Contract negotiation and drafting are two things that might not be a large focus of startups early on but the implications of them further down the track can be very important. Whether you’re a startup founder or a head of sales, navigating the fine print of contracts can do a lot from reducing risk to reducing your time to get deals closed won. Here are some best practices for effective contract negotiation and drafting:
1. Know Your Needs and Goals
First cab off the rank is that you need to understand your company’s needs and goals for the deal. This can be very specific and relies on you understanding your business from the inside out as well as your platform, product and risk appetite. What are your non-negotiables? Where can you be flexible? Having this clarity helps you stay focused during negotiations and draft contracts that align with your objectives. One useful thing here is to write down lists of things that you can negotiate and things that you can’t negotiate.
2. Do Your Homework
Thorough contract negotiation preparation is key to effective negotiation. This involves understanding the market, your customer, and any potential legal implications. Additionally, anticipate the other party’s needs and prepare for their likely objections. A lot of the time your sales team will be able to give you an idea on what your customers are worried about in terms of contracting or where their head is at. Understanding their budget and buying urgency will also help you know what can be used as a negotiation lever. This allows you to propose solutions that meet both parties’ needs.
3. Use Clear and Precise Language
In drafting contracts, clarity is paramount. Avoid vague terms and legal jargon that could lead to misunderstandings or disputes. Every clause should be clear, concise, and precise. This ensures both parties understand their obligations and expectations. Keep in mind here that your contracts legal jurisdiction also has implications. Certain legal terms have certain meanings dependant on the jurisdiction in which they are interpreted.
4. Address All Possible Scenarios
While we can’t predict the future, we can certainly prepare for it. Contracts should include provisions for likely scenarios such as potential breaches, disputes, and contract termination. One particular one to look out for is termination for convenience which a lot of enterprise companies try to sneak into their contract negotiations. This helps prevent confusion and makes handling these situations smoother.
5. Seek Win-Win Outcomes
Effective contract negotiation is not about one party winning at the expense of the other. Instead, strive for a win-win outcome where both parties feel satisfied with the deal. Look to implement a logrolling style of negotiation. This approach fosters good business relationships and paves the way for future collaborations.
6. Don’t Rush (well, sort of)
Negotiations take time. Rushing the process can lead to oversights and mistakes. Take the time to thoroughly discuss each term, ask questions, and understand each clause in the contract. Patience and diligence pay off in the long run. Well, kind of. This is great advice for any company except a startup company. In startup land you have to be growing as fast as possible, if not, you’re dead in the water. So sometimes you have a rush around closing off contracts to keep in line with the speed of your sales team. One of the best ways to do this sometimes is to remove the lawyers from the conversation. Get the other side on a call and speak to the commercial outcomes that you both want from the negotiation. Sometimes getting out of each others way is the best thing to do.
7. Incorporate a Dispute Resolution Clause
Despite best efforts, disagreements may arise during the contract’s performance. Including a dispute resolution clause can provide a clear roadmap for addressing such issues. This could involve mediation, arbitration, or litigation, depending on what’s suitable for your business. It’s an easy catch all.
8. Involve a Legal Professional
Contracts have legal implications, and it’s crucial to ensure they are legally sound. Involve a lawyer in the negotiation and drafting process. They can help review contracts, provide legal advice, and ensure you’re protected. But also understand where a legal person is blocking a negotiation by being too risk avoidant.
9. Keep Communication Open
Transparent and open communication is key to successful negotiation. If any issues or doubts arise, address them promptly. Keeping the lines of communication open helps build trust and facilitates effective negotiation. Like we said earlier, sometimes it goes a long way to get on a call without the lawyers, and sometimes a show of good will by getting someone on your senior leadership team on a call to show how much you value business can be the best thing you can do.
10. Regularly Review and Update SaaS Contracts
Contracts are not set in stone. They should be reviewed and updated regularly to reflect changes in business operations, market conditions, or regulations. This ensures the contract remains relevant and beneficial to your business. One key thing to keep up to date with is how the signer of the contract was, keep track of whether this person stays in their role or with the company at all. This can be useful when it comes to renewing your contract. You don’t want to have to sell to a whole new stakeholder again at renewal time.
Contract negotiation and drafting are critical skills in business. They require a clear understanding of your business needs, thorough preparation, and open communication. Remember to use clear and precise language, strive for win-win outcomes, be patient, involve a legal professional, and keep contracts updated. Let’s have a look at some of the team members that are involved in the process.
Who should be involved in Contract Negotiation and Drafting in Startups
Getting the team involved in contract negotiations and drafting contracts is essential for your startup. It is not just a legal process but also a strategic one, involving a delicate balance between securing the best deal and fostering strong relationships. Think of all the things your contract is agreeing to, they involve your product, your customer service team, levels of service, finance and bill payments as well as a hundred things in between. Here’s a look at the key roles that should be involved in contract negotiation and drafting within a startup and why they should be involved:
Founder or CEO
The Founder or CEO sets the strategic direction of the startup and therefore plays a critical role in contract negotiation and drafting. Often, in the early days, they are the person that is doing the contract negotiation work themselves. Their deep understanding of the business model, objectives, and strategic direction is invaluable in defining the overall terms of a contract and making key decisions even as the company grows.
Contract negotiation and drafting require a thorough understanding of contract law, which is why legal counsel is crucial. Whether it’s internal or external counsel. They ensure the contract adheres to legal guidelines and protects the startup’s interests. They can also anticipate potential legal issues and suggest solutions, making the contract sound and robust. In terms of having legal counsel, it’s good to involve them early, there’s only so long you can get away with template contracts and template NDAs for.
Your sales team understands the market and client needs like no one else. Their insights are invaluable in drafting realistic and competitive contract terms. They’re also the ones who’ll often communicate the contract terms to prospects or customers, making their involvement critical. Your sales team should be well trained on how to use your contract management system and when to have legal paperwork put in front of a customer.
The financial viability of a contract is crucial and how it’s going to be billed is very important for getting money in the bank. The finance team can provide insights on pricing, payment terms, and the financial impact of proposed contract terms. Their expertise ensures that the contract aligns with the startup’s financial strategy and doesn’t inadvertently create a financial burden. Contract information standarization helps a lot to scale invoicing for a SaaS business.
The operations team can give practical input into what is achievable in terms of delivery and the service levels that you provide to customers. They can assess the proposed timelines, resources, and logistical aspects, ensuring that the contract commitments are realistic and within the startup’s capabilities. A lot of startups over promise and under deliver. You need to strike a good balance here so you customers are looked after.
In tech startups, the involvement of the tech team in contract negotiations is essential, particularly when the contract involves technical specifications or deliverables. They can ensure that the contract terms align with the startup’s technical capabilities and do not promise more than what can be realistically delivered.
The product management team understands the product roadmap and the future capabilities of the startup’s offerings. They can contribute valuable insights into how the contract aligns with the product’s direction, particularly for long-term contracts. At the early stages of contracting for your startup you’ll find that enterprise customers might ask you to include specific feature builds into contracts, this is where product needs to be across what you’re putting into contracts.
Customer Success Team
If the contract is client-facing, the customer success team should be involved in the process. They are the link between the client and the company post-sale, and their understanding of the contract terms can ensure smoother relationships and better service.
Contract negotiation and drafting in a startup is not a solo endeavor. It’s a cross-functional process that requires the expertise and insights of various roles within the organization. This collaborative approach ensures the contracts are legally sound, financially viable, operationally achievable, and strategically aligned with the startup’s goals, setting the foundation for successful business relationships.