Contracts 101: read this before signing
Updated: Nov 23, 2021
Contracts can be tricky and it's important to get proper legal advice to avoid pitfalls.
Exciting! You have your first client. Your prospective client sends you a legal contract to sign. Hardly anyone signs a legal contract without any changes whatsoever.
Disclosure: I'm not a lawyer and what follows is no substitute for the professional advice of a lawyer.
TIP: Make sure that a lawyer is involved in reviewing your contracts.
Some language in a contract may have a different legal meaning than you expect.
TIP: You should personally scrutinize every contract.
Even if your legal counsel finds that the contract is reasonable and sound, you may find that the client is asking you to include some services that are not acceptable to you. Carefully read the contract and mark it up for your lawyer with questions, comments, and changes you might want to see. This also prepares you for productive discussion or correspondence with your lawyer. It can save you money.
TIP: If you have established a formal business structure, make sure that your company's name is in the contract and that you sign on behalf of your company.
It's better to have the protection of a formal corporation or LLC.
Clients may assume that they are dealing with you personally and not your company.
If the contract is in your name and you sign it, you are responsible as a sole proprietor would be, not your company.
Some clients may ask you to specify that your company designates you as the actual consultant that will do the consulting. That is fine as long as the contract is between your company and your client for you to do the services.
Before signing a contract to perform work, your client may want you to sign a confidentiality or non-disclosure agreement to discuss the project.
This protects your client and ensures that you cannot reveal the company's secrets that have been revealed to you in the discussions. If they don't need to reveal any confidential information to you to discuss your role, they may just include a confidentiality / non-disclosure agreement in the contract to perform the work.
The statement of work is usually described as an exhibit in the contract so that it can be signed separately.
This happens if the nature of the work may be more open ended or if you may undertake new work over time while the contract is in force.
Clients expect that you may have questions or require changes.
Clients may include language that is very one sided, extensive and complex developed by a legal department dealing with a large number of consultants and other vendors.
They may put in the contract that you:
will be paid within 45 or 60 days, but it is reasonable to be paid within 30 days.
would defend them in a legal dispute without mentioning paying you for your time, legal fees, and other expenses.
must have a certain, minimum amount of insurance coverage.
destroy all records on request or after the contract ends. The problem is you may need some of those records for legal defense. Also, you may not be able to guarantee destruction of all records stored in electronic media.
One company sent me a non disclosure / confidentiality agreement that included a 20 year bar on any disclosures, whereas most companies will settle for 4 or 5 years.
These are just some examples of the sort of requirements that I have modified or negotiated.
TIP: Negotiate what is important to you in the contract.
In the end, if you want the contract, you will likely have to accept some language that is not entirely to your liking. Though, you can often get changes that you negotiate. Lengthy discussions and extensive back and forth over minor details can be expensive and may not sit well with your prospective client.
How do you find a lawyer?
Ask people you know, especially if they are in consulting or own a small business.
Of course, lawyers are diverse in the skills, experience, and areas of work. A personal lawyer or a lawyer that specializes in family law (e.g., divorce, child custody) is unlikely to be a good choice. If all of your business is local and in your home state, it would make sense to have a local lawyer. Ideally, you would want a lawyer that deals with small businesses, consultants, and with the areas in which you work.
The number of online resources to find a lawyer are increasing and some sites can filter your search on your state and into areas like small business. One site I found recently is UpCounsel. I have not used this service seems like it would be ideal for a start up consultancy, if you are having trouble finding a lawyer. While companies like LegalZoom and MyCorporation will help you incorporate a business, help you file patents or trademarks, some like LegalZoom do also provide access to lawyers.
You will need to explore the lawyers rates. Most seem to charge by the hour, but may charge a flat rate for certain work. When you are paying by the hour, it is important to do your homework, keep your interactions brief, and focus on business.