Navigating the complexities of corporate contracts: 8 insights for startups
02 Jun 2023 - Frans Vanhaelewijck
Navigating the complex corporate contract landscape can be intimidating for startups. Yet, understanding and negotiating these contracts with confidence can become a strategic asset. In this blog post, we will break down eight key topics that often come up in contract discussions, derived from the wisdom of experienced entrepreneurs.
1. Embracing Strategic Partnerships
One common scenario involves corporations proposing a partnership model. In this instance, maintaining a delicate balance between meeting the customer’s needs and preserving your core product vision is crucial. A successful partnership means becoming an integral part of the corporation’s organization, which entails extensive collaboration and mutual commitment. To mitigate the risk of dependency on a single partner, keep your options open by actively pursuing partnerships with multiple companies.
2. Understanding Indemnification Clauses
You, as the vendor of the software, promise to protect your customer from any costs and/or legal actions in case a 3rd party claims that your software infringes that 3rd party’s IP. If that happens, your customer should inform you. In response, you agree to the following:
- You will handle the defense against this claim.
- You can choose your own legal counsel.
- You will not settle or end the claim without first agreeing with your customer.
- Your customer will not unreasonably delay or refuse to give permission.
It is advisable to agree to these clauses as they reflect a sense of responsibility from your part.
3. Navigating Insurance Matters
As a startup, you should be prepared to provide proof of your insurance coverage when requested. Be transparent about your coverage limits and communicate that any liability or damages cannot exceed your insurance policy’s coverage.
It’s often the case that customers request a coverage that is ten times greater than your current offering. If a corporation demands a higher coverage, agree to it only if they are willing to subsidize the extra premium.
Typically if you argue that you would need to increase your coverage only for them, the customer will agree with the initial terms.
4. SLA Agreements
Service Level Agreements (SLAs) may seem overwhelming, but you can agree to them strategically. Implement tiered SLAs that ensure prompt attention to critical system down situations. Focus on ‘reaction times’ rather than ‘solution times’ to provide a realistic commitment.
5. How to approach Penalties
It’s advisable to initially decline penalties. In case they are unavoidable, ensure they are carefully managed. Set a cap on the penalty amount (e.g., it cannot be higher than the quarterly contract value) and only agree to penalties following a formal and written escalation that failed to be remedied.
6. Decoding Support Contracts
Consider adopting a credit-based system for support contracts. Assign each issue or question a ‘credit’ value based on its complexity, and agree upfront on the allocation of credits for each type of request. Each credit corresponds to a specific monetary value and a number of credits is allocated on an annual basis.
7. Interpreting Change of Control Clauses
A Change of Control clause refers to stipulations in a contract that take effect when your company undergoes a significant shift in ownership or management, e.g. your customer can end the contract in case you are acquired by one of their competitors. These clauses can negatively impact your company’s valuation during a potential acquisition, so it’s best to try to avoid them.
8. Choosing Between Your T&Cs or Theirs
Choosing your customer’s terms and conditions may seem counterintuitive, but it’s often the more practical choice. Negotiating your own terms with corporate lawyers can consume substantial time and resources.
Hopefully this allows you to approach corporate contracts with more confidence and strategic awareness. Remember to consult with a lawyer to ensure all the necessary details are covered in the contract and that all clauses are legally enforceable.