From one vantage point, a business is only a business when it has “agreements” in place that govern its relationships with other parties:
- agreements with clients to deliver goods or services in exchange for compensation
- agreements with vendors to pay for products and services
- agreements with employees, financiers, landlords, insurers, etc.
You get the idea. The number of the contracts it takes to form and run a company can be dizzying, but not all are recorded in the form of a document, and not all of them benefit from the involvement of an attorney in equal measure. While each business has unique requirements, here are a few key agreements that most business owners or executives should have in place and consider carefully.
1) Shareholder or Partner Agreement. Similar to the risk inherent with hiring employees, some of the most common and costly disputes for businesses are not with external parties, but with members who were otherwise part of the same team. Even when personalities don’t conflict (which of course they can), the priorities and circumstances of business partners are likely to change over time. An agreement among owners should address operational expectations as well as how the parties can exit, and new parties can enter, the arrangement.
2) Financing. When money is involved, business principals should take special care to negotiate the terms and conditions. This consideration is equally valid for debt and equity sources of financing. For debt, the business should fully understand the interest rate, repayment terms, any penalties, covenants and the recourse that the lender will enjoy. For equity, it is important to be aware of the oversight and influence investors will they have over operational decisions and how the business will be able to buy out investors or raise additional funds.
3) Office / Facility Lease. The moment a business leaves the “garage,” real estate is likely to become one of its top expenses. Finding and securing the right space, at favorable terms, can be a significant challenge. If business owners or executives then (perhaps out of exhaustion) give insufficient review to the lease agreement, they could unknowingly expose the business to costly problems down the road. Considerations include: the ability to move, expand or contract to accommodate changes in the business, renewal options, and who is responsible for specific types of expenses.
4) Employment Agreement. Once an organization hires employees, its level of risk jumps. A high percentage of business disputes occur between employer and employee. Unfortunately, when relationships with employees are not well documented, disputes are often costly to the business. In order to avoid misunderstandings and future financial stress, it’s important to construct clear documents that spell out expected performance standards, responsibilities, and compensation.
5) Non-disclosure Agreement. Employees, vendors, contractors, clients, partners, investors and more are likely to come in contact with information that a company should keep confidential. Because many modern businesses are formed around ideas, the importance of protecting intellectual property (IP) has become even more critical. IP expands beyond proprietary product information to include customer lists, pricing plans, development methods, and the like. A non-disclosure agreement is the first line of defense in protecting this information and should be one of the early documents that a business adopts and commits to using religiously.
As I mentioned at the beginning of this post, each business is unique and may have a number of additional agreements to consider very carefully. Starting with properly drafted or tailored key agreements across the five areas above can mean the difference between smooth progress and thousands or even millions of dollars in legal battles and lost opportunity.
Leave a Reply