Well-crafted commercial forms bolster a startup’s credibility and can expedite customer onboarding by reducing redlining. To think this through, let’s engage in a little shop talk.
Big Picture
Once a startup secures funding and develops a minimum viable product, it needs to begin gaining market traction – fast. The adage “time kills all deals” rings as true as ever in today’s competitive landscape. Your deal paperwork and negotiation strategies should facilitate customer sign-ups, not introduce unnecessary red tape or friction.
Moving Away from Generic Forms
Startups often use generic forms provided by investor counsel. That’s fine at the outset but once you have, let’s say, 20+ customers and some recurring revenue, it’s a worthwhile investment to create template agreements that conform to your specific product and services.
But don’t confuse customization with complexity. Your updated forms should enable customers to clearly understand what you’re offering (including what you’re not) and the basic allocation of risk. The more straightforward the better.
Roundup of Recommended Documents
A startup’s commercial documents should paper its relationship with customers from start to finish. The idea is not to over-legislate or tie discussions in knots. Rather, it’s to literally get everyone on the same page. The point of any agreement is to clarify the parties’ mutual understanding of what they’re doing together and bring predictability to how they will engage, including if things fall apart.
- First things first – your mutual NDA. Keep it simple; anything more than one page probably is overdoing it. This typically is the first legal form a prospective customer receives before engaging in procurement talks. Show commercial prowess by providing a short and balanced mNDA your customer can easily approve.
- Master Service Agreement (MSA). These are the commercial terms that will govern your customer relationships. If it’s not in the terms (including OF and DPA, discussed below), it doesn’t exist. You want these to be comprehensive but not overwrought. At a high level, the terms should cover each party’s role and responsibilities specific to how your product works, protect your IP, manage exposure to third party claims (e.g., indemnification), and define how the contract can end and what happens if a dispute arises. These types of provisions can be drafted in a myriad of ways depending on a myriad of factors; it’s not one size fits all. When you’re just starting out and have limited leverage, the general best practice is to adopt positions that are in line with industry standards and can be explained with a straight face if a customer pushes back.
- Order Form (OF). If you value getting paid, do not treat your order form as an afterthought. Incorporated into the MSA, your order form should unambiguously set forth all relevant pricing and payment details, as well as billing information.
- Data Processing Addendum (DPA). Even if your startup isn’t subject to the GDPR, CCPA or other data protection laws, some of your customers will be and they’ll expect you to enter into a DPA if your services handle any personally identifiable information (PII). A DPA governs the transfer of PII between parties as well as the protection of that data and what happens in the event of a security incident. DPAs tend to be technical in nature, particularly when it comes to the data security commitments outlined. Don’t let that overwhelm you. Have someone on your team who oversees infosec and understands your data flows review your form of DPA to ensure it accurately reflects the processes in place. The last thing you want is to over promise or misstate your security measures in a binding contract and have that haunt you following an alleged breach. While the DPA is a separate agreement, it should be incorporated into the MSA like the OF so that together all three parts form the sum of your “terms.”
Recognize Your Limits
Leverage is a reality in any negotiation. It takes time to gain the market position needed to enforce your terms without redlines or negotiation. Until then, it’s an ongoing effort to strike the right balance between signing marquee customers and protecting your interests. The trick for any startup is knowing what matters to it, and why, and preparing fallback positions that enable informed bargaining.
This fundamentally is why having your own commercial forms is important. Develop a thoughtful deal process and own it. Being prepared to insist that customers work off of your paper, even if you end up negotiating, serves to frame the conversation in a product-centric way and to define strategic risk thresholds you know you can handle.