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The Essential Role of Legal Counsel in Negotiating Contracts for Small Businesses and Startups

Studies show that as many as 50% of small businesses and startups do not hire legal counsel during their early stages. Forgoing legal counsel, regardless of the age and maturity of a business, can have serious consequences. It is especially important for small businesses and startups to ensure that they have reliable and experienced legal counsel by their side.

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The Cost Factor

There are many reasons why these companies choose not to seek out legal counsel, but the most common is because of concerns surrounding cost.

Those concerns are not unfounded. Traditional law firms on average charge anywhere from $200 – $750 per hour, depending on the level of experience of the attorney and the reputation of the law firm. For many small businesses, legal fees can add up very quickly at those rates.

For example, imagine a small business that has landed its first client and is sent a 20 page contract to review and sign. If they hire a traditional law firm, the costs can skyrocket quickly. For example, even if the law firm just does an initial review and written analysis of the contract, it may result in 2-4 hours of work and an invoice of $800 – $3,000, without any negotiation.

In reality, contract negotiations often include multiple rounds of revisions and at least one phone call with the counter party. With a traditional law firm that could take in excess of 10 hours of billable work. Of course, depending on the size of the deal, paying an attorney $2,000 – $7,500 to negotiate the contract may be worth it, but in many cases small businesses do not have that kind of cash to spend.

So instead, they review it themselves, save the money, and in many cases, accept terms that could have disastrous consequences down the road.

As you can see, the decision to use legal counsel when a small business is fighting to stay afloat is not an easy one. However, having an affordable, business-minded attorney by your side in those early stages can save you a lot of time, money, and headaches in the future.

The Risk of Using Customer Templates without Legal Review

Often, small businesses do not have their own contract templates. They have focused their time, energy, and money on developing and marketing their products and services. Then, when those efforts result in a customer, the business must rush to get everything documented.

Depending on the size and sophistication of the customer, this can result in the small business accepting terms that are not balanced or fair. While using the customer’s template may be a necessity at first, it is still essential to make sure that it has been reviewed by an attorney who is experienced and trained in identifying the types of clauses that will protect the small businesses interests.

In some industries, customers may not have a good template for what the supplier is selling, so they just send a generic “services agreement” that may not even be relevant to what is selling. When the contract template doesn’t match the services or products being sold, it is like fitting a square peg in a round hole.

If everything goes well with service delivery and there is never a dispute, then this may be okay. However, if anything does go wrong, having the wrong type of contract can cause confusion, ambiguity, and legal liability in many cases.

We have seen many situations where a customer has sent a startup a contract template that is for general services or delivery of a physical product, when they were purchasing digital software or cloud services.

For example, imagine the agreement sent by the customer states that the “service provider must pay all shipping costs and deliver the goods to a specific address by a specific date.”

While this might make sense if the customer is purchasing a table, it makes very little sense when the supplier is licensing software or providing a cloud-based service on an ongoing basis.

In that case, the contract should be very different and, at a minimum, include terms relating to (a) how the customer will access the cloud services, (b) the duration of the subscription, (c) usage limitations, and (d) terms related to payment.

Of course there are terms in almost all contracts that are similar, like limitation of liability clauses, which limit the total amounts that one or both parties will be liable to pay the other party in the event of disputes or contractual claims. However, the content of those common clauses varies significant depending on the industry, so review by an experienced attorney is crucial.

The risk of accepting a contract that does not apply to what is being sold is significant. Especially, if it hasn’t been reviewed by a qualified attorney.

Taking the extra step of having an attorney review contracts that are sent to your small business can make a huge difference. In the above scenario, an attorney will be able to quickly point out that the contract is not appropriate and will be able to either provide a template that is better suited for the transaction, or have a discussion with the customer’s attorney to request a different agreement.

Even if the customer insists that the service provider needs to use their template, skilled counsel will be able to make updates to the agreement to bring it in line with what the transaction is about.

Being Empowered with Information to Avoid Bad Deals

Another benefit of having an attorney review your contracts is to help you avoid making bad deals. As a small business, it may be tempting to sign anything that a customer puts in front of you, but if the contractual terms are so one-sided and onerous that it removes the financial benefit, it is sometimes better to walk away, or at least to make the customer believe that you will.

While there are some large companies that will not accept any changes to their terms, you may be surprised how willing others are to have negotiations. The fear of losing a customer because of contract negotiations is a real one in the business world, but it happens a lot less often than you may think.

Business attorneys have reviewed hundreds or even thousands of contracts and can quickly point out the risks of certain contracts. In the end, the business owner must decided if the benefit outweighs the risk, but it is essential that they have the information needed to make that decision.

Sometimes, the consequences of making a bad deal are not apparent until years later.

Years ago, a company that we worked for had an opportunity sign up their biggest client yet. In the excitement of getting the deal, the company, which at that time did not have in-house legal counsel, rushed through the review of a 200 page contract, accepting terms without understanding the long-term consequences. For example, the contract required that the small company take out an insurance policy that was at least 10 times higher than what was standard in the industry.

While the cost of the policy was less than what the one-time lump sum payment for the software license, it was required to maintain that insurance for as long as it was providing support, so each year the company had to continue paying the extremely high premium for the policy while bringing in only a small amount of recurring revenue from that customer.

A more thorough review at the outset could have resulted in the contract being more balanced and fair.

The Solution

Larger, more established businesses often have in-house legal teams. They are employed by the company and the company is their only client. This is beneficial, because the attorneys understand the business objectives and have a personal stake in ensuring that deals move along smoothly. They still have an ethical obligation to advise their client of risks, but their approach often differs from that of a law firm that does not have as close of a connection to the business.

For startups, the cost of hiring in-house legal counsel can be prohibitive. The salaries for even a junior level in-house attorney with less than 5 years experiences can be well into the six figures.

While hiring in-house counsel should be in the long-term roadmap of a startup, for many it just isn’t realistic during the startup and growth phase.

So, what should a startup do? Either hire in-house counsel that may be too expensive, or hire a law firm that charges expensive hourly rates. Those are the options that many business owners think they have.

Fortunately, there are other options that can allow them to protect their interests without breaking the bank.

At LegalNow Business Counsel, we offer outside legal services with an in-house approach. We have worked for small and large businesses as in-house counsel, so we understand the importance of moving quickly and focusing on what is most important in contracts and other legal matters.

We offer flexible pricing options that can be tailored to your specific business. We never charge hourly fees, and you will always know what you are going to pay up-front.

Our subscription model allows you to have access to a licensed attorney at all times for legal questions related to your business.

Additionally, depending on the subscription tier that you select, we will negotiate a certain number of contracts per month on your behalf, protect your intellectual property by registering trademarks with the United States Patent and Trademark Office (USPTO), provide our LegalReady™ analysis of your business, and when you are ready to hire in-house legal counsel, we will even participate in the interview process to ensure the counsel you hire is the best option for your business.

We would be honored to serve your business and ensure that you are armed with the tools and information necessary to protect your business in this important stage.

Reach out to us today to get started.

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