Startup Law 101 Series – Mistakes Founders Make – Misusing Form Contracts

Ours is an era in which legal forms proliferate and many entrepreneurs are tempted to use them without much thought given to customizing them for the specifics of their deal.

This is a mistake.

The unthinking use of legal templates assumes that the law is a mechanical process, as capable of simplification as is the process of selling widgets. The thinking goes something like this: You find a widget on the web. You buy it for a cheap price. You use it. Hence, no need for those middlemen lawyers who charge a lot for pulling the identical widget out of their drawer and handing it to you with their bill.

There are some partial truths here. Some contract situations are utterly routine. And lawyers sometimes have abused entrepreneurs by keeping them in the dark while running up billings in simple situations. It does not follow, however, that contracts are merely widget-like and interchangeable units that anybody can use in plug-and-play fashion.

In reality, the law is a slippery beast, one that seems to defy simplification.

David Dudley Field made a famous effort to simplify California’s laws in the 1870s. The most educated men of that era consciously set about to take all of California’s laws and make them so simple that even the least educated person could understand them. The result — a world-class belly flop. The judges took the simplified new layer of laws embodied in the Field Codes, wove them into a complex system of legal interpretation, and — voila! — California emerged with the most complex set of laws in the nation.

Why does this happen? Why does law so stubbornly defy being reduced to a system of unthinking application that is easy to understand and administer?

Because, like it or not, law is designed to regulate human affairs that are themselves complex.

And it cannot do this effectively unless it is customized to the situations at hand. This is why judges decide issues case by case. It is why law has so many localized variations. It is why a canned contract, beautifully drafted though it may be, will ill serve the parties who adopt it without thinking through its implications.

Again, like it or not, business and corporate law is complicated. So too is intellectual property law. And tax law. And securities law. And licensing law. And distribution law. And property law. And all other forms of contract and commercial law. Have you ever tried to deal with an unsecured debenture? Or a revisionary interest? Or with any other of thousands of bizarre-sounding legal concepts that seem to float in and about the law that surrounds businesses and corporations? Yes, you may be familiar, from your practical experience, with what FOB means as a commercial shipping term. Or with what an “implied warranty of merchantability” means. But take such terms, multiply them by the thousands, put them in an unfamiliar context, and what do you get? You get a web of legal terms of art, each of which has a specific meaning only when understood within a complex legal context.

This is much more than the case of a lawyer trying to spread so-called “fear, uncertainty, and doubt” in an illegitimate manner. This is the reality of law trying to comprehend and regulate complex affairs that do not lend themselves to simplification when considered as a whole.

Therefore, contract and commercial law is highly complicated and does not lend itself to thoughtless application. If it were only a matter of filling in the names, for example, on a partnership agreement, then anyone starting a business could go to a stationery store (the old way) or go to a forms download site (the new), buy a canned partnership agreement, fill in the names, and be done with it. This is normally an unwise way to form a company. Such a boilerplate form may have nothing to do with the nature of the business being set up by the parties. It may have language in it that has no bearing on their deal and that will only confuse them and everyone else concerning what was intended by their deal. Worse, it will not expressly set forth the nature of their deal to make clear what they intend in their contract. Such a contract is an open invitation to litigation should anything go wrong in the deal between such parties. Perhaps tens or even hundreds of thousands of dollars will be spent hashing and re-hashing ad nauseam what they intended when they “agreed” to badly-worded boilerplate. If you have ever had the misfortune to suffer this fate, you will never again resort to such corner-cutting in documenting the affairs of your startup business or small business.

All but the simplest of contracts need to be reviewed carefully by someone with a discerning eye and also need to be understood in their full legal context. A contract review, of course, can be done by a smart lay person using self-help resources. And some people are inclined to invest time and effort for that purpose in a way that helps them manage their legal budgets more carefully because they pick up a lot of the burden themselves. But it is a burden, and it has a cost attached to it – there is always a cost-benefit component to any such effort. What is worse, many people do not do a good job of thinking through the issues and wind up cutting corners. A contract in their hands can be like a loaded gun in the hands of a six-year old — wildly unpredictable and sometimes dangerous results can follow.

Moreover, context is critical. What seems placid on the surface can hide legal turbulence beneath. Sell stock to investors with a simple purchase agreement. Fine. I sell. You buy. Then, later, you find you did not comply with securities laws. Or that your buyer gets a large taxable gain for having contributed intangible assets for his stock. Or that your deal violated someone else’s rights in the company that restricted such sales. Yes, lawyers can and do sometimes spin such issues out needlessly. But such issues can and do exist in many cases. When you use a boilerplate form, you need to see beyond its apparently simple boundaries to understand how it functions legally in its broader context. Otherwise, you might step into trouble without having the slightest idea that you are doing so.

So, can you as an entrepreneur use boilerplate forms with impunity without fully understanding them and without understanding their context? In some cases, yes. You need a simple promissory note, and the generic one fits your needs without too many risks of getting legally blind-sided in a simple transaction. You need a canned nda for your employees and you have a form you had used in a prior company — the type of form that has remained pretty constant over many years of use. This can work for you and, even when there are potential technical problems with the documents you are using, the problems may never arise in your particular situation.

For every case where entrepreneurs either can or do get away with it, though, there are all too many situations in which their attempts to do so prove ill-advised. Flying blind does have its limits, after all.

Bad business lawyers are lawyers that simply take forms and switch the names without giving thought to the nature of the deal before them. Bad as this may be, at least such lawyers have a modicum of legal education and experience to be able to spot some of the legal issues and some of the potential traps.

The same cannot be said for an entrepreneur trying to do the same thing but without the benefit of a legal education or legal training. This then is the worst of all cases. Don’t put yourself in this situation.

The issue gets confused when the entrepreneur will have had significant exposure to certain types of legal documentation, as for example in the case of one who managed the contracts of a large company in an executive capacity while working under the guidance of skilled lawyers. In such cases, someone who has had a lot of practical experience with a particular class of contracts is often far more aware of their ins and outs than are non-specialist lawyers who have not dealt much with such contracts.

This is true as well of the seasoned entrepreneur who has developed such a strong working knowledge of business deals as to be able to run rings around certainly any green business lawyer who attempts to work on such deals.

While all this is true, it simply means that law has a practical side as well as a theoretical one, and any smart person who has worked through complex legal deals often enough will come away from that experience with some excellent skills applicable to such deals. Serial entrepreneurs, contract managers, and others with like experience fit this mold.

This only confirms, however, why it is ill-advised for an entrepreneur to try to do business by using legal forms unthinkingly. The seasoned entrepreneur, the skilled contract manager, etc. may not be business lawyers but do have the vast experience to be able to think their way carefully through a complex contract. Even then, such persons will attest that they ultimately need their deals reviewed by a skilled business attorney. Though they may be able to drive a deal more efficiently owing to their experience, they themselves know this is no substitute for using the services of a lawyer who is an expert in their field.

The operative word is “think.” A good business lawyer will think carefully about any given deal and will customize any contract for the commercial situation at hand. A seasoned entrepreneur will do the same within the limits of a layman’s knowledge in a technical field. An entrepreneur using good legal self-help resources will similarly think through the issues carefully within the limits that such resources enable.

It is the unthinking use of boilerplate forms that does not cut it. Use of boilerplate forms without the requisite training, experience, and education does not give an entrepreneur any basis for thinking through a deal to spot the issues and potential trouble spots. Don’t use boilerplate forms mindlessly. In the end, it may cost you dearly.

Question by GOLA n: what kind of contract (forms etc) do i need to make with a musician who wants to sell me all her tracks?
i know this girl who has about 30 really good all original music songs she made all in .Wav format and she’s not smart enough to send it out or distribute it herself, so i told her i would give her a thousand dollars, if somehow she could transfer the rights to all the songs to me (so i can distribute them and make money) … so does anyone know what paperwork and forms i need to do this?

Best answer:

Answer by Dodie
None. Instead, contact the Volunteer Lawyers for The Arts chapter in your state and inform them of the impending deal. They’ll walk both you and the girl through the process in a way fair to both of you. Seriously – one wrong step on this could cost you a lot down the road. VLA will help you low cost or free. It’s what they do for a living all day.

Here’s their website in New York.

http://www.vlany.org/

They have chapters in many other states. If you are unable to locate one nearby, consult an entertainment attorney – fast. This young lady could sue you years from now for a minor clause you neglect adding to your contract today. Take this seriously: be fair to her, and PROTECT YOURSELF.

Add your own answer in the comments!

New state web site shines light on billions in contracts
Those are the conclusions of CFO Jeff Atwater after a sample audit of 24000 state contracts at 33 different agencies found that 35 percent were flawed.At stake, he said: “Hundreds of millions of dollars” of the state's $ 70 billion budget — 67 percent …
Read more on St. Augustine Record

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Contracting for labor, 1943

Image by OSU Special Collections & Archives
Original Collection: Extension and Experiment Station Communications

Item Number: P120:2670

Item Description: Bryant Williams, farm labor assistant, and Preston Daughton, USES representative, arrange with S.E. Starr and K.A. Bursell for Mexican workers.

Restrictions: Please contact the OSU Archives for permissions forms or information on how to cite our collections.

Click here to view our digital collections. You can find this image by searching for the item number.

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We’re happy for you to share this digital image within the spirit of The Commons; however, certain restrictions on high quality reproductions of the original physical version may apply. To read more about what “no known restrictions” means, please visit the OSU Archives website.

Watertown Education Association forms new contract
After nearly three years of negotiations behind closed doors, the Watertown Education Association has a new union contract. The city school district's Board of Education approved the document June 5. According to WEA President Dianne H. Loonan, the …
Read more on WatertownDailyTimes.com

Los Angeles, CA (PRWEB) June 29, 2012

The Unmanned Aerial Vehicle (UAV) Manufacturing industry is growing. The benefits of unmanned drones combined with various military and civilian needs have created favorable conditions for drone manufacturers during the past five years. While multinational conglomerates like Northrop Grumman are expected to dominate the industry, specialized firms like General Atomics Aviation Systems also garner a sizeable share of overall revenue. With the US government as the primary client, firms seek to develop solutions that reduce risk to human labor, increase operational efficiency and extend the reach of various conflict-resolution groups, from the US Navy to local firefighters, says IBISWorld industry analyst Josh McBee.

Favorable conditions stemming from recent conflicts in the Middle East, as well as the ongoing need for homeland security, are expected to increase industry revenue at an annualized rate of 11.5% during the five years to 2012. At the same time, firms in the industry have benefited from reduced operating costs in the form of falling prices for semiconductors and electronic components. Lower input prices combined with high demand are expected to increase industry profit and lure more companies into the drone manufacturing business. In 2012 alone, revenue is expected to increase 13.2% to total an estimated $ 4.8 billion, as the US government contracts firms to create drones it then uses for either domestic purposes or sells to foreign nations. There’s no shortage of opportunities for drone manufacturers during the coming five years. According to McBee, technological advancements in payload capacities, fuel efficiencies and onboard systems are constantly evolving to expand the usefulness of UAVs. Though federal funding for defense and homeland security are both projected to fall off during the coming five years, the ongoing threat of terrorism and disasters (man-made and natural) will continue to spur investment into drone research and development. Through 2017, revenue is forecast.

The Unmanned Aerial Vehicle (UAV) Manufacturing industry is characterized by a medium to high level of concentration, with the top four companies accounting for about 59.2% of industry revenue. The overall industry comprises about 36 companies with 38 manufacturing facilities. The top two companies, Northrop Grumman and General Atomics Aeronautical Systems, generate a combined revenue share of 40.5% or nearly $ 2.0 billion through their UAV manufacturing operations. High barriers to entry play a large role in determining concentration level, as the vast majority of industry revenue is granted through US military contracts. In addition, the costs associated with developing and producing sophisticated UAV systems are very high. Contracts are usually awarded to existing players in similar fields or those with a previous successful relationship with the US Department of Defense (DOD). For more information, visit IBISWorlds Unmanned Aerial Vehicle (UAV) Manufacturing report in the US industry page.

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IBISWorld industry Report Key Topics

Industry firms manufacture and design unmanned aerial vehicles (UAVs) and related control systems for civilian and military applications. UAVs can be either autonomous or remote controlled, and are used in situations where the use of a human pilot is undesirable or dangerous.

Industry Performance

Executive Summary

Key External Drivers

Current Performance

Industry Outlook

Industry Life Cycle

Products & Markets

Supply Chain

Products & Services

Major Markets

Globalization & Trade

Business Locations

Competitive Landscape

Market Share Concentration

Key Success Factors

Cost Structure Benchmarks

Barriers to Entry

Major Companies

Operating Conditions

Capital Intensity

Key Statistics

Industry Data

Annual Change

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About IBISWorld Inc.

Recognized as the nations most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit http://www.ibisworld.com or call 1-800-330-3772.