Why You Need a Contract
You’d be amazed how often people hire me to fix deals done on a handshake. The industry differs, but the fact patterns are identical. A good guy has been working with a bigger, richer group in the hope – backed by vague promises – that any day now he’d get paid cash and stock. Years go by, the guy’s investment grows, but his payout doesn’t materialize. The guy usually comes to me for help when the venture is just about to hit it big. Often, at that point, it’s too late. The group has built a business and resources and can replace him. The guy has to rely on the group’s good will or fear of litigation to make him whole. It rarely happens. I’ve helped people with these facts in alcohol importing, live theatrical events, hedge funds, web app development, real estate development, films and book publishing, among others.
What a contract does for you
A contract is important because it forces you to have a conversation with the other parties about what you will do, pay and own when the deal is done. In the course of the conversation, you get to see whether the other party is decent or douchey, and whether you have the same expectations. The written document gives you a roadmap through your work. Your signature is the starter pistol, triggering the deal.
(Most people think the contract is important because you can wave it in front of a judge if things go badly, but that’s 5th on the list.)
Here’s Why You Will Avoid the Contract
There are human, predictable reasons why you and lots of other people avoid contracts. Opportunities seem scarce; great ones seem invaluable, worthy of a risk. As an entrepreneur, you are optimistic about your abilities and the good will of others – that’s what empowers you to run your own show in the first place. Asking for terms, in writing, complicates your new relationship and shows mistrust. Plus, you just want to get to work.
I get it. For years, I was just a lawyer and I didn’t get it. Then, I became an entrepreneur and I suddenly didn’t want to blow my own opportunities. So, I’m going to tell you the truth.
Here’s Why You Need A Contract
Putting things into a contract could skew your deal in all kinds of ways. Sure, asking for what you want may turn off the other side. The other side could insist that no contract is necessary (which is a red flag). But, the real danger is what the conversation could reveal to you. You may see traits in the other people that scare you. You may learn that the possible benefits aren’t that great. But, you could also clarify your obligations and your expectations, deepening your relationships with your partners. In the end, you get what all great business people need: data to make decisions to keep control over your future.