The Dangers of Cutting and Pasting
Introduction
No, we are not talking about children playing with scissors and glue. Rather we are talking about entrepreneurs and business owners creating their own contracts, often using forms downloaded from the internet which will not cover the business risks at hand.
When it comes to contracts, Corporate America has a competitive advantage because public companies can afford sophisticated counsel to handle transactions. However, entrepreneurs and SMEs have their own competitive advantage - rapid decision making. They do not have to wait for a bureaucracy at corporate headquarters to approve their decisions.
But at the same time, many business owners think they can save money and time by drafting their own contracts and handling legal matters on their own. NOT!
Here are 4 common situations where “do-it-yourself” contracts will not work.
1. NDAs
Non-disclosure agreements, also called confidentiality agreements, are ubiquitous because companies are worried about protecting their proprietary information from competitors and former employees. However, an NDA drafted for an employee to sign requires different terms than an NDA used for a potential joint venture or company sale. It is never a “one size fits all” document.
2. Channels to Market
A sales representative is not the same as a distributor. The sales representative does not take title to the manufacturer’s goods and resell them. He or she is merely an agent who generates new business for a commission. Just like a realtor does not take title to your home when you list it for sale. Distributors buy the goods from the manufacturer and resell them.
3. Exporting Goods
A contract used in a U.S. domestic transaction will not have all the clauses required for an overseas deal. You need special clauses when you are exporting goods and services, including software, to foreign buyers or licensees.
4. Percentages and Profits
When a company promises to pay a sales commission or a royalty, it is essential that the base upon which the commission or royalty is computed is defined with precision. Are we talking about gross sales or net sales after taxes, product refunds, discounts etc.?
Don’t make the mistake of promising a key employee a share of the “profits” when a business is sold without properly defining this term to consider taxes and other deductions. Further, will the “profit” be paid to the business owner in cash or with stock in the acquiring company. The business owner who receives restricted stock in the acquiring company may not have the funds available to pay the key employee as promised.
Conclusion
Most people do not rely on internet medical advice sites to diagnose an illness but instead consult with a physician. Similarly, it can be a dangerous practice for non-lawyers to take a legal document designed for one purpose and use the “cut and paste” function to modify it for another purpose. Words matter especially when it comes to contracts. Using the wrong words or not including necessary words will create unforeseen and unreasonable business risks.