By: Kurt M. Watkins
Mastering Your Service Agreement
Most startups offer services rather than goods to their customers. These types of professional services can range from things like designing, consulting, software, or data management. When a business engages another business for the first time, there is usually only a small relationship between the two, such as a referral or an initial consultation. In these scenarios, each side is eager to receive what they bargained for, but unsure if the other side will ultimately deliver.
These businesses rely on two interconnected things: 1) trust between the parties, and 2) a clear understanding of the roles and responsibilities on each side. Therefore, in order to both build trust and to protect the business, each side needs one document that lays out the expectations and what happens if expectations are not met. This type of document is called a Master Service Agreement (“MSA”) and can be an important tool for any startup or small business looking to work with or offer their own services to others.
Know Your Clauses
A startup, and especially those start-ups engaging larger companies, typically may not have much bargaining power to structure the agreement as favorable as they would like. However, there are several clauses or sections which can be negotiated or tweaked so that if the deal does not work, the startup is still protected. These sections are usually titled “Termination”, “Indemnification”, “Limitation of Liability”, and for the software providers, “Data Security”. Most startups read a standard form of these sections and generally think that those sections are acceptable or are told that they cannot be changed. However, if the deal does not work as planned, not understanding these sections can have dire consequences for a smaller business.
For instance, a startup may not be able to terminate the contract, may be on the hook for thousands of legal fees or expenses, may wind up having to provide continued support for free, or may end up paying for services they did not need. Thus, having a full understanding of what these sections mean is essential to a startup’s long-term success and its development of customers or vendors.
MSA and Statements of Work
Equally important to the MSA are the attached “Statements of Work (“SoW”). An SoW defines what specific work will be done under an MSA. For instance, a designer might be retained by a software company to redesign its application. Once that work is complete, the company may then engage the same designer to design a website. Each of these projects will be described in an attached SoW to make clear what the time lines are, how and when payments will be made, and when that specific SoW ends, among other items.
When negotiating the MSA and the specific SoWs, the first thing a company should consider is whether which one takes precedent over the other if things go wrong. In the event of a conflict, clearly mapping out which document should be referred to over the other may help keep the parties involved on the same page. While there is no uniformed best way to handle this, the language must be carefully carved out to exhaust any and all potential outcomes that may happen from the parties working together. All in all, it will depend on the startup’s needs in that specific relationship.
While these contracts tend to be 10 pages or more, dry, and highly standardized, understanding a how the sections apply to a startup’s engagements either as a vendor or as a customer is important. Determining how they can be negotiated, revised, and crafted may not only prepare and insulate the startup from unforeseen circumstances, but may also build up the startup’s reputation as a fair and reliable partner.