In this episode: Once you’ve planned and funded your business, you need to protect it. Jon Peyton walks through the internal contracts that protect you with your team and the external contracts that protect you with customers and vendors. He shares a costly lesson from a contract with a friend, and explains why your contracts can raise or lower what a buyer will pay for your company. As Jon says on air, this isn’t legal advice; work with your own attorney.
Key insights
- Internally, you need both an employee contract and an employee handbook. They do different jobs.
- Confidentiality and non-solicitation clauses protect the intellectual property and relationships you’ve invested in. Non-competes face more legal challenges in many states.
- Have employees acknowledge the handbook every year, not just on their first day.
- Customer contracts should fit the state you operate in and address where disputes are resolved, including whether arbitration applies.
- Contracts affect enterprise value. A vendor discount that ends on a sale, for example, lowers what a buyer will pay.
Episode timeline
- 0:00 How do you protect what you’re building?
- 0:36 Two types of contracts
- 1:29 The employee contract versus the handbook
- 2:46 Confidentiality and your intellectual property
- 4:13 Non-compete versus non-solicit
- 7:14 Why the handbook needs an annual sign-off
- 10:43 Customer contracts
- 12:48 Which state’s laws apply?
- 14:10 Vendor contracts
- 16:54 The cost-benefit of good contracts
- 18:18 A costly lesson: when a client is also a friend
- 20:49 Fixing the gaps for the next business
- 24:54 Patents, IP and enterprise value
- 26:09 Vendor terms that change when you sell
The episode in brief
Protect what you’re building. After planning and funding comes protection. Jon is clear that this isn’t legal advice and encourages every owner to have an attorney review their contracts. He shares what he has learned from attorneys, from business owners and from his own experience.
Internal contract one: the employee contract. It sets the standard you expect and spells out what happens if someone leaves. Its most valuable piece may be confidentiality. The intellectual property, processes and systems you’ve invested in belong to the company, even after an employee moves on. Without that protection, someone could replicate what makes you unique and erode your value.
Non-compete or non-solicit? A non-compete tries to stop a former employee from competing. In many states these have been challenged, often because a business can’t prevent someone from earning a living. A non-solicit accepts that they may compete but bars them from taking your customers, vendors or employees. Jon notes that non-solicits are often more enforceable. Whether to use one or both is a question for your employment attorney.
Internal contract two: the handbook. The handbook covers day-to-day expectations such as attendance, conduct and time off. Signing it once at hiring isn’t enough. Review it regularly and have employees acknowledge it every year, so no one can claim they were told once and didn’t understand.
External contracts: customers and vendors. Boilerplate customer contracts may include terms that don’t hold up in your state, putting clauses, or the whole contract, at risk. Address which state’s laws apply and whether disputes go to court or arbitration. Vendor contracts protect you in both directions: from a supplier that doesn’t deliver, and from a customer who won’t pay for work you’ve done.
A costly lesson. Jon describes a client relationship with a business run by a friend. When the bill came due, the client refused to pay, arguing that informal help it had given offset the fee. Jon’s attorneys found gaps in the contract, including no arbitration clause and no adequate confidentiality provision. He chose to absorb a significant loss rather than fight it out in public. When he later spun a service into a new company, he made sure its contracts closed those gaps.
Contracts are part of your value. Patents and protected IP can be worth a great deal. A buyer will also review your contracts. If a vendor’s discount ends when the business sells, the buyer’s costs rise and profit falls, and so does what they’ll pay.
Key action items
- Have an attorney review your core contracts. Start with your employee agreement, handbook, customer contract and key vendor contracts.
- Check your confidentiality and non-solicit terms. Ask your attorney how enforceable they are in your state.
- Set an annual handbook sign-off. Pair it with a short refresher on key policies.
- Read your vendor contracts for assignment terms. Note any pricing or terms that would end if you sold the business.
- Budget for legal protection. Treat it as an annual line item, not a one-time cost.
Listen next: Episode 16: Entrepreneurship and the Importance of Effective Leadership
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.