In the entrepreneurial world, one skill stands out as a game changer: mastering contracts. It’s not just about reading or negotiating them; it’s about understanding how to write them and negotiate them. And here’s a bold statement: you, as an entrepreneur, should know how to write contracts better than most lawyers.
Entrepreneurs should never fear contracts, they are your best friend and best weapon to fend off your enemies. Everyday you make promises to each other that are considered "contracts" and a few simple contract skills, red flags, and ways to make contracts work in your favor can help you as an entrepreneur.
In business, almost everything hinges on contracts. Everything is a promise to perform and entrepreneurs really need to learn contracts, the basics, and how to rewrite them in their favor in order to protect themselves. It’s not that difficult and most entrepreneurs are smart enough, they just need some training.
Contracts have real power and real pitfalls in business. This post focuses on simplicity and practical application. Let’s delve into the top three basics every entrepreneur must understand about contracts:
1. Contract Fundamentals: Understand the essentials of what makes a contract legally binding. This includes the parties involved, the mutual agreement, the intent to create a legal relationship, and consideration (exchange of value). Understand as well that contracts should be in writing, otherwise you could spend years in litigation trying to prove the existence of a contract. So learn the fundamentals because if there is no consideration, it’s not an enforceable contract - it’s a gift.
2. Clarity and Specificity: A contract should leave no room for ambiguity. Clear language, specific terms, and detailed obligations and rights of each party are crucial. This clarity prevents disputes and misunderstandings. Contracts that are simple, clear and short leave no room for argument.
3. Negotiation Tactics: Negotiating a contract is an art. It’s about finding a balance where all parties feel their interests are adequately represented. Learn negotiation strategies to ensure your contracts are not only fair but also favorable to your business goals. Negotiation comes from practice and having the right mentors to coach you and give you frameworks that really work in both life and business.
In addition to these basics, remember that a well-crafted contract can be your strongest ally in business. It’s a tool for clarity, a shield against misunderstandings, and a foundation for strong business relationships. Plus, once the world sees that you know what you are doing, understand contracts and how to protect yourself, your enemies (competitors, customers, regulators, challengers and your very own ego) will think twice about trying to harm you. Great contracts are incredible deterrents of liability.
Understanding Key Contract Provisions:
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Confidentiality Clauses: Essential for protecting your business secrets and proprietary information. Understand how to draft and enforce these clauses to safeguard your competitive advantage.
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Liability Limitations: These provisions limit your responsibility in case things go wrong. It’s crucial to define the scope of liability clearly and understand how it impacts your business.
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Exit for Nonperformance: Put "exits" into contracts so a party can get out. People get stuck in contracts that don’t foresee this issue, and it can be devastating.
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Termination Conditions: Understand the conditions under which either party can terminate the contract. This includes breach of contract, mutual agreement, or other specified conditions. Clearly defined termination clauses can save you from protracted legal battles.
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Payment Terms and Conditions and Penalties: These are critical for cash flow management. They should cover payment amounts, schedules, late fees, and penalties for non-payment. Penalties are necessary as well to hang a hammer over the other party’s head, including attorney fees otherwise there’s no incentive to make timely payments.
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Non-Disparagement: It’s wise to get a party to agree to this term prior to any issues happening as this will prevent someone from wrongfully bad mouthing you all over social media in the event that your business deals goes bad.
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Intellectual Property Rights: If your business deals with intellectual property, this clause is crucial. It should clearly state who owns the IP created during the contract’s term. In addition, it should spell out the IP that is protected, who owns same and penalties for any infringement.
Applying Contract Provisions in Real Scenarios:
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Negotiating Contracts: Use your knowledge of these key provisions to negotiate contracts that favor your business interests. For example, if your business relies heavily on proprietary information, emphasize a strong confidentiality clause.
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Risk Management: Liability limitations and dispute resolution clauses are vital for risk management. Tailor these clauses based on the risk profile of your business activities.
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Contract Enforcement: Understanding these provisions helps in enforcing contracts. For instance, clear payment terms enable you to take timely action in case of non-payment.
- Compliance Manuals: Your business should have compliance manuals listing DO’s and DON’T’s in addition to all the laws and regulations that touch upon your business
- Creating a business defense system: The real key to success is creating a defense system out of the contracts, legal documents and strategies that apply to your industry and implementing that system into your existing business to deter your two biggest business threats - your 5 enemies and the 101 deadly mistakes that plague all entrepreneurs.
Karam Nahas is a retired litigator, licensed in New Jersey and not practicing. Legally Bulletproof provides education and templates to help entrepreneurs understand and manage legal risk. Preventing liabilities is the key to success.