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What contracts do you need for your startup?

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What contracts do you need for your startup?

This is a DMZ guest blog by Konata Lake and Wendes Keung of Torys LLP.

Building a startup is challenging. You need to balance cash flow control, product development, go-to-market strategies, talent, branding and working in perpetual ‘go’ mode. And then there is the back-end work—the part that you don’t look forward to—financial records, information management systems, documents, policies and procedures, and, of course, contracts. Although a good contract doesn’t feel quite as rewarding as building your product or closing a deal, it’s an essential building block for a successful startup.

The best contracts are always ones that are drafted with your product, business model and consumer base in mind. Early-stage startups can be tempted to use online templates, but templates can leave you vulnerable. Most templates favour one side or are drafted ambiguously in a way that leaves interpretation up for debate.

We thought we would break down a few key contract non-negotiables to always keep in mind.

Your service offering and crown jewels

  • Services: The agreement should clearly describe the services that will be provided and what is included or excluded as part of the project scope. For example, will your service include software licenses, hardware, software, professional services, training, installation/integration, or maintenance and support? The agreement should be clear about allocating responsibilities, development milestones, and milestone deadlines.
  • Intellectual property: Your intellectual property (IP) is your most valuable asset. Investors will closely scrutinize your IP clauses to confirm that you actually own your IP. Here’s what to look out for:
    • Effective license rights if you are licensing your IP to customers via service agreements or if you require the customer’s data to deliver the services. 
    • Ensure your IP clauses in employment agreements and independent contractor agreements are clear about ownership. In Canada, the default for IP ownership developed by an employee is ownership by the company unless the contract says otherwise— however, the opposite is true for contractors and consultants.

Managing data

  • Confidential information: The definition of confidential information typically covers any information disclosed by or on behalf of a party to the other party that is marked as confidential or that reasonably should be understood to be confidential. Confidentiality terms are crucial to ensure that the person you are negotiating with won’t steal your secrets.
  • Customer data: If you are dealing with customer data as a part of your service, be prepared to answer questions on privacy and security. Customers will likely want to know the security requirements you have in place to protect their data. If you will be collecting, accessing, using, or disclosing personal information, consult a privacy expert to ensure that you’re compliant with appropriate privacy laws. Certain jurisdictions, such as the EU, UK, Switzerland and California, have specific requirements that companies must follow if they deal with individuals in those jurisdictions.

Mitigating risk exposure

  • Disclaimers: Disclaimers notify your users that you will not be held responsible for certain damages from their use of your website, products, or services. They need to be carefully structured to have legal effect. One that is too broad may be struck down by a court as ineffective. Well-crafted disclaimers go a long way in protecting a business from liability.
  • Indemnification: Put simply, an indemnification clause requires one party to compensate the other for putting that party in harm’s way. For example, if you are a software developer, your customer may ask you to indemnify them if they receive a copyright infringement claim for using your software. You would be asked to “step in the shoes” of the customer and manage the dispute. If you agree to offer an indemnity, you should limit the categories of claims that you are willing to indemnify for, put caps on the damages and consider purchasing insurance as a way to limit your financial risk and exposure. 
  • Limitation of liability: Limitation of liability clauses allow parties to limit the amounts owed by one party to the other in the face of a claim. The type of damages due or claims brought can be limited. This allows a party to avoid a “bet the business” situation by allocating risk between the parties. There are typically three parts to a limitation of liability clause to look out for: 
    1. Waiver of Indirect Damages: This clause states that a party will not be liable for any indirect damages that arise under the agreement, including any damages for lost revenue, lost savings, or lost profits. 
    2. Cap on Direct Damages: Agreements typically limit the maximum amount of damages that can be claimed as direct damages. This amount is typically tied to the fees paid under the agreement. 
    3. Exclusions: The parties may agree to exclude certain types of damages from the above circumstances. If these types of claims occur, whether directly or indirectly, the party will be exposed to unlimited liability. Parties will typically negotiate excluding claims for gross negligence, willful misconduct or fraud.  
  • Governing law & forum: The agreement should state what substantive law governs the rights and obligations of the parties and which country’s courts will hear disputes. You should consider the most practical and convenient jurisdiction if a dispute arises. If you choose a jurisdiction that is not your home court, make sure you are comfortable with their procedural system and how difficult it may be to enforce a foreign judgment domestically.

How you do business

  • Subcontracting: A contract is between two parties, and typically the rights and obligations under the contract cannot be imposed on a third party. However, third parties can sometimes be brought under a contract. For example, a subcontracting clause can be used to allow a party to assign or outsource parts or all of the obligations under a contract to a third party. You may need to rely on this clause if you have a third party hosting provider or even independent contractors working for you. Take note of language that requires you to obtain the customer’s consent before subcontracting (or to notify the customer in advance). 
  • Non-solicitation: As an early-stage company, almost all of your employees directly impact the bottom line. Non-solicit clauses protect your employees from being poached by a customer. The clause should define the timeframe, be limited to employees related to the services being provided under the agreement, and exclude situations where an employee responds to a general recruitment advertisement. 
  • Assignment: An assignment clause governs whether and when a party can transfer the contract to a third party. While agreements typically limit the ability of a party to transfer the contract without some form of prior consent, startups should ensure there is language that permits it to assign the agreement to a purchaser of its assets or shares without consent.

Many startups offer game-changing products and services to solve inefficiencies in the market, but overcoming the growing pains of launching a startup isn’t easy. A well-thought-out risk management tool often makes the difference between a successful startup and a struggling one. Good contracts are part of your risk management toolbox. A great technology contracting lawyer should be able to leverage sector knowledge and their own experience to advise you on which terms are negotiable and what is market in the industry.

Are you a startup founder with contract questions for Torys? Reach out to Wendes Keung today to get your questions answered.

 

This article appears on Torys’ Startup Legal Playbook: a guide to issues founders face as they grow their company, from ideation to exit. For more actionable insights on operating your startup, raising capital, building a team and going cross-border click here.

Hear from DMZ’s first-ever unicorn founder for his advice on building a billion-dollar company

Event recap: DMZ’s Founder Dinner

Co-founder and CEO of brand interaction platform Ada, Mike Murchison, spilled the entrepreneurial tea at DMZ’s Founder Dinner earlier this month, sharing lessons learned from scaling the first-ever DMZ unicorn company the ground up.

Empowering brands to automate customer interactions, Ada brings a VIP experience to every customer and employee through its platform. Since 2018, Ada has increased its revenue by 764% and in 2021, raised its Series C at a valuation of $1.2B, officially achieving unicorn status.

The first in-person DMZ Founder Dinner since 2019, the events are designed to bring the larger DMZ founder community together for an evening of food, drinks and connections.

We thought we’d share some of Mike’s insights and how he built the first-ever DMZ unicorn company for other founders looking to build the next big thing. Watch his full founder talk below to learn more about Ada and Mike’s journey, or keep reading for a recap of the tips and learnings Mike shared with the audience during his talk.

Entrepreneurship is a deeply personal experience

“We in this room are all united by this shared dream of building something important, big and world-changing. The journey that we’re all on is a very, very unique one, but we’re all unified in that shared ambition.”

The value of improving your rate of learning

“I think the single most important thing I’ve learned over the course of this journey has been a deep inward focus on improving my own rate of learning.

I think that’s one of the things I so admire about the community here at the DMZ, is that we’re all committed to learning. We’re all highly curious people who are eager to learn new things.

I encourage you to ask yourself, ‘What is piquing my curiosity? What problem am I facing that may seem insurmountable that I may be able to learn something new from?'”

Founders have a responsibility to support one another

“We all have a responsibility as founders to support one another in our own growth. I encourage everyone making progress themselves to share it with others.

We’re not competing against one another, we’re supporting one another. We all win when a startup in our ecosystem succeeds.”

Mike Murchison talking with another guest. - DMZ Founder Dinner recap

Sometimes the easiest path IS the right path

“I was dealing with a hard problem and someone asked me, ‘What if it wasn’t hard? What if it was easy?’

I’ve grown up and trained myself into thinking I need to do the hardest things, and what I’ve learned in the course of building Ada is that sometimes the easiest path, where you’re feeling the pull, is actually the right path.”

Don’t take yourself too seriously

“Looking back, something I would’ve done differently is not taking myself so seriously.

I wasted a lot of energy thinking about what the ideal path was meant to look like. I wish – earlier on – I would’ve let go of my perception of the right path and been more excited about the path that was unfolding before me.”

DMZ card that says "Changing entrepreneurs' lives." - DMZ Founder Dinner recap

Want to have a front row seat at the next DMZ Founder Dinner to hear from other founders who have made it? Apply to our upcoming Incubator cohort kicking off this fall at dmz.to/incubator.

Meet the DMZ’s Spring ‘22 startup cohort

Introducing the DMZ’s newest cohort: 11 tech startups that are disrupting the Canadian tech ecosystem 


DMZ’s Incubator is a market validation and traction program that helps venture-backable pre-seed and seed-stage startups execute their go-to market strategy, acquire lighthouse customers, gain media exposure, explore global expansion, preparing for the next round of funding, and much, much more.

Out of hundreds of the high-calibre startup founders that applied from Canada and around the world, the DMZ hand-picked 11 tech companies to join a new 18-month cohort in the Incubator. 

This cohort has startups joining from Vancouver, Canada to Budapest, Hungary, across diverse industries like logistics, insurtech, fintech, proptech, and more.

Introducing our Spring ‘22 Incubator cohort:

 

AssetFlo is building the next generation of location products to help the supply chain increase visibility with a single device that works everywhere and eliminates costly infrastructure.

Baoba is creating street-smart insurances by combining location intelligence with technologies to create geo-triggered coverages. Baoba’s vision is to become the #1 global ecosystem orchestrator for on-demand insurance needs and the platform for connecting a fragmented market.

Carmodity partners with car dealerships to provide lease-financing to customers in a debt-free and interest-free model.


Cozii Technologies provides sustainable residential and commercial properties management services. Their flagship product Cozii Proptech allows residential landlords to manage their rental properties from anywhere in the world.

Lightster is a mobile platform that enables tech startups to build instant user communities for input and co-creation, and rewards users for their time with exclusive access and cash.

Businesses, governments, and individuals share many important documents every day. myLaminin uses Blockchain to deliver security, convenience, and control to the document issuer, document holder, and third-party document verifiers.

Reyts is a marketplace that allows individuals to swap currencies seamlessly and securely.

SizeWize offers an AI-backed fit recommendations eCommerce app that ensures online shoppers can buy the right size online, providing reduced returns, increased conversion, increased AOV, targeted marketing and optimal supply chains. 



ShiftRide is a car subscription service allowing people to subscribe to cars listed by owners and dealerships in the community. Every subscription comes with maintenance, insurance options, and flexible terms that suit any lifestyle.

VRapeutic is an Ontario-based UNICEF Innovation Fund portfolio software house specializing in developing therapeutic and rehabilitation solutions, with a focus on virtual reality (VR) for learning and developmental challenges.

 

If you are an early-stage tech founder interested in joining DMZ’s Incubator, check out more about the program details and selection criteria here.