Contracts: Why ‘I Promise’ Doesn’t Hold Up in Court
By Shradhanjali Sarma
In an era where AI can generate a contract faster than you can say “terms and conditions,” it’s easy to assume that the art of contract drafting has been delegated to machines. For business leaders juggling multiple priorities to ensure their company’s success, contracts can often seem like a time-consuming distraction, prompting a search for quicker solutions to get the job done.
In the hustle and innovation of starting a business, one thing can often be overlooked: contracts. While contracts may not sound as thrilling as landing your first investor or launching your product, they are the unsung heroes behind every successful startup. Without them, your great idea could quickly become a legal minefield. So, let’s talk about why contracts are not just important but essential for every startup's survival and growth.
In the early stages of your startup journey, a handshake agreement might feel good. Often we believe in building relationships in a business on trust rather than contractual documents. Imagine a situation where one of the co-founders remembers that the equity split was not proper, or your employee asks you about the grounds of termination while you have nothing to point towards. These are the situations where you are safeguarded from the very first day. Because contracts ensure that everyone knows exactly what to expect. Without a contract, you’re always one step away from saying, “Wait, I thought you meant...!”
Investors like startups that take risks. But investors would not like to invest in a business which takes risks but has unclear business practices. Having solid contracts in place ensures your business is well-organized, which is essential for securing funding—especially as you progress a few years into operations and seek additional investment. Anyone and everyone who comes and invests in your business would want to protect their interests, and having sound contracts reflects it. While it does not matter whether your startup operates from your home or garage or from your study, your contracts should be board-room ready.
Your intellectual property (IP) is your startup’s lifeblood, and contracts are essential in protecting it. Whether it’s a Non-Disclosure Agreement (NDA) or an IP Assignment Agreement, contracts ensure that your IP remains yours and doesn’t end up in the hands of a competitor.
You would not want your startup to have episodes of ‘Whose Job Is It Anyway’ from the very first day. You would want the roles and responsibilities of founders, co-founders, employees, investors, vendors, service providers, clients to be clearly charted out. AI can generate the clauses, but only a lawyer can protect you by understanding the nuances behind each one—because “I thought that meant something else” isn’t a great defense in court!
Contracts let you plan for the "what ifs" of the business world. What if one of the founders leaves? What if an investor backs out? What if there’s a dispute with a supplier? By addressing these scenarios upfront, you can avoid costly legal battles and wasted time down the road. While it is natural to think of contracts as a cost to your business in the initial stages because you would need to spend on a lawyer, think of contracts as your startup’s prenup. It is better to have it and not need it, than need it and not have it.
In a nutshell, contracts may not be the most glamorous aspect of your startup journey, but they are absolutely essential. They safeguard your intellectual property, establish clarity in roles and responsibilities, enhance investor confidence, and help you avoid potential disputes. In essence, contracts form the backbone of every successful business. While you concentrate on developing your next big innovation, it's crucial to also create a robust legal framework to protect it.
Shradhanjali is a lawyer specialized in advising startups. If you are a startup founder and would like to understand more about contracts you can book a consultation call.