If you want to become a successful entrepreneur, you’ll need to learn the ins and outs of reviewing and negotiating contracts. Sure, you can (and should) rely on contract lawyers to help you, but you also want to have a good understanding yourself.
In this post we’ll walk you through both steps: Reviewing a Contract & Negotiating a Contract.
HOW TO REVIEW A CONTRACT
The first thing to consider when you review a contract is what the deal should look like based on your prior conversations with the other party. If you don’t have a good understanding of the deal itself, then you won’t know what to look for in the contract.
Accordingly, you might sketch out a bullet point list of the key deal terms as you understand them. Then, skim the contract to make sure the overall deal is presented correctly.
From there, you can consider using these tips to help you narrow in on the specifics:
- Review the contract’s actions sections. These are the sections that should explicitly state what each party is obligated to do. For example, how much is being paid (and when are those payments due) and what is the other party doing (developing a website, painting a house, etc.).
- Read the rest of the contract. Although boring, this is important. You need to review all of the other sections to make sure you are not agreeing to something hidden in the terms. You’ll find that most formal contracts include various provisions that are “standard” and require each party to do certain things, promise other things are true, while refrain from doing other things.
- Consider if other terms are missing. After reading everything, refer back to your bullet list to see if anything is missing. Additionally, after you understand all the provisions you can then think through various what-if scenarios to see if anything else is missing.
HOW TO NEGOTIATE A CONTRACT
Many people struggle with negotiations; however, it doesn’t have to be hard or adversarial. Rather, many negotiations can be friendly and in most cases your negotiation will lead to a better deal and long-term relationship.
- First, ask questions. If you are confused about something in the contract or if you don’t understand why the other side included a particular provision, just ask the other side about it. Often, a simple conversation can clear up a misunderstanding and sometimes the other party will insert a provision by mistake.
- Understand your position. Sometimes you can negotiate a lot, especially when you and the other side are comparable in size/power. However, if you are negotiating with a huge corporation, you may not have much power to change things.
- Be reasonable. Often, signing a contract is just the starting point to your relationship. And if you are hard to work with during the contract negotiation stage, the other side may not even want to continue working with you.
- Be assertive. Subject to the above (be reasonable), always stand up for yourself. You should never sign a contract if its terms place too much of a burden on you or if it subjects you to too much risk.
- Make changes. Assuming you have the power to make changes, you should always do so if it can help you. If your changes are really simple, you might just communicate them in an email or conversation with the other side and ask them to make them. However, if they are not simple, you should consider using a redline tool such as Microsoft Office’s redlining function.
- Keep their language where possible. Although you should always redline a contract when needed, you should usually try to use the original language whenever possible. Although you may prefer your language, you should only delete entire sections and replace them with your preferred language if there is a substantive reason to do so.
You’ll encounter a lot of contracts along your path to starting a new business and growing it into something larger than just you. But the more you understand about business in general, the better you’ll be at reviewing and negotiating contracts. If you’d like to learn more about starting a business, you should enroll in the Kauffman Foundation’s FastTrac program at www.fasttrac.org
CONTRIBUTOR: Chris Brown, Founder and Attorney, Venture Legal