Negotiating Big Client Company Agreements for Emerging Companies – Part 1
Note: This conversation has been organized around dealing with ‘big’ clients. But many of the lessons apply to large, important vendors.
The best-case scenario for your business is when your product or service takes off. Say you’re about to potentially land your first ‘bigger fish"—an important contract with a significant client. There are a lot of things to keep in mind as you surpass this early benchmark, so we’re going to go over some basics of what to look out for. We’ll continue this subject over the next few months so you can make sure you’re fully covered.
What does “important” mean here?
It might mean a significant dollar value as of Day 1 of the contract.
It might (as often) mean the future size and the potential dollar value of the contract if things work out and demand grows from that client.
It might be that you need an important, well-known client to be an adopter, whether that's one of your truly first clients, one of the first clients for a particular service/product offering, or perhaps one of the first clients above a specific threshold.
Either way, this is great news! The next thing to do is to send over your company’s Master Services Agreement + Statement of Work template, which you’ve been looking forward to using.
The person your team has been negotiating with takes your contract. This looks good.
But wait… This client company is not a small company – it’s not a Fortune 100 company, BUT it’s much bigger than your startup/services shop – a company that happens to be big enough and, to be fair, well-organized enough that this new client chooses not to spend the time dealing with separate forms of the contract for every little supplier/vendor/service provider that comes knocking on their door.
So what happens?
The classic situation is that everything is going smoothly, you’re looking forward to getting a signed copy back of your company’s contract, and then—often just a few days before the deal is supposed to actually CLOSE—instead of returning your contract, your wonderfully friendly business contact passes along an email with THEIR company’s standard contract and a friendly message to the effect of... “Oh, Legal says we can’t sign your contract. Instead, we need you to sign ours. Don’t worry, all the other vendors do it.”
Of course, if you’re a smaller company, you can run this never-seen-before legal agreement by your own lawyer, but no one really expects you to do that. It’s the agreement that “everybody signs,” after all.
Sigh. You download the file. It’s….
Option A: It’s like 35–70 pages long (yes, it happens). Maybe all in one doc. Maybe in one main doc, the template SOW doc, the Exhibit A additional terms doc, the Exhibit B additional terms doc, the Exhibit C additional terms doc, etc.
Option B: It’s an SOW or Purchase that’s only 1–5 pages long, but it has the words “This SOW/Purchase Order incorporates and is governed by the Amce Inc. Standard Terms and Conditions for Suppliers located at [LONGER URL]” (Note – this trick is used a lot by bigger Vendors… and you might want to consider using it too!).
Option C: It’s something like 12–20 pages, sometimes extra terms incorporated by referring to other documents (whether or not those are located at some easy-to-find website or not), sometimes not. But when you look at it, you’ll see—or your lawyer will see—that a number of very important and very customary terms, usually around areas of potential vendor liability, are missing.
Ok, what do you do next?
First, take the time—at least some time—to see what’s actually in the client contract paperwork you received.
Please do not assume this never-seen-before agreement is harmless or essentially fair or would never include any terms and conditions that could seriously burn you…
Big questions here…
Did you get the entire contract?
You’d be surprised how often Exhibits, Addenda, Schedules, etc. are missing when the draft contract comes via an email from someone at the client business.
This is no surprise—attachments get accidentally left off of emails all the time.
Also, just because you didn’t get all the documentation doesn’t mean you shouldn’t worry about it. Depending on how the contract is drafted, you could still be on the hook for stuff in WORD docs or PDFs you never received.
OR, even if you would be able to make a legal claim that you aren’t bound to a specific legal obligation in a missing document (“You never sent me X! We never agreed that X was part of the contract!”), that may not matter business-wise—the client may have a right to terminate you easily and for convenience, and if it discovers later on that you refuse to comply with their super important “confidential information security measures and procedures” policy, they’ll feel free to drop you yesterday, right about the time you tell all your company’s potential next-round investors about this *STAR* client.
2. What’s missing from the contract?
Not things that were included but didn’t make their way over to you—these are items that were left out entirely from the contract that you want to be written out and agreed to explicitly. Check (we recommend using a lawyer or law firm like MGLS) about what’s missing. This is exactly what people expect to see.
This can commonly be things like…
Disclaimer of Warranties
Limitations of Liabilities
Customary Exceptions to what will qualify as the Client’s Confidential Information
Interest payment obligations on late payments
Exclusion of taxes, bank charges, etc. from any invoiced amounts—meaning those can be charged on top of your service/product/etc. fees
The concept of “Prior IP” in the IP ownership and assignment provisions
And more…
3. What’s in the contract that’s extra excessive or one-sided?
Obviously, when you’re going through a contract with a client company, you want to look out for your company’s best interests. So, you’ll want to keep an eye out for items that put undue burden on your company, harm your bottom line, or are outright unrealistic. You’ll go back to negotiate these items to make things more fair.
Limitations of Liability:
Only written to protect the other party in the agreement?
Even if you are theoretically protected, there are so many holes and exceptions in the language, that basically this protection is illusionary
Data Protection/ Privacy Requirements Inapplicable to what you are doing:
Is there a data protection or requirements section [sometimes 10 or more pages long] even though your business won't handle any “sensitive data” for which all of these measures have been placed?
Termination for Convenience:
Do the other guys have the right to walk away suddenly without any reason in the middle of what you thought was the total of the contract term?
Do you have the same right?
Service Level Agreement [When you are dealing with a vendor]:
These are often very detailed, but are they binding obligations that you can easily legally enforce?
Are there real consequences for material failures of tech support, or instead are you only getting relatively small monthly credit that you have to jump through a bunch of hoops to collect it all?
A lawyer can also help you make sure that you are covered legally—you don’t want to put in dubious legal waters by signing something you don’t understand the implications of.
ASK A QUESTION OR SCHEDULE A MEETING/CALL.
Disclaimer: This article constitutes attorney advertising. Prior results do not guarantee a similar outcome. MGLS publishes this article for information purposes only. Nothing within is intended as legal advice.