Earlier this week, Priori and General Assembly hosted Put it in Writing! Understanding and Drafting Smart Contracts. At the event, Priori lawyer Daniel Bellizio covered contracts that every startup needs to be familiar with and discussed how, if properly drafted, these contracts can help companies avoid costly legal pitfalls.
While the contracts discussed are applicable across industries, they generally need to be tailored to fit specific business needs. Below, we review three types of commercial contracts that are likely to pop up regardless of your industry.
The first commercial contract your business should know and implement is a “standard” Non-Disclosure Agreement (NDA), also known as a Confidentiality Agreement. NDAs are generally established between two companies or individuals that are seeking to create a business relationship. When drafting an NDA, you must consider whether the agreement is unilateral or mutual. This will determine if the confidentiality requirement extends to one or both parties. In practice, NDAs tend to be mutual -- meaning both parties are subject to the restrictions set forth in the agreement -- because most business relationships require each party to share information that they likely consider proprietary. There are three crucial provisions in every NDA:
- Definition of “Confidential” and “Proprietary” information. For an NDA to properly protect your information, it must clearly define what information is confidential (and therefore prohibited from disclosure). While it is very tempting to include a general laundry list of items that are “confidential” in your NDA, overly broad NDAs may not hold up under a court’s scrutiny. Instead, you should make sure you keep your list of confidential information tailored to information the protection of which serves a legitimate business interest.
- The Term. While some NDAs have no term or an indefinite term, it’s best to define a specific and reasonable time period for the NDA. In certain scenarios, an unreasonable term can jeopardize the enforceability of your agreement.
- Exceptions. Every NDA should contain common exceptions to the obligation not to disclose confidential information. This can include information already known to the recipient when the NDA was executed, information disclosed by a third-party who had the right to disclose, information already publicly known or information made publicly known after the execution of the NDA through no breach of the recipient. This provision is beneficial in protecting both the party providing and receiving the confidential information.
Terms of Employment Agreements
Equally as important as protecting confidential information is building your team and managing your relationship during and after their employment. Here are three employment agreement terms that can help protect your business:
- Non-Solicitation. Companies can run the risk of having their employees or clients poached by an exiting employee. One way to prevent this from happening is by having employees sign a Non-Solicitation Agreement. As the title suggests, this type of restriction prohibits an ex-employee from recruiting your employees or client base. Like NDAs, Non-Solicitation Agreements must be narrowly tailored in order to be enforceable. This means that the restriction must only be in place for a limited period of time. In some instances a restriction lasting up to 3 years may be enforceable, but courts more commonly consider 6–18 months a reasonable term. It’s also important to include an acknowledgement that all restrictions are reasonable and necessary to protect the company’s bona fide interests and will not unduly hinder the employee’s ability to obtain employment upon termination or resignation. These types of affirmations serve to strengthen your agreement.
- Non-Compete. Another restrictive covenant, Non-Compete Agreements prevent employees from working for a competitor for a certain period after leaving your company. Given that Non-Compete Agreements can hinder individuals from finding employment, courts can be hesitant to enforce them, and some states, such as California, do not recognize them. However, in the states that do honor them, Non-Compete Agreements must typically be very narrowly tailored, for a short and reasonable period of time, in a limited geography and pertain only to high-level employees.
- Intellectual Property Ownership. Protecting ownership rights in intellectual property is critical for any company. A Proprietary Information and Inventions Agreement (PIIA) protects your company from employee disclosures of the company’s confidential or proprietary information. A PIIA also clearly outlines ownership of employee-created inventions, discoveries, designs, developments, processes, improvements, copyrightable material and trade secrets discovered or created during the course of their employment.
Simply put, a Service Agreement is an agreement for the provision of services between two people or companies. Examples of Service Agreements include:
- Independent Contractor Agreement. An agreement that establishes the relationship between a company and an independent contractor. These agreements include provisions for cost, termination, ownership of intellectual property and dispute resolution. An independent contractor agreement may also include a non-compete provision, though it may be very difficult to enforce, unless the independent contractor is an entity and not an individual. When working with independent contractors it’s important to have a Work-Made-For-Hire agreement or clause in place, whereby the contractor acknowledges and agrees that all intellectual property rights from the work are, upon creation and without further consideration, automatically and irrevocably assigned to your company.
- User agreement. A User Agreement is created between a provider and a user. A prime example is a terms of service agreement. These agreements can be used to manage expectations for the provision of a wide variety of services from food and beverage catering to IT support.
- Master Service Agreement. Unlike other types of Service Agreements, a Master Service Agreement (MSA) addresses the ongoing provision of services. An MSA aims to lay out all the terms between two parties that will remain constant from one project to the next. This includes items such as confidential information, non-solicitation, IP ownership, representations and warranties of both parties, etc. The business terms -- deliverables, time frame for completion and payment terms--for each project will be set forth in a supplemental document called the Statement of Work. This document should be signed and dated by both parties and will affirm the terms of the “master” agreement. One example of where an MSA may be appropriate is if you are an advertising agency working on multiple campaigns for a client. Each campaign will be subject to a separate Statement of Work, but the overall relationship between the parties will be governed by the “Master” terms.
Depending on which side of the transaction you find yourself, you may be presenting a contract or you may be receiving one. In either case, you need to understand how to use the agreement as both a sword and a shield. While it’s tempting to use or agree to sign a template or “boilerplate” contract without consulting a lawyer, these are precisely the types of contracts that can lead to disputes that will force you to spend significantly more money in the long run than hiring a lawyer from the outset.
If you have any questions or want to hire a lawyer to advise you on your company’s contracts, you can request a free consultation with an experienced member of Priori’s network here.