Advisor Ellie Braun discusses why contracting is especially important for start-ups, and the danger of doing business without the right protections in place.
Understandably, many start-up businesses want to have steady revenue before incurring legal fees. This means that start-ups often begin providing services for customers or engaging with vendors without a written agreement (or with one that doesn’t have the right protections). This is a dangerous way to do business, which companies often come to regret.
Here’s a cautionary tale: A company which provides a CRM platform for construction contractors begins providing the software with a contract they found online. The contract doesn’t contain the necessary disclaimers or limitations of liability. One day, a bug infects the software and it goes down for 24 hours. The company is able to resolve the bug, but some data was lost as a result of the bug.
Because the contract didn’t contain a provision specifically stating that there was no guarantee that the software would be without bugs or that the software would always function, the company’s customers sue the company.
Also, because the contract didn’t contain a limitation of liability section, the customers seek damages for both direct and consequential damages (for the lost profits/business as result of the downed software and loss of data). Now, the company is faced with a law suit and legal fees easily big enough to put them out of business.
More importantly, because the contract didn’t contain the proper confidentiality and intellectual-property provisions (to make it crystal clear that the software is the company’s intellectual-property and is confidential), one of the company’s customers has taken the software and is gearing up to compete with the company in providing the software to other contractors.
All of this could have been avoided if the company had hired an attorney to get a good contract in place prior to providing services to its customers.
The contract would have protected the company’s intellectual-property, laid out the expectations and duties of the parties, and set limits on the company’s liability, among other things. For a fraction of the cost of a litigation, a good attorney will be able to identify all of the disputes that could arise under a contract, and resolve for them in the contract, which will prevent, or at least deter, the potential for litigation.
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