$10 million mistake: how the lack of a consulting agreement led to a startup's shutdown 👇
A startup founder, eager to launch the MVP, hired a developer online without a formal consulting agreement. Everything seemed fine until, just before a major funding milestone, the developer demanded a huge payout, threatening to withhold the intellectual property unless paid.
Negotiations fell apart, and the developer brought in an aggressive attorney, dragging the startup into an expensive lawsuit that quickly drained its resources.
The legal battle scared off investors, shifted focus, and burned through funds, leaving the startup in ruins.
One promising venture, destroyed by the simple oversight of not formalizing the relationship.
Tip: Always use formal agreements with service providers. A clear contract protects your IP and keeps things running smoothly as your startup grows.
Must-Haves in Your Consulting Agreement
- Defined Scope of Work: Clearly outline the consultant's tasks, and if the project scope is clear, include milestones and deadlines. Emphasize that time is of the essence to make delays a material breach.
- IP Ownership: Your startup's future may hinge on its IP. Ensure all intellectual property created by the consultant is assigned to your company.
- Confidentiality Clauses: Safeguard your proprietary information with stringent confidentiality obligations.
- Payment Terms: Detail how and when the consultant will be paid to avoid disputes. Whether it's a fixed fee, hourly rate, or milestone payments, clarity is key.
- Independent Contractor Status: Clarify that the consultant is not an employee to avoid employment tax and benefit obligations. Indicators include the consultant's control over their work, use of their own tools, and the ability to work with other clients.
- Term and Termination: Specify the agreement's duration and how either party can end it. Include notice periods and any post-termination responsibilities.
What to Avoid in Your Consulting Agreement
- Vague Language: Ambiguity can lead to legal battles. Use precise, understandable language.
- Overly Restrictive Covenants: Non-compete clauses should be fair and enforceable. Overly broad restrictions might be unenforceable.
- Unlimited Revisions or Open-Ended Projects: Set boundaries on revisions and project scope to prevent endless work cycles.
- Ignoring Conflict of Interest Provisions: Ensure the consultant isn't working for competitors or engaged in harmful activities.
- Forgetting Applicable Law and Dispute Resolution: Define the governing law and how disputes will be resolved to avoid jurisdictional headaches.
- No Mention of Subcontracting: If the consultant can subcontract, specify approval rights and ensure subcontractors are bound by the agreement.
Engaging Foreign Contractors
Hiring across borders? Here are additional key considerations when contracting with foreign consultants.
Different IP Rules Abroad
IP ownership rules vary dramatically by country. Watch out for these common issues:
- Assigned copyrights may revert to the original owner after a period
- Some countries require periodic IP assignment renewals instead of one-time deals
- Considering getting local legal advice to understand IP rules in that specific country
Check Your Existing Contracts First
Your current agreements might already limit your ability to hire foreign contractors:
- US government contracts often restrict foreign contractors
- Partners in regulated industries may prohibit overseas work
- Review all existing agreements before starting international hiring
Extra Due Diligence Required
Foreign contractor agreements face heavy scrutiny during investments and M&A deals. Get legal advice before signing to avoid future deal-killing issues.
A consulting agreement is your startup's shield and strategy. It protects your IP, maintains confidentiality, and sets clear expectations. Don't let your startup become another cautionary tale. Invest in a solid consulting agreement and secure your startup's future.
DISCLAIMER:
This blog post is not legal or tax advice. I'm a corporate lawyer, but not your lawyer (yet).
