The Building Blocks of Good Contracts

Contracts are the foundation of any business relationship. 

As an entrepreneur or executive, you'll encounter them constantly — with vendors, partners, investors, and more. While they may seem complex, contracts follow a logical structure with key elements you need to understand. This understanding empowers you to negotiate effectively, ensure clarity, and protect your business interests. 

Let's break down the essential building blocks of a well-drafted contract:

Setting the stage: Identification and definitions

1. Preamble: This section identifies the type of agreement, date of execution, and names with addresses of the contracting parties (e.g., your startup and a vendor).

2. Definitions: Defines key terms used throughout the contract (e.g., "Buyer," "Effective Date"). This avoids confusion and ensures everyone's on the same page.

Tip: Pay close attention to defined terms, especially those that impact your rights and obligations.

Background and agreement

1. Recitals: This section uses "WHEREAS" statements to provide background information relevant to the agreement (e.g., "WHEREAS Buyer has ownership of the vehicle"). It can also introduce additional definitions.

2. Words of agreement: This core provision states that both parties agree to be bound by the terms of the contract.

The heart of the deal: Terms and conditions

This is where the meat of the agreement lies. It details the specific rights and obligations of each party. This can cover things like:

1. Consideration: This explains what each party is exchanging for the other's performance. It's typically money, but can also be services, goods, or other rights.

2. Payment terms: Amount, schedule, and method of payment.

3. Division of rights: Intellectual property ownership, data usage rights, etc.

4. Delivery or service expectations: Deadlines, quality standards, etc.

Tip: Carefully review these terms to ensure they align with your expectations and protect your business interests.

Representations and warranties

These are statements made by each party about the truth or accuracy of certain facts relevant to the agreement (e.g., a seller guaranteeing a product is free from defects, that all the shares are fully paid for etc.).

Tip: Negotiate clear and strong representations and warranties to safeguard yourself in case of misrepresentation.

Protecting your interests: Indemnification

This clause requires one party to "indemnify and hold harmless" the other party for certain losses or liabilities arising from the agreement. 

Tip: Negotiate clear indemnification provisions to minimize your exposure to potential risks.

Wrapping Up: Endgame provisions

Endgame provisions cover various scenarios after the main obligations are fulfilled. These may include:

1. Governing law: The state and country whose laws will apply to the contract.

2. Dispute resolution: How disagreements will be settled (e.g., arbitration, litigation).

3. Assignment: Whether the contract can be transferred to another party.

4. Entire agreement: This clarifies that the written contract represents the complete agreement and supersedes any prior discussions.

5. Amendment: How the contract can be modified (usually requiring a written agreement signed by both parties).

6. Notices: How legal notices will be provided (e.g., email, certified mail).

7. Severability: If a part of the contract is found to be unenforceable, the remaining parts stay valid.

Tip: Consider including provisions that benefit your startup, such as specifying email as an acceptable form of communication.

Signing the agreement

Include designated lines for authorized representatives of each party to sign the contract.

Tip: Make it very clear whether someone is signing in their capacity as a shareholder, director or officer. Use their full name and address.

Attaching extras: Exhibits and schedules

These are separate documents referenced within the main contract that provide additional details (e.g., technical specifications, pricing schedules, lists of shareholders, lists of SAFE holders etc.).

Tip: Ensure all exhibits and schedules are clearly referenced in the body of the contract to avoid confusion.

Takeaway

By understanding these building blocks, you can approach contracts with confidence. 

Carefully read the entire contract to see if these components are present and whether they are reasonable.

Remember, consulting with a lawyer is always recommended for complex agreements or when significant interests are at stake.