In a world of technology, innovation and e-commerce, the number of technology companies and tech startups are growing rapidly.
Legal services and commercial negotiation could be key to succeed, in what is a very competitive and growing market.
What exactly is commercial negotiation, and why is it important to a tech startup?
As a tech startup, the intricacies of agreements may not be at the forefront of your mind, but as a technology business you likely have valuable assets in your intellectual property, among other things, and may be negotiating with businesses that have more resources or power than you.
Commercial negotiation involves negotiating the terms of business agreements, contracts, and transactions to ensure you receive the best possible outcome and your interests are protected.
Therefore, it’s particularly important as a tech startup that your rights and best interests are protected and that receive the best possible outcomes from commercial negotiation.
Whether you are considering outsourcing your legal operations or are legal counsel yourself, formal agreements form a critical part of businesses and their success.
Here are some of the key elements of commercial negotiation.
What do you know about the other party?
It might be necessary to conduct some research on the other party in preparation for your agreement:
- Does the other party have a good reputation? Will you conduct a credit check? Remember this could affect the reputation and success of your business.
- Consider this scenario: you have spent time negotiating the terms of a contract, for the other party to then say they need to consult their boss. Get to know the business and their structure, and make sure the person you are negotiating with has authority to do so.
What is the scope of the agreement?
Disputes between parties regarding the services being performed or goods being delivered are common. It’s important to clearly list and describe the goods and services that form the agreement, very accurately!
Consider what the scope of work will be now, and in the future, could there be changes to what you require of the other party as time goes on?
Maybe the other party mentioned that they might be willing to complete work outside of the scope if needed. Make sure everything is confirmed in the contract, and do not rely on verbal assurances.
What if something goes wrong?
When you enter a contract, you are usually on good terms and expect that things will go to plan. Unfortunately, this isn’t always the case and it is important you anticipate risks and are protected if things do go wrong.
To start with, consider all possible issues that could occur in this agreement:
- Could a breach prevent you from fulfilling your obligations under other Agreements?
- Could you then suffer reputational damage that affects your business?
- What happens if something out of your control causes a loss to the other party?
Businesses try to reduce their legal responsibility in these situations by limiting their liability. Consider areas of your business where something could go wrong (likely an event outside of your control but is foreseeable) and aim to protect yourself against this. Also be wary of any clauses in an agreement that would limit the liability of the other party.
Here are some things to remember when determining where to limit your liability:
- If you are buying goods and services, try ensuring that the other party is responsible for all resulting losses that could occur
- If you are providing goods and services, consider limiting the amount you are liable for if you breach your contract, to a fixed sum.
- Ensure that the other party is responsible for the contract if subcontractors are used.
- Consider a time frame in which the other party can make a claim.
- Ensure that liability is covered by your insurance.
For a tech startup, severing relationships is not something you want to do early on in your business. Including a Dispute Resolution clause could prevent some of the risk of this occurring if there is a breach or dispute.
What happens if the other party defaults on the contract?
What if the other party breaches the contract and you are entitled to compensation, but they can’t afford it?
To prevent this, you should consider requiring security from the other party, such as:
- Cash retentions (where the payer holds back a sum of money to be released at a certain time)
- Guarantee by a bank or related party (where the third party promises to make the payment if the other party defaults)
Requiring a security from the other party will provide a protection to you if they default in some way.
How do you protect your Intellectual Property?
As a Technology business, you likely have valuable assets in your intellectual property. Here are some things to consider:
- Is one of the parties creating something for the other? (e.g. bespoke software)
- Will one of the parties be using the other’s brand, trademarks, and other IP?
- If you are creating something for the other party, who will retain the IP rights of the work?
- Ensure the other party does not infringe any intellectual property rights of a third party.
Include a provision indemnifying your business against liability in this case.
When a party has access to your IP, confidential information, and general business know-how to execute a contract, you run the risk of them using this information for their own benefit.
Imagine how damaging this could be to you as a tech startup.
It is important that there are strict IP, non-compete and confidentiality provisions in place monitoring the use of this information. Firstly, to protect your assets, but also as reputational damages could occur as a result of the other party using your brand and affect the future of your technology business.
What do you need to think about before signing an international contract?
Businesses in Australia are interacting with those overseas at a faster rate than ever. If you are forming an agreement with an international firm:
- You need to determine what currency payments will be made in
- Consider requiring security from the other party
- Perform research on the payers such as credit searches and bank and commercial references
- You must comply with both Australian and international laws
- There may be IP issues, for example, will you own the IP rights to work that has been completed abroad?
It is also important to include a dispute resolution clause outlining how disputes will be resolved and what country’s law will apply. It can be costly and complex if the dispute must be heard by an international court, therefore it is recommended that arbitration be specified in the agreement.
What else needs to be included in a contract?
Below are some other elements you should consider for your agreement:
- Is the price fixed, or based on something such as materials and time used?
- How will you make payments, and will it be due in instalments or a lump sum?
- What are the conditions surrounding the delivery of goods?
- Is GST and other taxes included
- When does the work need to be completed or goods delivered?
- Ensure that a detailed schedule of services, deliverable and timelines is included
- What happens if the schedule is not met (would you terminate, or impose financial penalties)?
How long will the agreement go for?
- How long do you want to be bound by this agreement?
- Will the contract be for a fixed period or will it automatically renew?
- Will you include a right to terminate at any time, subject to notice?
- Under what circumstances would you need the right to terminate the contract immediately? (Anticipate any risks that would result in this.).
Remember to determine what obligations you will impose on the other party upon termination. For example, you may require the other party to cease use of your trademarks and confidential information.
Are there risks in commercial negotiation?
As with anything there are risks involved, and there are things to be wary of such as:
- A contract doesn’t have to be signed or in writing to be binding – make sure you clarify in any verbal or written communications that the correspondence is subject to contract.
- Be wary of signing any pre-contractual agreements, purchase orders, or delivery notes to avoid sign any standard terms.
- Make sure you don’t mislead the other party
- Consider implementing a non-solicitation agreement, to avoid employees or customers being poached.
As a tech startup, you need to protect your valuable assets as well as achieve the best possible outcomes through negotiation. Whether you will be using outside counsel, or doing this in-house, commercial negotiation is very important to your business and its success.
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