It took a few weeks of back-and-forth, but eventually, finally, there it was — our first client contract draft. Fewer things make an entrepreneur happier than seeing that first agreement in place. Little did I know that this isn’t where the finish line. Instead, we were just getting started.
When you get that agreement, your excitement is usually followed by a million other questions. Chiefly among them: “What do I do now?” Fortunately for us, I have had a few years experience negotiating agreements. But for many startups, they are either left staring blankly at the stack of papers or simply sign blissfully. As you know, bringing an attorney to the table is the ideal response. However, as a startup you may realize that this is much easier said than done in the beginning.
So many people try to go it alone. If you are one of those people, you are likely going to have to negotiate certain terms. You may be nervous to counter with anything, for fear the contract may go away. However, clients are typically used to negotiations and if they have a contract to pay in front of you, you have already convinced them of your worth. So here are some ways to manage
If you are trying to go it alone, here are some things to look out for in agreements you are asked to sign:
Issue: Payment Terms
When you receive your first agreement, the first unfamiliar things you may say is “Net-#” (e.g. Net-60, or Net-30). This is important, because it tells you when your invoice will be paid. Some new B2B (business-to-business) entrepreneurs may not realize that, unlike in the direct-to-consumer market, businesses don’t always pay immediately and upfront. Net 60 means that the customer has 60 days from receipt of the invoice to pay. In the beginning, you may be thinking, “They can pay me whenever. I’m just happy to have the contract!” But remember that the longer it takes for you to receive payment, the longer you have to service their contract using your own funds. For many companies, this becomes a difficult cash flow issue, because you can have tens of thousands of dollars in receivables and still potentially be bankrupted.
At the same time, the client needs to manage its expense and risk expectations as well (after all, you are a new startup!). So there must be a middle ground for both of you.
How to Manage:
(1) Negotiate a smaller net. Push for a net-15, but typically it will be net-30 at the lowest.
(2) Invoice more frequently. The net terms clock doesn’t begin until your client receives your invoice. Therefore, if you deliver your entire product/service, and then deliver your invoice, you could be waiting for months or even up to a year to receive payment on something you have already expended costs on. Instead, break your product/service into milestones along the way that you can invoice for. For example, rather than one $20,000 invoice for a SAAS product that is a year in length, you can invoice $4k for initial setup, $4k for the in-person orientation, and $1k per month for license to the SAAS product.
(3) Offer incentives for earlier payment. At times, companies have been known to offer a discount on pricing for upfront payment. This strategy is really dependent on your costs of foregoing that payment. For example, some contracts for good will say 2%/10 net 30, meaning that there is a 2% discount if paid within 10 days. The reason why it’s cost-dependent is because you are in effect giving an annual discount of 36.7% to your client if you go this route (read more here: http://www.smbiz.com/sbspec385.html).
(4) Offer discounts for upfront payment. At the same time, upfront payments can be one of the best ways to finance your company’s growth. And that growth is something both you and your clients (who are investing their time in your product as well) want to see occur. In this case, it would be ideal for you to negotiate an upfront payment.