16 Sales Contract Clauses

I often hear from founders of B2B companies, especially in the early stages, about the difficulty of negotiating customer contracts. As a startup, negotiating is tough because you are not yet established or trusted in the marketplace. When a customer buys a product from your company, they are taking on risk: risk that your startup may fail, leaving them with an unsupported product; risk that your product won’t work as advertised or that it will mismanage private data, open up security holes, infringe on IP, or cause collateral damage to other critical business systems; risk that your company won’t patch bugs on time or respond to support calls when issues arise; and so on.

With all these risks, many founders and startups make the mistake of being overly accommodating during initial contract negotiations. The best approach, however, to writing a sales contract is to think of it as a system of interconnected components and levers that work together to achieve an acceptable level of risk and reward for both you and your customer. “Put everything on the table. Be open to negotiating everything as long as it’s within the acceptable boundaries. The customer’s got to give to get,” advises Mark Cranney, CRO at Signal Fx.

To help startups navigate the risk and reward trade-offs of customer contracts, I interviewed lawyers, founders, and CROs about their experiences and what they learned about winning the deal without taking on contractual risk. In this post, I look at 16 of the most important sales contract clauses and how to approach each.

Warranty and remedy clauses are your first line of defense against unacceptable risk for your company. Warranties describe what your product will do and how it will work (“conforming to spec”) as well as what your Service Level Agreement (SLA) covers. Remedies describe how you will compensate the customer if your product does not work as defined by the warranties. By clearly defining your warranties and remedies, you avoid the risk of an unhappy customer suing you for damages when your product breaks down or does not work as expected.

The next most negotiated clause in the contract is the limitations of liability clause (aka LOL). Limitations of liability set a cap on how much you, as the vendor, can be sued for. Usually, there’s a general catch-all cap and a higher super cap for specific items related to negligence, misconduct, and breach of confidentiality.

Indemnities provide an insurance policy for your customer in the event that they are sued for something related to their use of your product. For instance, if your product infringes on a third party’s intellectual property or mishandles private data, indemnities establish what your responsibility is. Damages that a customer might expect you to compensate them for can be direct, such as settlement amounts and legal fees, or indirect, such as reputational loss and business impact.

Entitlements establish boundaries around what the customer gets. It’s important to have these boundaries so that you can later upsell the customer on new features/capabilities and experiment with packaging and pricing over the lifetime of the company.

With the rise of machine learning, the ability to train models based on customer data and reuse those models across customers is a strategic capability. At the same time, customers will often refuse to allow you to use their data due to privacy and litigation concerns. You need to think carefully about what it takes to win the contract and maintain a long-term strategic capability, then have a plan for negotiating with customers who are hesitant to share their data.

At a high level, there are three types of data use agreements:

Contract term defines the length of the contract. The length of the contract term should be based on your expectation of leverage in future contract negotiations. On the one hand, your product may become more business-critical to the buyer or they may want to expand significantly, thus increasing your leverage. On the other hand, the renewal or expansion revenue from the customer may become critical to making or breaking your numbers, thus decreasing your leverage. In general, if you expect more leverage in the future, you will want to negotiate shorter contract terms.

Often overlooked, publicity is one of the more important clauses for early stage startups. Early stage companies should ask customers to participate in marketing activities, including displaying a customer’s logo in marketing materials, developing case studies and joint press releases with the customer, and quoting the customer in product testimonials. Unfortunately, publicity clauses are often the first that a sales rep will redline because they can cause friction in the sale. Luckily, there are tactics for making sure these make it into the final contract.

This clause defines the terms under which a customer can access product source code. Large customers will sometimes negotiate source code escrow clauses to protect themselves in case your company disappears or terminates a product and they need to support the software themselves. In reality, it’s very unlikely they would be able to do that, and these clauses are typically ones to avoid.

The “Most Favored Customer” clause guarantees the customer the best price the vendor gives to anyone. Apple, for example, is known to require this from vendors.

Many startups are eventually acquired. If you are acquired, what does it mean for your customers? Assignment provisions set out in advance what happens to a sales contract if you are acquired.

Customers will often want the freedom to terminate the contract for any reason. The termination of convenience clause allows them to do this. Like source code escrow and most favored customer clauses, it’s another one startups should avoid, if possible.

If an interested party makes an offer to acquire your company, a Right of First Refusal (ROFR) clause allows a customer to acquire the company if they make the same offer. You should generally say no to these types of clauses because they can significantly impact the acquisition process.

Support terms define what your customer should expect from your support team and what happens if they don’t meet those expectations. These are similar in spirit to warranties and remedies, but rather than covering the product and its capabilities, they covers the promised support around your product.

Some sales contracts have clauses so that you don’t get paid unless you meet certain roll-out or milestone requirements. Unfortunately, rolling out new technology in an enterprise is tough. There’s often legacy compatibility issues, user training, and a constant deluge of fires for IT to fight. Hinging payment on deployment is risky.

Arbitration is a process by which parties that may have otherwise gone to court instead go to a third-party neutral judge who decides on the outcome. Arbitration clauses prevent both parties in a contract from filing a lawsuit and require that they use an alternative, such as a third-party neutral judge, to resolve certain disputes. These clauses are common (and controversial) in employment contracts. More recently, they have started to appear in sales contracts to reduce the financial risk in the event of a dispute.

Pricing is one of the most important contract clauses. Nothing impacts what type of business you build and its economics as much as pricing. Too often, my partners at a16z and I observe early-stage companies underprice their offerings. Pricing is also a deeper and longer topic than I can completely cover, so here I’ll focus only on the contractual aspects of pricing — for a discussion of the full topic of pricing, check out the a16z “Pricing, Pricing, Pricing” podcast and “The Price Is Right: And for Early-Stage SaaS Companies, It Needs to Be” article.

The sooner you can put together a standard contract and a strategy for negotiating with your customers, the better. As an early startup, you may have very little leverage in sales negotiations, but thinking through your contract clauses will help you get a strategic balance of risk and reward. This won’t just keep you in business, it will also set the stage for a successful exit strategy.

Many thanks to the folks who have helped me to put this together: Sowmya Bala, Martin Casado, Mark Cranney, Patty Downey, Stacey Giamalis, John Gilman, Juleen Konkel, Peter Levine, Paul St. John, Sheena Weinberg, and Dan Wright.

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