#12 - Be your own legal team

Start negotiating the fine print.

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#12 - Be your own legal team

Management roles almost always come hand in hand with a certain level of budget ownership, and with it, the responsibility to negotiate contracts with suppliers of products or software that your team need to operate successfully.

Your ability to negotiate a reasonable price will set you apart as a leader, but price alone isn't the only relevant negotiable element of contracts. Those additional pages of legal fine print that you're being asked to sign are all up for discussion. Doing so effectively is a sure way of gaining the respect of your CFO and legal counsel.

Today we're diving into 3 common contract clauses that you should consider negotiating on to mitigate the risk you expose your company to.

#1 - Payment terms

While revenue and profit are often touted as the most important company metrics, managing cashflow is equally vital to a company's success.

Your company could be profitable but still go out of business if all the revenues fall in the latter half of the year and your expenses in the first.

Contracts always provide one or more clauses about payment terms covering questions like: is the full amount due in one go or can you pay in installments? How soon are those payments due? Does the entire contracted value need to be paid upfront or can part be paid upon delivery?

ADVICE: try paying as late as possible, if necessary with staggered due dates and ideally with a small percentage being paid after successful execution, so that you always maintain some leverage in evaluating the delivery of the product/service.

#2 - Cancellation policies

Nobody gave a bat's ass about cancellation policies until Covid-19 came around, but suddenly it turned out to be the most important clause in every contract.

Evaluating and negotiating changes to this clause help to mitigate the risk your company is exposed to for worst-case scenarios. They'll likely never happen, but if you do find yourself in the middle of a black swan event like Covid-19, you might just find yourself needing to invoke this clause for every active contract.

Cancellation terms usually focus on how much of the full contracted value still needs to be paid when cancelling at specific times during the contract.

ADVICE: Consider asking yourself some of the following questions to challenge or negotiate how you would like to structure this clause:

  • Can I limit my financial risk to paying for the actual expenses the supplier has made up until the point of cancellation? e.g. if a catering company hasn't cooked the food, but has spent time designing a menu, pay them for those expenses only.

  • Can I convince my counterpart to let me convert the full contracted value to credits for next year if I cancel, so they keep my business and I don't lose money?

  • How will we deal with Force Majeure situations like Covid-19 outbreaks or service delivery issues due to national lockdowns?

#3 - Resolving a dispute

Like marriage, you don't plan to break up when you first tie the knot, but it is sensible to discuss how you'll go about resolving disputes while you're on good terms.

When you venture into contractual obligations with international vendors, a common clause to add to contracts is to decide on the governing law and/or in which country disputes will be settled if they arise.

Your first worry is not that another EU country will have barbaric laws, but more the fact that your own company's legal counsel will be well-versed in the governing law of the country that your company operates in. Imagine you do have to go to court over a dispute: you'd be making it your Dutch company very challenging if they have to fly over to Budapest to defend your case according the Hungarian law.

Additionally, it's common practice in contracts to agree on an indemnification clause where either:

  1. you agree to hold each other harmless for liabilities, loss, claims or expenses that flow from a breach of contract e.g. you weren't able to deliver what was promised and as a result I lost a client worth €1 million and I want you to cover for that.

  2. you agree to limit the amount each of you can be held liable for to a specific total sum, so that you mitigate the exposure your company has to being sued.

ADVICE: aim to align governing law with the country your company operates in and depending on which side of the contract you're on, either limit your exposure to liability or increase your ability to make claims for losses incurred through the other's fault.