By Omoruyi Edoigiawerie, Esq
Launching a start-up is a roller-coaster journey filled with ambition and, most times, unforeseen challenges. Amidst the hustle and bustle of building a business from the ground up, drafting contracts is often seen as a dreary task and is thus relegated to the back burner.
This should not be so. Contracts lay the foundation for business relationships, protect rights and interests, and mitigate legal risks. That is why understanding the peculiarities and challenges of drafting contracts for start-ups is essential for laying a solid foundation and mitigating potential risks.
Contractual agreements galvanize the terms and conditions governing the interactions that form the backbone of relationships within and outside the business. Given the intricate nature of start-up operations in a fast-paced and dynamic environment, contracts are often complex; it is, therefore, crucial for entrepreneurs and business professionals alike to be aware of the legal intricacies that revolve around them when drafting contracts, thereby mitigating potential risks and avoiding the pitfalls associated with faulty contractual obligations.
*Understanding start-up contracts
At its core, a contract is a legally binding agreement that governs the rights, obligations, and responsibilities of parties involved in a business relationship. For start-ups, contracts play a pivotal role in shaping the trajectory of the business, from firming up initial collaborations, engaging third parties, and securing funding and partnerships to protecting intellectual property and managing risks. Unlike established companies with processes and resources, start-ups often face unique challenges and constraints when drafting contracts.
As often said, uncertainty is the name of the game in the start-up space. Business models evolve, partnerships shift, and market dynamics fluctuate, leading to frequent changes and the need to update existing contracts. Start-ups must, therefore, navigate this uncertainty with agility and foresight, anticipating potential risks and adapting contracts accordingly.
*Categories of contracts in the start-up ecosystem
From my experience in the start-up ecosystem, start-ups enter three broad categories of contracts.
The first category deals with Relationship Contracts. These types of contracts span from Founders/Shareholders/
The second category covers Proprietary Right Protection Contracts, from Intellectual Property Agreements, Non-Disclosure Agreements, Technology Or Intellectual Property Assignment Contracts, and Cybersecurity Agreements to Privacy and Data Protection Agreements; these types of contracts ensure the protection of a Start-up’s proprietary rights.
The third category of contracts are Service Contracts, from Service Level and Web Development Agreements to Software Service Agreements, Standard Service Agreements, and End-User License Agreements; these forms of contract establish the contractual relationships between the start-up and other parties and outline the terms and conditions specific to a particular project or engagement between the start-up, its customers, service providers, and the general public.
However, it is important to point out that the above categorizations are broad and not all-inclusive, and the examples stated in each category are also not exhaustive.
*Critical considerations
Start-up contracts outline essential terms like roles, responsibilities, scope of work, intellectual property ownership, payment terms, termination rules, and dispute resolution procedures. Clarifying these roles minimize future conflicts by defining each participant’s contributions.
Also, start-up founders must resist relying on free online templates. While it is practically impossible not to browse the web and come across different contract templates for various areas of the start-up ecosystem, it is not advisable to rely unthinkingly on these templates because even though many think that using a contract template is an easy and cost-effective way to legalise a relationship, it can lead to serious legal problems and from experience, I have seen this seemingly harmless decision adversely affect various start-ups. The best advice would be to work with a lawyer who understands the parties’ intentions and can put their intention in writing in the most effective way while also ensuring that the adequate troubleshooting clauses are correctly reflected.
*Mitigating risk in contract drafting
It is also essential for start-up contracts to put as much into perspective as the parties’ founders can envisage; every detail must be painstakingly considered.
Therefore, they should ensure that the contract clearly sets every party’s objectives and expectations. This will reduce the chances of any misunderstanding/conflict that may arise as the relationship progresses.
Also, as the start-up grows, its founders must update and check on any contractual agreement to ensure that it remains fit for purpose. This is especially so because antiquated contracts can pose risks for start-ups.
*Conclusion
It is hard to overstate the importance of contracts. They are essential for companies to protect themselves from potential risks and disputes. Although they may seem like a herculean work to create correctly, contracts are crucial for safeguarding business interests and ensuring all parties understand their responsibilities.
Contracts are necessary tools in every start-up’s life and form the bedrock upon which they scale. This means that just as much as they present unique challenges and considerations that require careful attention and strategic planning, the founders must ensure that their contractual curve adequately envisages these challenges.
*Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services focusing on start-ups, established businesses, and upscale private clients in Nigeria. The content of this article provides a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at hello@uyilaw.com.
