Startups rely on independent contractors for a multitude of things, from graphic design to coding parts of the company’s software product. However, startups and independent contractors sometimes enter into relationships with one another without properly protected themselves.The following are a couple of key areas startups and independent contractors should focus on to protect themselves.
First, and this goes without saying, you need a contract. If you’ve met up through a freelancing website, such as Elance or Guru, there may already be terms of service in place that partially define your relationship. However, in all likelihood, the site’s terms probably aren’t enough to fully protect both parties, so they should take the time to negotiate their own contract that fully defines their relationship.
Speaking of defining the relationship, the second area startups and independent contractors should focus on developing is a good project description. A good project description should VERY clearly define each of the elements the client/startup is looking for, and also need to be exclusive, so there is little room for discussion or confusion in the event that the client/startup asks for something else. From the startup’s perspective, if there is something you know in the beginning you want included in the project, make sure it is included in the project description, otherwise the contractor may have grounds to claim that your request carries an additional fee! Finally, when it comes to project descriptions, if the project is long or complicated enough both parties should consider setting milestones and review points, so that errors can be fixed as they pop up — I’ve seen startup/contractor relationships go south very quickly when the finished product was delivered with a myriad of problems.
A third area that often gets overlooked by startups and contractors is handling the IP ownership rights. Startups often forget to have the contractor assign intellectual property rights to the startup, or at the very least grant broad license rights, as the circumstances may dictate. And where contractors assign the IP rights, they may forget to carve out exceptions for project elements that they may intend to keep and use in future projects, or retain a license to display the work in their portfolios. It is also important to ensure that an IP assignment doesn’t take effect until payment is received for the project. Stemming from the issue of IP assignment is negotiating out the warranties and liabilities that arise from the use of intellectual property. Startups should have contractors warrant that all intellectual property provided by the contractor for the project is owned or may be used by the contractor and the startup; if both parties can agree to it, the contractor can indemnify the startup against third-party IP infringement in the event that project material provided by the contractor does result in liability for the startup. Other product warranties and liabilities not arising out of liability can be negotiated by the parties; however, at a minimum contractors should disclaim warranties and liabilities in the event that their deliverable is misused, used in a way not intended, or is modified by the startup.
Finally, unless the project is short and/or simple, independent contractor agreement should also specify a kill fee — this is a fee that the client/startup pays in the event it has to cancel the project before it is finished. This protects both parties: the contractor is paid at least something for the work they perform, and the startup is protected from breach of contract or quasi-contractual relief claims by the contractor.