Essential Business Contracts Part 2: Key Terms in Common Contracts
No matter what type of business you run, contracts are essential. In our previous article, we discussed how many contracts share several standard features and provisions. Now, let’s dive into a few key terms of the most commonly used and most important types of contracts — and what you should look out for when drafting or signing a contract.
Limited Liability Company (“LLC”) Operating Agreements
Operating Agreements clearly delineate who the members are and their respective ownership interest, determine if and how new members are added, and establish how the LLC can raise money by taking on new investors. The Operating Agreement also stipulates how decisions are made, such as by unanimous vote of the members, majority vote of the membership units, etc
You want to carefully work out and delineate if and how members can transfer their membership interest and if/how they can exit the LLC. And don’t forget to address under what circumstances the LLC can make distributions to the members.
Nondisclosure Agreement (“NDA”)
Thoughtfully define the “Purpose” of the NDA because this is the purpose for which the parties are permitted to use each other’s confidential information — everything else is a breach of the contract.
You should also spend time reviewing what’s considered “Confidential Information” because this is the meat of what’s protected by the agreement. As part of this, remember to address:
- What format the information may or must be in to qualify as “Confidential” (written, oral, etc.)
- Whether the information needs to be labeled as “Confidential”
- Any permitted exceptions to what is considered “Confidential”
It’s important to remember there’s a distinction between the term of the NDA, and the confidentiality term. The former is how long the contract will last and how long the parties can trade confidential information and expect it to fall within the bounds of the NDA. The latter is how long the information that falls within the NDA bounds must be treated as “Confidential.”
Finally, you need to specify how “Confidential Information” must be treated or protected by the recipient. Oftentimes NDAs will say something to the effect of “each party must treat Confidential Information of the other party with the same amount of care as they treat their own Confidential Information.” This is a fairly safe and standard threshold, but certain situations may require a higher degree of care.
First, it’s important to determine if the employment will be for a specified term or period, or whether it will be “at-will.”
“At-will” means that, subject to any other provisions in the employment agreement, the parties are free to terminate the agreement for whatever reason, and whenever they like. If the employment agreement is for a specified term, then it’s a good idea to think about some “for cause” termination provisions that allow one or both parties to end the contract if certain, particularly egregious things happen, such as the employee breaking a law.
Compensation is a key provision with several levers to pull such as:
- Cash v. equity compensation
- Incentive-based compensation
- Hourly v. salaried payment
Often, employment agreements will use a combination of these to achieve a happy compromise between the two parties. Most employment agreements will provide some restrictions on employee behavior, with three of the most common restrictions being around the use of confidential information learned on the job, restrictions on the employee’s ability to work for competitors (“non-competes”), and restrictions on the employee leaving and hiring some of the employer’s other staff (“non-solicitation”).
Lastly, the employer will want to make sure that any agreement ensures that any inventions created by the employee while working for the employer remain the property of the employer.
Independent Contractor Agreements
Many of the terms from the above section on Employment Agreements will apply here. However, the following are more prominent with Independent Contractor Agreements.
At the outset, it’s vital to properly classify your workers as either employees or independent contractors — misclassifying someone as an independent contractor can be incredibly costly when you tally paying missed wages, multipliers, and penalties from the Department of Labor.
Assuming the person is properly classified as an independent contractor, your Independent Contractor Agreements will want to address:
- The fact that both parties agree and desire for the contractor to be treated as an independent contractor
- Whether or not the contractor has a duty to use their own resources to correct substandard services
- The fact that the independent contractor doesn’t get access to any company benefits
- Stipulating that the contractor either has their own worker’s compensation insurance, or if they do not, they understand they’re not covered by the employer’s worker’s compensation insurance
If you need assistance drafting, reviewing, or negotiating a contract, or you just want to chat about contracts, please feel free to reach out to me at email@example.com.
ABOUT THE AUTHOR
Michele Leonelli is a CA-licensed, Austin-based lawyer who loves working with entrepreneurs, startups, and small-medium-sized businesses with Phocus Law. His specialties are corporate M&A (including entity formation and structuring); and drafting, reviewing, and negotiating all manner of contracts. As outside general counsel to a variety of companies, he also handles a range of other legal needs for his clients and their businesses. Michele is also one of the vetted partners for the Legal Hotline available to our members. Reach out to Pavilion Career Services to connect.
Check out Michele’s post on how to pick the right legal entity for your business.
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