Written Contracts are Important for Every New or Growing Business


by William McCartan, Attorney

February 2008 -- Faced with the pressures of payroll, the need to get a product to market, the imperative to build sales and the myriad other issues an entrepreneur faces, it is often tempting for young businesses to rely on oral understandings with investors, customers, and vendors rather than fully documenting the terms of these relationships. Based on the natural desire to trust, business people will forego the extra work and sometimes difficult negotiations required to put all of the terms of a business relationship on paper.

For young and growing companies, with their sometimes delicate financial condition, the absence of a clear agreement on the details of a deal can be extremely costly. Sometimes, when it turns out that the "deal" was not as a company believed it to be due to simple misunderstandings, failure to foresee a particular situation, or even integrity issues, the absence of written documentation can be fatal to a young business.

Business moves quickly, and the time and expense required for a custom legal agreement for every transaction is not practical. But those time and cost pressures should not mean that adequate documentation gets shortchanged. One good and cheap technique used by many companies is a standard set of terms and conditions. These general legal terms, developed in collaboration with counsel, can be used with invoices, purchase orders and the other run-of-the-mill arrangements required in ongoing business to at least cover the basics.

Some matters that might be covered in a standard agreement:

  • Performance
  • Price
  • Payment conditions
  • How long the relationship will last
  • Requirements for early termination
  • Indemnification
  • Insurance
  • Confidentiality
  • Governing law and venue (for relationships between parties in different states)

For agreements that go beyond day-to-day business arrangements - the ones that can make or break your business - clear written agreements are vital. To develop these documents, a young business needs the help of qualified legal counsel. No business person should attempt a "do-it-yourself" job for key legal agreements, including arrangements to borrow money, agreements for the sale of stock or other equity interests in the business, agreements among owners (e.g. "buy-sell" agreements"), agreements relating to the patents, trademarks, copyrights or other intellectual property of the company, documents concerning real estate, and other agreements that might involve payments potentially significant to the financial condition or results of the company.

For a company to succeed it must get the "little things" right, including the terms of the company's legal agreements. The best way to make sure that each of the parties to these agreements has the same understanding about those important details, and is forced to live by the promises they have made, is to write them down.