What is a contract?
A contract is a legally enforceable promise or set of promises. Entrepreneurs should know that an agreement does not need to be drafted by a lawyer or contain fancy words like “whereas” or “witnesseth” for a court to enforce it. Courts have enforced napkin, instant messenger, and oral agreements. With this in mind, exercise care in making any type of offer.
Well-written contracts accurately reflect negotiated solutions and set the rights, restrictions, and expectations of the parties. Good contracts are future oriented, and help both parties understand (and agree on) expectations of the contractual relationship.
Even if a written agreement is not legally required, putting a contract in writing helps prevent later misunderstandings. All that is required is a “document” signed by all parties that contains the identifies of the parties, the subject matter of the agreement, and the basic terms and conditions.
Keep track of your contracts!
In an ideal world, a startup will have a secured data room for all of its contractual agreements. In reality, this doesn’t always happen. However, it is very important for companies to keep track of the material contracts, like: commercial bank agreements, vendor and service agreements, leases, employment agreements, and investments. It is also important that anyone you are doing business with knows what they can expect from you. Without contract law, businesses would find themselves providing goods or services and only hoping to get paid.
Key contract pointers!
- When a contract is entered into with an entity, such as an LLC or corporation, it is important to make sure that the person who signs the agreement has the authority to do so. On the flip side, if you are entering into a contract on behalf of your entity, make sure that is explicitly stated in the contract. Otherwise, you could be held personally liable for not “putting the other party on notice” that you were contracting on behalf of a limited liability company.
- Oral agreements (i.e. handshake agreements) are subject to a state’s statute of frauds (likely three years) and enforceable. You don’t have to agree in writing to enforce a contract. It is just harder to do so.
- In the US, most contracts executed electronically are valid just as if they had been signed on paper.
- Amendment provisions that allow for the parties to mutually agree to change the parties’ obligations are important because business evolve over time; commitments do, too.
- A contract to do something illegal is always void. Not enforceable. ALWAYS.
If you remember anything, try your best to enter into written agreements and keep track of your contracts! Happy startup-ing!