Startup Contract Review Process

Once you’ve got the first few customers on board for your startup the next step is trying to understand how to do it faster. This article is going to look at how a strong contract review process for startups can help you with this. When you review your sales cycle what is common for a lot of B2B startups is that the legal negotiation stage of your deal cycle hops along at a snails pace. This may be driven by a number of causes. Complexity of your product, types of customers, market changes or shift of the buyers urgency can all slow things down. Slow redlining and decision making can also slow things down on your end, this is where a startup contract review process comes in.

What Is A Startup Contract Review Process?

When it comes to a startup contract review process it is generally quite informal. The usual process involves your in house or external legal team receiving a copy of your redlined contract or the customers base terms and conditions and going through and accepting or rejecting the clauses that are applicable. After doing so they will then raise any decision making points to the appropriate person in the company, this may be the founder, the COO, the head of sales or anyone in the senior leadership team who has enough knowledge of the product and the risk appetite of the company.

This typically involves sitting down in a meeting a going through the changes that have been made in the contract before sending it back to the customer. After a while your team will become comfortable in the knowledge that your legal team understands the product and the business well enough to make these calls themselves. Which is great but there is a lot of context that the legal team may not have to know when they should make concessions on certain things. A heavy handed redlining approach isn’t always the best.

Things To Consider When Reviewing Contract Negotiations

While you are negotiating contracts there are a lot of simple rules that you can put in place to help provide guidelines to your legal team to make decisions on your behalf. But when you are an early stage startup and every new customer matters you, at times, need to be flexible with your negotiations. Often this means that the understanding that your legal team has of what can and can’t be negotiated needs to be overridden. This is one of the key reasons to have a contract review process for startups. Here are some of the things to keep in mind when meeting with your legal team:

Is The Customer A Strategic Customer?

Often you’ll come across a potential customer that could have a strategic advantage to closing a deal with. This could be from the context of a great logo to have as a customer, a customer that will come on with fantastic expansion opportunities or a customer that will help you hit your annual recurring revenue goal for the end of quarter.

When it comes to strategic customers you may be willing to give better billing terms or you may have more focus on being allowed to use their logo in future marketing. Either way, the way that you treat this contract negotiation will most likely be different than other contract negotiations and should be considered when you discuss this with your legal team.

Can Negotiation Turn This Into A Two Year Deal?

By breaking a few of your own negotiation rules you may be able to persuade a customer to become a much more long term, stickier customer. Even if you allow your customer to have much longer terms, lets say ninety days for example, this may convince a them to sign a two year deal with upfront payment instead of a one year deal. Something like this would allow you to get that cash flow into your business upfront.

Is This Customer Going To Be A Drain On Account Management?

Not all customers are made the same. In particular when it comes to the level of sophistication they have and ability to implement your tool in house. It’s important to gauge this as a customer who does not have a high level of internal sophistication may need a whole lot more handholding. There’s nothing wrong with that but as an early stage startup you should keep this in mind and charge for it where possible.

What Aspects Should A Startup Contract Review Process Look At?

When negotiating software sales contracts and reviewing these contracts with your legal team, there are several aspects that should be carefully considered and, in many cases, raised for approval rather than simply accepted. Here are some key considerations:

Key Contractual Considerations:

1. Price and Payment Terms:
   • Ensure that the pricing structure is clear and aligns with your profit margin.
   • Negotiate pricing and different discounts for the customer, especially for long-term commitments.
   • Discuss and agree upon payment terms, including any installment plans. This is particularly important when you’re an enterprise play, a low number of high value customers means that one not paying on time is expensive on your cash flow
2. Service Level Agreements (SLAs):
   • Clearly define service level expectations, including uptime guarantees and support response times. Where needed make sure your legal team and your product and engineering team are across these.
   • Specify penalties or compensation for any breaches of SLAs to build trust. One common negotiation point here can crop up if your customer is embedding your tool into theirs. This generally means a higher level SLA is needed.
3. Scope of Services:
   • Clearly outline the scope of the software services being provided. The sales team should have input here.
   • Define any customization or additional features required and their associated costs.
4. Term and Termination:
   • Determine the contract duration and conditions for renewal. This is where you can gun for longer contracts. A two year contract is great to have.
   • Clearly define the termination clauses and associated penalties. Look to ensure you’re not allowing for termination for convenience which allows for a refund.
5. Intellectual Property Rights:
   • Clarify ownership of intellectual property, especially if there is any customization or development involved.
   • Establish the rights to use, modify, and transfer the software as well as the ownership of outputs after the customer stops being a customer in the future.

Smooth Implementation and Training Strategies:

1. Data Security and Privacy:
   • Ensure that the contract addresses data security and privacy concerns.
   • Comply with relevant data protection laws and regulations. This is an ongoing issue so ensure your customer knows when and how they can get updates about this.
2. Implementation and Training:
   • Clarify responsibilities for software implementation and user training.
   • Discuss any associated costs and timelines for these services.
3. Support and Maintenance:
   • Define the level of support and maintenance included in the contract. We discussed earlier about the importance of understanding how much support a customer will need.
   • Clarify response times, support channels, and any associated costs for additional services. The customer should know who their go to point person is.
4. Warranties and Indemnities:
   • Address any warranties provided by the software vendor.
   • Discuss indemnification clauses to protect against legal claims.
5. Escalation Procedures:
   • Define procedures for issue resolution and escalation.
   • Establish clear communication channels for problem resolution.

Compliance and Safeguarding Transitions:

1. Compliance and Auditing:
   • Ensure the software vendor is compliant with relevant industry standards and regulations.
   • Discuss audit rights to verify compliance and performance.
2. Exit Strategy:
   • Discuss the process and costs associated with transitioning away from the software vendor.
   • Clarify data migration and ownership rights upon termination.
3. Insurance:
   • Determine whether the software vendor carries relevant insurance coverage.
   • Discuss the scope and limits of insurance in case of unforeseen events.
4. Dispute Resolution:
   • Establish a clear process for resolving disputes, whether through mediation, arbitration, or legal action.
5. Changes in Business Conditions:
   • Include clauses that allow for adjustments in the contract in the event of significant changes in business conditions.

It’s important to involve legal and relevant subject matter experts during the negotiation process to ensure that the contract meets the organization’s needs and mitigates potential risks. Always carefully review the terms and conditions before finalizing any software sales contract.

The Startup Contract Review Process Isn’t A One Person Job

As things are changing constantly in your startup you need to communicate well to ensure quick turnaround for contract redlines and negotiations. Treating this turnaround like a project with tasks, notifications and deadlines will help get the process moving forwards. Using features like Contract Sent’s tasks for contract management will help to get these turned around quickly.