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- A vendor contract is a legal agreement that clearly lays out the provisions and conditions surrounding the service(s) which will be provided by a vendor to a startup.
- A vendor contract is needed when your startup is either the beneficiary of some kind of service(s) delivered by a vendor or when your startup itself is offering services to people and/or businesses. The contract defines the relationship between your startup and the vendor by delineating the scope, capacity and duties of the vendor.
- Types of vendor contracts include lump-sum, cost disbursal and time and materials.
- Before writing the contract, set down the contract terms. Leave some room for both your startup and the vendor for flexibility. For instance, the deadline that the vendor has to adhere to for submitting their deliverables could be a range instead of a rigid date. Similarly, you can also be a beneficiary of such flexibility when it comes to paying your vendor invoices.
- When writing a vendor contract, you should understand why it needs to be written to establish the parties to the contract, employ precise and straightforward language, document what both parties will bring to the table, specify expectations for performance, define your rights and ownership of important data and properties, establish the relevant dates, provide for follow-up service, and signature lines.
- This template for a vendor contract might be helpful to you. It claims to be a “fair and equitable agreement” for both parties.
What is a vendor contract?
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A vendor contract is a legal agreement that clearly lays out the provisions and conditions surrounding the service(s) which will be provided by a vendor to a startup. It specifies details regarding the work that will be done by the vendor, including:
- Date of service
- Provisions for contingencies, if any
A vendor contract should not be executed without the statement of work. Then, after the startup and the vendor sign the contract, it goes into effect.
How are vendor contracts important/relevant to startup founders?
Vendor contracts, like many other kinds of contracts, are quite relevant to early-stage founders. This is because founders in the early stages have to make careful decisions in many areas (e.g., product development, customer acquisition, accounting details, etc.). How legitimate these decisions actually are often depend on how well you can understand and negotiate the contracts that stipulate the specifics of the relationships that you have with your vendors. This is also the reason why learning how to negotiate contracts (including vendor contracts) is essential for becoming a successful founder.
A vendor contract is needed when your startup is either the beneficiary of some kind of service(s) delivered by a vendor or when your startup itself is offering services to people and/or businesses. What the contract essentially does is define the relationship between the startup and the vendor by delineating the scope, capacity and duties of the vendor.
As most founders have likely already experienced to some degree, there are a lot of different factors needed for the smooth functioning of a startup’s day-to-day operations. These factors could come in the form of services as diverse as accounting solutions, customer success software, raw materials for manufacturing of goods, etc. And that is precisely where vendor contracts become significant. They act as a legal instrument to enforce the performance of the vendor as per stipulated terms and conditions. These contracts also make sure that you make payments on time.
Interestingly, vendor contracts -- when properly negotiated -- come in handy for startups that fail to gather traction and generate profits, thus being forced to cease operations. In cases of startup failure, many founders end up defaulting on the fees that they owe to vendors. While this may seem insignificant at the time, defaulting on vendor payments can lead to civil, and in some cases, criminal legal proceedings. As a founder, it would be beneficial to write and negotiate an airtight vendor contract that has the legal capacity to provide for contingencies such as business failure.
Moving beyond the basic terms, conditions and provisions, vendor contracts are also important as they serve as a statement of work. They dive deep into the services to be provided by the vendor, including the appropriate deliverables and timelines. Individual contracts have to be executed with individual vendors to lay the groundwork for good service.
Considering the financial constraints of most startups, the inclination is to go with the most affordable vendor services. While this is understandable, it is a common mistake. Instead, the quality of the service being offered is also a valuable factor to weigh. That’s where vendor contracts come in -- they can obligate the vendor to provide optimum services. Therefore, you should negotiate a contract that guarantees not only good deals but also optimum services.
Examples of Contracts
A few examples of vendor contracts are:
You can check out more types of vendor contacts here.
Some quick tips
While negotiating with vendors and drafting vendor contracts, it pays to consider the following pointers:
- The key to many successful startups has been great vendor relationships. Like most other business ties, these relationships can be instrumental to helping you scale and succeed. So focus on building healthy, strong and reliable relationships with your vendors.
- Leave some room for both your startup and the vendor for flexibility. For instance, the deadline that the vendor has to adhere to for submitting their deliverables could be a range instead of a rigid date. Similarly, you can also be a beneficiary of such flexibility when it comes to paying your vendor invoices.
- Ensure that the contract does not involve the provision of goods/services which are not strictly legal, as this would render the entire agreement invalid.
How to write a vendor contract?
Understand why it should be written
It is not necessary for all contracts to be written down -- in fact, every state maintains its statute of frauds, which delineates the types of contracts that need to be written down. This often includes contracts related to real estate, debt, goods worth more than $5000 and contracts with time frames spanning more than a year.
It’s generally a good idea to execute a vendor contract in writing since written contracts uphold their validity better in court.
Establish the parties to the contract
Which parties are involved in the contract? Identify them by properly naming them. This could either mean including their complete legal names or the business names under which your startup and the vendor are registered.
Employ straightforward, unambiguous and precise language
When writing the contract, using details that are straightforward, unambiguous and precise is the best way to ensure that all parties are able to fully grasp the terms of the contract. When such precise language is used, the final draft of the contract should clearly explain the particulars of the goods/services that your startup is contracting.
Note down what both parties will bring to the table
What and how will your startup and the vendor contribute to the engagement? The contract should specify each party’s contribution. For example, the amount of money to be paid to the vendor, as well as the means of payment, should be explicitly mentioned in the contract.
The explanation of the vendor’s services should be in sync with what was discussed between the two parties during preliminary discussions. If you wish to get more precise/comprehensive, you can also include an addendum wherever needed.
Specify expectations for performance
What standards of performance do you expect the vendor to adhere to while offering their goods/services to your startup? The contract should specify any performance standards that you have in place for the vendor. Are there any fines or penalties when the vendor falls short? If yes, include those too, as clearly as possible. For example, you might want the contract to include a clause requesting the vendor to redo work that is not up to par or to compensate the vendor with a reduced amount that is commensurate with the reduced quality of their performance.
Specify your rights and ownership of important data and properties
While writing vendor contracts -- particularly when dealing with tech vendors -- it is important for founders to establish their ownership of digital properties (e.g., patents, copyrights, and other IP) and licenses. Founders should also specify their rights to their information and permits. Start the dialogue with your vendors (especially the technology-related vendors) regarding the steps they will take to safeguard your data and digital properties and how they will deal with damages incurred from a breach.
If you get any written assurances in this regard, you could include them in your contract through an addendum.
Establish the relevant dates
Founders should ensure that the contract provides not just the exact date(s) of service but also the date on which the contract is signed. In the case of a situation with extended service, you should include the date on which the service starts as well as the date on which the service ends. For situations when there is no clear end date, you should include a method of terminating the contract. This could take the form of a clause that states that goods/services will be provided up to and until the point when either party wishes for the contract to be terminated. Such a clause should typically request a 14-day service termination notice given by either party.
Provide for follow-up service
Prudent founders know the importance of keeping their future needs in mind, especially in cases where there is a possibility of needing some kind of follow-up service. This often tends to happen when changes or updates need to happen in the future. For instance, if you’re hiring a web/mobile/technology vendor, there should be a provision in the contract for them to take care of software and staff training updates.
Provide designated space for signatures
The contract should include an area for signatures and the date of signing for all parties involved. A signature block usually includes space for a signature and the corresponding name in print. If the parties are businesses (such as your startup and the registered business of the vendor), then the signature can be given by suitable representatives.
Vendor Contract Template
This template for a vendor contract might be helpful to you. It claims to be a “fair and equitable agreement” for both parties.
Though it is not always necessary to have a vendor contract in writing, it is recommended to do so to uphold the legitimacy of the contract in court. Before writing the contract, set down the contract terms. You can do this by assessing your needs, negotiating, waiting for the acceptance of the offer, specifying the goods/services being provided and defining the means and amount of the payment to be given to the vendor. The contract should include a provision for accommodating future changes to the contract by mutual agreement, and, lastly, you should have an attorney review the contract if possible.
Learn more with us
- How to handle vendor contracts?
- How to build a successful relationship with your vendors?
- What to include and what to avoid in a vendor contract?
- Tips to manage vendor contract negotiations
Access more guides in our Knowledge Base for Startups
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