by Tej Prakash, co-founder of ShouldiSign.com
Owners of a business are constantly dealing with people (both internal to the business and external) and other businesses. It’s these relationships that, more often than not, make a business successful. Think about it – when is the last time a business didn’t benefit from having smart employees or strong customer relationships?
However, what some businesses (especially small businesses) take for granted is that these relationships will remain strong and unchanged overtime. Therefore, they fail to document initial understandings at the outset. The fact is, incentives and goals change, and what started as a fruitful relationship may no longer be a year from now. It’s for this reason that it is very important that businesses utilize contracts when dealing with third parties, whether internal or external. Simply put, a contract sets forth the rights, obligations and expectations of each party and helps avoid misunderstandings down the road.
Set forth below are four areas where businesses should utilize contracts when dealing with third parties:
Exchanging Information.
A business’s information is its secret sauce. Whether the information is trade secrets, business know-how, financial data, product plans, customer acquisition strategies, the information a business possesses is what makes it valuable and unique. When a business needs to share that information, it is important to protect it from unnecessary disclosure. Whether a business is contemplating entering into a partnership, hiring a service provider or in the process of selling itself, a non-disclosure agreement should be utilized when information is shared with third parties. A non-disclosure agreement not only prevents a third party from disclosing information, but it also ensures that the third party doesn’t utilize the information for purposes other than what is stated in the non-disclosure agreement (for instance, entering into a mutually beneficial relationship). This concept prevents a third party from utilizing information learned for its own purposes, for instance, to gain a competitive advantage. Even if both parties are sharing information, it is still important to enter into a non-disclosure agreement – in this case, a mutual non-disclosure agreement.
Employees.
An employment offer letter or employment agreement should be utilized when hiring employees. These agreements are useful because they set forth key aspects of the relationship, including reporting obligations, role of the position, salary and other compensation, benefits, vacation time and termination (i.e. how the parties can exit the relationship). Another reason is that a well-crafted employment agreement will usually contain a non-compete clause, which prevents an employee from engaging in any activities that are competitive with the business. If the employment relationship is not at-will and instead for a specified term, it is common to include a non-compete that has a reasonable “tail,” which is a period of time during which the employee cannot engage in competitive activities after the employment relationship has terminated.
Freelancers.
If you engage freelancers for your business, whether called a consultant, vendor or independent contractor, it is important to have an agreement in place with these third parties. An agreement will help clarify, among other things, the scope and quality of services to be rendered, timing of deliverables, payment terms, ability to terminate the relationship, how expenses of the service provider are treated, whether subcontractors may be engaged, and will also establish how disputes will be resolved. These agreements will also contain non-disclosure provisions which protects the business’s information shared with these providers. Lastly, and often overlooked, is that these agreements will explicitly state that the service provider is considered an “independent contractor” and not an employee of the business. This helps prove the intent of the parties and avoid any potential employee misclassification issues with the IRS.
Intellectual Property.
Similar to a business’s information, a business’s intellectual property can be one of its main assets. Intellectual property includes trade secrets, trademarks, patents and copyrights. Depending on the type of intellectual property in question, the general rule is that intellectual property created by an employee or independent contractor is owned by the individual rather than the actual business. In order to make sure that the business owns the intellectual property created by these individuals, it is important to have each person enter into an invention and assignment agreement. An invention and assignment agreement ensures that any intellectual property created by the employee or independent contractor while hired or retained by the business, is owned by the business. When selling a business, especially an intellectual property dense business, any potential acquirer will want to know that the business (as opposed to specific individuals) own the IP of the business and having an invention and assignment agreement in place is one way to ensure that.
Tej Prakash is the co-founder of ShouldiSign.com, an online legal marketplace that helps individuals and businesses find and engage pre-vetted attorneys in a transparent environment. By leveraging technology, Should I Sign is saving business owners time and money when they have a legal need. Prior to co-founding Should I Sign, Tej was a corporate attorney at Willkie Farr & Gallagher LLP and then Kleinberg, Kaplan Wolff & Cohen, P.C., specializing in public and private mergers and acquisitions, private equity and venture capital transactions and general corporate and securities law matters.
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