Customer Contract Negotiations For Early Stage Startups
Updated: May 2
Contract negotiations are potentially one of the larger expenses a startup can incur, especially when selling to large organizations. Anyone selling into enterprises and other large organizations should anticipate the occasional $10,000 agreement that takes 6 months to iron out, just to win a customer in the Fortune 100. Sometimes we get away with skipping it, but rarely.
There are a lot of great contract attorneys. But we often get what we pay for. One reason many organizations provide an “enterprise” package is that attorney review of contracts can run around $500 per hour. This eats into profitability, and in some cases puts us losing money when working with larger customers.
A little known growth hack is that many organizations can win deals simply by being flexible in contract negotiations. Here, we allow red lines (or changes to an existing contract or EULA - where other organizations might no longer do so for any old customer.
Eventually we may reach a point where we have to put a minimum on deal sizes that qualify for a red-lined contract. But once there, resist the urge as by then there will be competitors who are willing to do so. Instead, think about ways to be more efficient and reduce the cost to negotiate while still moving sales forward.
One of the most effective ways to do so is to actually spend some time thinking about what is important in contracts.
Limit liability. As we grow, we will need Errors and Omissions (E&O) insurance (for more on insurance see Chapter 9). Our contracts should limit the extent of our exposure in the event of a law suit filed over our negligence. Mistakes happen, but as we grow we want that E&O policy to grow as well and protect the company. Especially as more and more people rely on us for salaries to feed their families.
Define the rules of engagement. Social norms aren’t enough to define how we work with customers. We need to set expectations for what we provide and be held accountable for the expectations we set. This includes Service Level Agreements (SLAs), standard hours of operation for support teams, account management, and other aspects of day-to-day operations. These can be in the contract, EULA, or as standalone documents referred by and linked to from the contract.
Protect intellectual property. We don’t want anyone using our products to copy our products, steal code, decompile and then steal code, etc.
Protect against competitive action. In addition to protecting our intellectual property, when possible, we want to restrict a customer from engaging in competitive action - which includes not hiring our staff, developing a similar product, etc.
Make sure we get paid. Notice that we are putting this last. That’s because while we want to grow and make money, we only want to do so provided the rest of these are taken care of. We typically include invoicing terms, late fees, remediation options, legal jurisdictions, and other aspects of what happens if the customer doesn’t pay their bills in a timely fashion.
Once we know what matters to us, and where we’re willing to be flexible, we’re more easily able to make concessions in a clear and focused way. When a seller comes to us asking for a red line to be accepted it’s good to have already made this mental math - and thinking through these things in advance will help keep those legal bills down, as we won’t be thinking through things on the phone with attorneys.Some other suggestions to keep those legal bills in check (and it’s never too early or late to start on these) include:
Versioning. Contracts change over time, so make sure to version them, just like we might with software. For those who hate version numbers, a date stamp is fine, but this is a case where version numbers might be better (although let’s keep a running record of when each version was introduced. In the event that customers automatically agree to a EULA when signing up for a product, we should also keep a record in our ERP of the version that was agreed to.
Provide standard contracts to customers upon request. Many an organization will need a non-disclosure agreement (NDA) or a Data Processor Agreement (DPA). It’s a good idea to have these that can be provided to customers upon request and preferably e-signed and stored in the CRM.
Compliance. It may cost upwards of $100,000 to get a SOC type II compliance, but in the long run doing so will bring in extra customers and potentially reduce legal expenses as some language required in contracts is hammered out during the process of getting there.
Work with associates. Many a firm will have us work day-to-day with associates, or those newer to the firm. This often comes at a lower rate as the associate is junior to a partner. For some of the larger initiatives we might want a more seasoned staffer to work on projects, but keep in mind that associates become an assembly line for red lines and so are actually more efficient while being cheaper.
Make concessions in exchange for… something. It’s common to want concessions in contracts. Keep in mind that some of these companies have more attorneys than we have employees. Therefore, some of the protections we demand don’t end up meaning much. It sucks but complaining about it doesn’t help close deals. And think of the revenue we could have accrued during the months that these agreements can go back and forth. Sometimes, it’s best to make a concession and then ask for a customer story in return!
Get all parties on the phone. One of the biggest time savers in getting a contract executed is ending the cycle of back and forth red lining. If we can get all parties on the phone when we see this start to happen then we can get in front of getting nickel and dimed and get to the heart of what each party wants in a negotiation.
Don’t get emotional. Emotional attachments or getting worked up about something can cause us to dig in where unnecessary or make concessions when they weren’t needed. Don’t get defensive. We want to bring our whole, authentic self to work - but when the lawyers get involved we need to compartmentalize.
Make sure to keep a copy of every single custom agreement and start getting them into a database as early as possible. For example, if using Salesforce as a CRM, get a standard naming convention in place for executed contracts based on the version number of the contract and add either a field in Salesforce or an area in the namespace of the file to indicate it’s a custom agreement. Not only is this important as we’re dealing with the occasional issue that might arise with a customer, as we grow into an organization with a dedicated legal team, we’ll be able to provide them with the resources they need to inherit the legal duties of the corporation.
Finally, we want to have a good and trusting relationship with customers. Most of the items in this article deal with business to business sales. We don’t want the stakeholders at customers to get off on a bad footing with us. We also want to close deals. However we want to do these things in a way that doesn’t put the company at risk in ways that could be easily avoided. Mature, great customers will understand this. And, once we’ve done the work to get contracts sorted out, there’s a larger barrier for them to move to a competitor as the oceans get redder over time. Each protracted legal squabble should use all of this as part of the litmus test for identifying the perfect customer.