For every entrepreneur who has innovated a new product, service, or patented design, there are venture capitalists (VC) and private investors ready to pounce and earn return on their investment capital. However, not every VC has scruples or an innate moral concern for the founder and innovator, and vulnerable entrepreneurs can be defrauded easily during the startup phase if they are not legally protected.
What Kind of Contracts Do Small Business Owners Encounter Regularly?
Business owners typically found small start-up services or products because they are passionate about the idea of being self-employed. However, mastering the production of your good or service is only one small part of running a successful business (as most solopreneurs quickly find out). Overseeing the daily operations of a small business means acquiring legal support and extensive experience in contract laws.
1. Co-Founder Agreements
Some of the best and most successful startup businesses begin with a partnership. To secure business rights and intellectual property, and to protect private founders who have invested capital, a founding agreement is required. Before the business succeeds (or fails), accountability and ownership must be clearly and legally outlined.
There are six general legal structures for business owners and partners:
- Sole Proprietorship
- General Partnership
- Limited Partnerships
If equity partnership is involved, legalizing the investment by assigning a percentage based on equity capital is normal. What is most important, however, is to ensure that the founder or creator of the business or brand does not exceed equity to the point of losing control of interest of the business. While this makes common sense to most people (that owners would like to retain a minimum of 51 percent controlling interest), many startups fall into the trap of outgrowing their equity and offering more as investment capital is needed.
This is a very dangerous trap to fall into; after all, who would like to be the creator of a multimillion dollar business and own less than 20 percent interest? It seems odd, but it happens frequently, particularly when owners do not have a legal consultant experienced in venture capital or equity investment to guide them toward preserving majority ownership of their business, patent, or intellectual property.
2. Lease Agreements
While many small businesses start as “work from home” opportunities, a high-growth trajectory can lead to facility growing pains, and small businesses graduate from residential space to commercial leasing. It is a big and important step in terms of growth for small businesses, but with the rental of a commercial space, there are other legal considerations and responsibilities to consider.
Insurance becomes more complex when renting space from a landlord or development company. Not only are you responsible for replacing the value of your own goods, inventory, and equipment, but you are also required by law to maintain an adequate amount of liability insurance. If you have staff on the premises, other types of insurance – including participation in workers’ compensation for workplace injury coverage – may also be involved. Renters are also sometimes responsible for the interior of the facility, and must insure from “the drywall in” for damage protection.
3. Supplier Contracts
From paper and toner cartridges, coffee supplies, and materials for production or manufacturing, every small business owner will have a few wholesale supplier contracts. Contracted suppliers offer some of the best discounts for small businesses, with volume discounts that add up to significant savings throughout the year. However, supplier contracts also have provisions including minimum orders, scheduled delivery, terms of payment, and other details that need to be closely monitored to ensure that your small business is getting the best and most competitive rates.
Negligence on the business owner’s part can lead to misrepresentation in the contract negotiations, and a subsequent dispute over the agreed terms. This situation arises when either party fails to clearly state the obligations and duties that need to be fulfilled as part of the agreement. Seeking legal consultation prior to signing any contracts can help reduce the chances of omissions during contract negotiations.
4. Digital Marketing and Advertising Agreements
If your business is predominantly run as an ecommerce retail or service, hiring digital marketing support is common for the things that many business owners simply do not have time for. From website design and graphics, pay-per-click advertising and Google AdWords, to social media management and content marketing, small business owners that are experiencing growth will outsource to a marketing support provider. A contract is required between the business and the vendor, as well as nondisclosure agreements and others.
5. Employment Contracts
If your small business has grown to the extent that you need to hire more staff, venturing into the world of management and hiring is an intimidating process. It can also be full of legal repercussions, if it is not done correctly. The best place to start is by taking one or more night or online classes regarding labor laws within your state, which will help business owners learn the liabilities and responsibilities as a first-time employer.
There are many ways to employ individuals to work within your business, including as sub-contract laborers, part-time hourly, or full-time salaried employees. Employment contracts will also outline benefits including paid vacation, group health plan details, and other legally binding provisions.
What You ‘Don’t See’ Can Cost You More Than a Lawyer Would Charge
One of the universal truths about small business owners who have built their consultancy, brand, or product from the ground up is that they take a “do-it-yourself’ approach to virtually every operational aspect for their business. This is not surprising as almost 100 percent of small businesses are started as sole proprietorships or “one man/woman shows,” where production, finance, marketing, strategy, and service are all provided by the solopreneur.
Some contracts can be exceedingly complex, and while small business owners do (and should) take the time to review each contract line by line and ask questions, the real threat isn’t always the terms imposed on the contract; it can be what is simply left out of the contract that places the owner at a disadvantage or with financial and legal liability.
Ultimately, the decision is up to the small business owner whether he or she wishes to retain a lawyer for contract review and endorsement. Many seasoned business owners would agree that it can save you time, legal complications, and money in the long run to have a legal professional review important business agreements.