Having an Agreement Signed? Consider Whether You Have Consideration

If you’re an entrepreneur who’s DIY-ing an agreement with another party, you should always make sure that you have consideration for the agreement.

What’s consideration, you ask? Consideration is defined by Black’s Law Dictionary, Third Pocket Edition, as:

“Something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promisee; that which motivates a person to do something, especially to engage in a legal act. Consideration…is necessary for an agreement to be enforceable”

In simple terms, consideration is something you give, or give up, or promise to do in exchange from the thing or things the other party is giving, giving up, or promising in the agreement. For example, if you sign a contract to purchase raw materials for your product from a supplier, the supplier is promising to deliver the materials stated in the agreement; the consideration is the money you pay for those supplies (or the promise that you’ll pay the money). However, consideration can be anything; let’s go back to the previous example of the purchase agreement with the supplier, but this time you have a cause of action to sue the supplier — instead of paying cash for the raw materials, you agree not to sue the supplier. Your forbearance of your legal right to sue the supplier serves as the consideration for the purchase agreement.

In most agreements that a startup will sign, the consideration is built-in; obviously you are going to “pay” something for the things you get for your company, as you will insist on “getting paid” for the things you do for others. However, entrepreneurs sometimes miss the fact that there is no consideration for their agreement; this often occurs in agreements between the startup and a party with which it already has a relationship. The usual scenario is where a startup owner asks his or her employers — already employed by the company — to sign a non-disclosure agreement. Generally, without some sort of consideration, the agreement is unenforceable. In most states, mere continued employment-at-will is insufficient to serve as consideration (though there are a few exception); however, a pay raise, promotion, or even expanded duties that include access to confidential information (necessitating the NDA) may serve as sufficient consideration. Another usual scenario where consideration is missed is amending an existing agreement. In general, with the exception of sales or leases of goods, separate consideration is necessary to amend an agreement — and again, different states have local exceptions.

When you’re signing or amending an agreement, you need to ensure that your agreement has consideration or that the local laws don’t require it.