httpwebwitch - 2:47 pm on Jan 4, 2011 (gmt 0)
Often in business discussions, I encounter people who enter into working relationships with no formal contract. The stereotype situation is something like:
"I agreed to build a web app for Company X with Buddy Y, they promised to pay me N% of the profit. Now I hear he's earning $Z per year off stuff that I built"
Sometimes businesses start that way. A friend, an acquaintance, or someone with enough charisma to convince you that you can trust them & are willing to jump into a working deal surrounded by promises.
And most of the time, these deals work out fine. When the project goes smoothly, the launch is successful, the venture performs as expected, and everyone involved acts with integrity and honesty.
But what about when things don't work out?
How about those times when the plan doesn't flow as expected? Or if the market analysis was misleading and the project fails? Or when human relationships sour the deal due to personality conflicts and clashing egos?
When a business fails, how do you split up the debris that's left over? Or when it becomes massively successful, who becomes the Zuckerberg?
I can not stress enough the importance of drafting contracts. They are legally binding, can be used to resolve uncertainty when it arises, and can be held in front of a judge if negotiations go awry.
If you've been in business long enough, this is all common knowledge. But I STRESS to you that writing up a contract is IMPORTANT even if you're just building a little web app in your dorm room with your college roommate. You might feel that what you're doing is such a casual venture, everyone is going to be buddies forever and if money starts pouring in you'll all celebrate by buying a jet for your weeekly trips to Vegas and life is going to explode with happiness and wealth and of course no one is ever going to screw you over.
Sorry dudes, it don't work like that.
IRL, that project that you casually worked on together is going to be taken over by the smart one who took steps to document their ownership of assets, and those without a contract are going to get a puzzled look as the former buddy-turned-zillionaire's accountant asks "Why do you think we owe you half?".
A simple contract is something you CAN write yourself, and there are plenty of examples of good contracts (to get the wording right) that you can download from the interweb. If you're entering into a working or partnership deal, make sure your contract includes (if applicable):
- definition of parties (eg "The Company" and "The Contractor")
- ownership of assets
- description of duties
- schedule of compensation (when to be paid, and how much)
- limitations of liability
- definitions of negligence
- provisions if the contract can not be fulfilled
- a process for negotiation & arbitration
That's a list off the top of my head. If I've missed any good bits, say so.
More complex contracts should be passed in front of a lawyer. Stuff you should not leave up to your own wit include:
- complex division of assets
- child custody
- anything to do with real estate
- anything to do with wills, death, marriages, power of attorney, etc
Don't be afraid of writing a contract, or afraid that if you get "into the paperwork" that you will get sucked into paying a lawyer you can't afford. Lawyers exist because law is complex. When your business dealings are complex, you need a lawyer. Simple deals are simple, can be written simply, by the parties involved. A contract written yourself is better than no contract at all.