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Any time you enter into an agreement that can affect the future of your business, you need a business contract. Your business contracts are like turkey at Thanksgiving dinner — someone's bound to feel disappointed if you don't have a good one.
Take a look at ten key contracts for small and growing businesses. These contracts need to be well thought out and well drafted and can be crucial to the success of a business.
Employment offer letters
One of the best ways to protect your business from legal liability and misunderstandings with employees is to have an employment offer letter issued and sent to the prospective employee. The employee should then be required to sign it, evidencing the valid employment relationship between the parties.
A good employment offer letter covers the following points:
- The particular job offered
- The responsibilities of the job
- That the employment is "at will," meaning the employee can quit or the employer can fire him or her at any time
- That the employee is required to sign a Confidentiality and Invention Assignment Agreement (discussed below)
- That the letter constitutes the entire agreement of the parties, and can only be amended in the future in writing, signed by the employer and the employee
Confidentiality and Invention Assignment Agreements
Employees have access to a company's confidential information. Moreover, many businesses expect their employees to come up with ideas, products, business strategies, and inventions.
 | To make sure the employees keep the proprietary information of the company confidential, you should require them to sign a Confidentiality and Invention Assignment Agreement. This agreement deals with the confidentiality issue, but it can also provide that the ideas, business strategies and other work products developed by the employee belong to the company, and not to the employee. |
If you expect to have venture capital or other professionals invest in your company, they will expect that you have these agreements in place for all of your employees. So, make sure to get them from every employee.
Service Contracts
If your company provides professional services as opposed to selling a product, it needs to have its own good, standard form Services Contract (which can be labeled many things, including an Agreement for Professional Services). This type of agreement lays out the terms and conditions under which you provide services and tries to lay out specifically your responsibilities and liability.
Having a good contract here is important. You want to avoid misunderstandings and undue liability. Ideally, this agreement gives you flexibility in completing the services, spells out the fees for the job (and additional fees if you encounter unforeseen circumstances), and spells out the situations for your maximum exposure.
Sales Contracts
Many businesses sell products, and therefore need a good Sales Contract. The Sales Contract lays out the price, terms, and conditions for the sale of goods, equipment, or other products. Of course, some businesses (like the corner grocery store) don't need Sales Contracts, but if your products sell for significant dollars, then you likely need a Sales Contract.
 | The actual Sales Contract can take the form of fine print on an order form or an invoice, or it can be tailor-made for a particular sale. You always want to start with your own form of contract. The key terms in Sales Contracts include: price, price adjustments in certain events, responsibility for taxes, payment and credit terms, warranties to be given, disclaimers of various warranties, and liability limitations. |
Confidentiality Agreement
Numerous instances arise in which you want to share confidential or proprietary information with another party. You may want to show the information to get them interested in doing a deal with you, investing in your company, or working together on some strategic arrangement. Producing an agreement to prevent the other side from stealing or using your ideas is very important in these situations.
The Confidentiality Agreement provides that the recipient of information only uses the information for purposes of evaluating whether to enter into a business relationship with you. The key to this agreement is that you should enter into the agreement before any disclosure.
A good Confidentiality Agreement lays out the recipients' confidentiality obligations, the exclusions from confidentiality (such as information already in the public domain), how long the confidentiality obligation lasts, limitations on the use of the information, and the right of the disclosing party to seek injunctive relief to stop the other side from disclosing the information.
Web Site Terms of Use Agreement
Most growing businesses have established (or should establish) a Web site marketing their company and their products. Essential to these Web sites is a Terms of Use Agreement, which is intended to be a contract between the Web site owner and the users of the site and any purchasers of goods or services from the site.
A good Terms of Use Agreement is essential for avoiding legal liability to the site owner. The well-drafted agreement includes: limitations on how the site can be used, copyright protection warnings, disclaimers, liability limitations, disclosure on the site's privacy policy in dealing with customer information, jurisdiction where any disputes must be brought (ideally, the home town of the site owner), and much more.
Letters of Intent
A Letter of Intent can be a very advantageous and quick way to get momentum for a deal. The idea for a Letter of Intent is for the parties to get a "handshake" deal on the major points, and then move to creating definitive legal agreements.
| You need to be very careful about what you want to be binding or nonbinding in the letter. Most Letters of Intent are nonbinding and merely are expressions of the parties that they have a particular deal in mind and want to further negotiate to get there. Letters of Intent can also be binding contracts, however, so be careful what you say in these letters. |
Stock Purchase Agreements
Start-up and emerging businesses often need to raise capital to fund their business. They often do this by selling stock in the company.
Stock Purchase Agreements are the vehicle where stock sales can be affected. Such agreements can run from a few pages to 50 or more, depending on the investors and the complexity of the deal.
In most agreements, you need to carefully lay out: the type of stock sold, the price and number of shares, the representations and warranties of the investors, the representations and warranties of the company, the conditions to closing, the rights of the investors, and potentially much, much more. This is an agreement on which you typically need advice from an experienced corporate counsel.
Leases
A business lease for office or retail space is often one of the most significant contracts for a business. The starting place for most lease negotiations is the landlord's allegedly "standard" lease — which tends to be incredibly one-sided in favor of the landlord.
 | Because the lease can constitute a major commitment of the business, you have to watch out for all the "gotchas." Most importantly, you have to ensure that: |
- The space suits your needs
- The uses the landlord permits are broad enough for your business
- The lease term is sufficient, with a right to extend if possible
- The economic terms are competitive
- The lease clearly spells out the landlord's obligations
- You have some flexibility in assigning or subletting the lease
Loan Agreements
Many businesses enter Loan Agreements with banks or financial institutions and simply sign the lender's "standard" form. The standard form tends to be very one-sided in favor of the lender, with various restrictions on the borrower.
The borrower under a Loan Agreement needs to fully understand (and negotiate better terms than those contained in the standard form) a number of key issues, including the following:
- The total cost of the loan
- The right to prepay the loan without penalty
- The flexibility on use of the loan proceeds
- The right to cure defaults
- The appropriate representations and warranties of the borrower
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