the more advanced nuances don’t reach out to bite you.