Apply now to be an Entrepreneur 360™ company. Let us tell the world your success story. Get Started »
They needed a consultant; you needed a client. You pitched them, met with them, cooked up a proposal, negotiated and closed the deal. Now there's only one thing left to do: prepare and sign a contract.
Why bother? For one thing, according to movie mogul Samuel Goldwyn, "a verbal agreement isn't worth the paper it's printed on." Often, consultants are vulnerable to the whims and "convenient" memories of their clients. It's not that oral agreements aren't legally binding--they're just much harder to prove.
There's also a more subtle benefit to writing things down--it makes you think. Putting pen to paper forces each side to be specific about its expectations and more thorough about planning for problems. In fact, Glenn C. Devitt, co-owner of Isotope Media, a homebased Web marketing and design firm in Plainsboro, New Jersey, sees the formal agreement as a chance to produce good will. "Before accepting a signature from a client, we sit down with them and discuss the details of the agreement, line by line," Devitt says. "Clients appreciate this step, particularly because we often deal with individuals who are unfamiliar with the language and intricacies of our profession. Reviewing the contract is an additional opportunity to educate them about what they're getting into."
Finally, people sign written documents as a symbol, to memorialize the handshake that says "We've got a deal."
Do It Yourself?
Because consultants come in all shapes and sizes, there's no such thing as a truly standard, one-size-fits-all consulting agreement. In an ideal world, every consultant would have an attorney customize an agreement just for them. In reality, this is often too expensive. If you can't afford an attorney's help, take a shot at doing it yourself. Remember, whether your homemade contract is elegant in its simplicity or full of gaping holes, it'll generally serve you better than a mere handshake.
On the other hand, if your client presents you with a "form" contract, beware: Legal documents can be treacherous. Your first step should be to have a lawyer explain it to you. If that's not possible, study it yourself. If you're not sure what something means, ask. Until you really understand (and can live with) everything, don't sign or start working.
Regardless of who is generating the paperwork, here are some issues to consider and address in your formal consulting agreement:
*Are you an employee or an independent contractor? Although this is more of an employer's tax problem, consultants who are reclassified as employees may suffer, too, potentially losing their cherished home-office, pension-plan and other business deductions. An important strategy is having a written contract stating that the consultant is being engaged as an independent contractor. In a close case, this may make all the difference. There is also another crucial aspect to this distinction . . .
*Who owns copyrights, inventions or other intellectual property created during your engagement? Copyrights include written works, graphics, photographs, audiovisual works, music, blueprints and even computer software. An employer owns the copyrights for work created by an employee within the scope of his or her employment. With a consultant, it's the opposite: The consultant owns the copyright unless he or she has signed a specific written agreement to the contrary.
Likewise, patents, inventions and trade secrets created by employees are owned by the employer. But the law isn't clear about who owns these rights if they're created by freelance consultants working without a written agreement. Obviously, having to decide this in court is expensive , time-consuming and aggravating for both sides.
Written agreements can prevent misunderstandings. But here's an important tip: Ownership of rights doesn't have to be an all-or-nothing proposition. Consider negotiating the amount of time, the geographical area and the specific types of uses each side may enjoy, as well as whether those rights may be exercised exclusively by one side or nonexclusively by both.
*Are you being asked to sign a noncompete clause? You may be asked to sign a contract that limits your right to work for others for a certain time period, in a certain geographical area or in a certain field. Don't. Although courts frown on such restrictions, the last thing you need is a courtroom battle to have them invalidated. As a practical matter, even the mere threat of a former client enforcing that provision against a prospective one could scare away new business. Don't let any client interfere with your ability to earn a living.
*Are you vulnerable to a lawsuit? Depending on your field, if money is lost, property damaged or people injured because of your work, you may be legally and financially accountable not only to your client but to third parties you've never even met. Include language in your contracts that limits your liability. State that you aren't responsible for any loss resulting from your services. If your client won't accept that, limit your responsibility to no more than what you were paid. Avoid any clause requiring that you "indemnify," "defend" or "hold harmless" your client from anything. In the words of Wayne Schulz, owner of Schulz Consulting, an accounting software consulting firm in Marlborough, Connecticut, "Don't open the door for a bad businessperson to make claims that your $1,000 service bankrupted his company." In fact, try to have your client indemnify, defend and hold you harmless from all third-party claims.
*What's a secret? During your engagement, you may become privy to information your client considers secret. The problem is, "confidentiality" clauses are often written so broadly that you wouldn't be able to work for anyone else without breaching them. For starters, insist that your client identify all confidential information in writing. Make sure that confidentiality doesn't apply to what you knew before you started the job, what becomes public knowledge, what you learn from a third party who has no duty to keep these secrets, and what you develop on your own. Keep the period of time you're obligated to maintain secrecy as short as possible.
*How do I make sure I get paid? As usual, checking out your client ahead of time and getting as much of your money as you can upfront are the street-smart things to do. Also consider imposing penalties for late payments. Schulz likes to add a clause stating that "the work stops if the payments do." Finally, put an attorneys fees clause in your agreements stating, basically, that if you sue your client and win, your client will have to pay your legal bills. Besides being fair, this clause provides your clients with a strong incentive not to play the "your check is in the mail" game. If they do, your work may cost them a lot more than they bargained for.
Isotope Media, http://www.isotopemedia.com
Schulz Consulting, email@example.com
Marc Diener is an attorney and author of Deal Power: 6 Foolproof Steps to Making Deals of Any Size (Owl Books/Henry Holt). This article contains general information only. If you are concerned about how these issues might affect you, seek independent counsel.