A founder’s guide to commercial contracts: what you should never sign without advice

For technology businesses, intellectual property isn’t just an asset. In most cases, it is the business.

Yet IP assignment provisions are among the most routinely misunderstood clauses in commercial agreements. The distinction that matters isn’t complicated, but it is critical:

• An assignment transfers ownership permanently.
• A licence allows someone else to use your IP while you retain ownership.

The drafting battleground that arises most often concerns the scope of what is being assigned. Broad wording such as “all intellectual property created during the engagement” is common. What founders frequently don’t appreciate is the difference between IP created during an engagement and IP arising from it. The latter can capture background technology a business developed long before the relationship began.

The other concept that matters here is the distinction between background IP (what a party brings to the table) and foreground IP (what is created during the project). In a well-drafted technology services agreement, these are treated differently. In a poorly drafted one, or one drafted entirely by the other side, they often aren’t.

Particular caution is warranted where an agreement could transfer ownership of:

• Software code or algorithms
• Product developments or enhancements
• Data models or training data
• Know-how embedded in your team
• Future improvements to existing technology

This issue arises regularly when advising SMEs that are providing IP to public bodies – IP that has often been meticulously developed and is central to the SMEs business. Often, the public body will want to own all rights in the IP being provided. In the vast majority of cases, that requirement is not genuinely necessary. That was illustrated recently when a client was bidding for defence and security related work. The commercial deal ultimately did not make sense and, following legal advice, the client rightly made the decision to walk away. The lesson: “we need to own the IP” is often a negotiating position, not a genuine commercial requirement. It is always worth asking why.

The test to apply: if this agreement were shown to an acquirer in three years, would they be comfortable that your business owns everything it needs to own? If the answer is not clearly ‘yes’, the clause needs attention before signing.

Red flag: any wording that grants another party ownership of IP “created during the relationship” without expressly carving out background IP and pre-existing technology.

Exclusivity provisions rarely cause problems immediately. They cause problems when a better opportunity emerges, and by then the business is already locked in.

The pitch is always attractive: a distributor promises increased sales in exchange for exclusivity in its territory; a customer wants sector exclusivity in return for a significant contract; a commercial partner seeks exclusive access to a platform. These arrangements may make commercial sense at the time. The question is whether the exclusivity is properly conditioned.

The provisions to examine first:

• How long does the exclusivity last and can it be terminated early?
• Is it tied to minimum revenue commitments, volume thresholds or activity obligations. Or is it unconditional?
• Does it apply to products, customers, sectors, territories, or all of these?
• Does it restrict business models the company hasn’t entered yet?

A two-year exclusivity commitment entered into during an early growth phase looks very different when the business has doubled in size twelve months later. Founders have turned down acquisition approaches, partnership opportunities and new market entries because of exclusivity obligations they signed without fully appreciating their scope.

A recent example illustrates the point well. A client entered a collaboration agreement with another party. Both parties were enthusiastic about the opportunity and convinced that nobody else could contribute what each of them would be bringing to the joint endeavour. Both were keen to lock down exclusivity for a three-year term, with a further twelve months of post-termination restrictions. Six months later, the relationship was not going well. New players had also entered the relevant market, making the exclusivity provisions look increasingly unattractive to either party. Unpicking a three-year exclusivity commitment six months in proved considerably more expensive and more damaging to the relationship than conditioning it properly at the outset would have been.

The test to apply: would you be comfortable if your best future customer, partner or acquirer saw this clause? If the exclusivity isn’t tied to meaningful, measurable performance commitments from the other side, something is being given away for nothing.

Red flag: exclusivity obligations that are not conditional on the other party meeting defined, measurable performance commitments (such as minimum revenues, volumes or activity levels) with a right to terminate if those commitments aren’t met.

Most founders understand pricing, service levels and term commitments. Far fewer read the liability provisions with the same attention. In practice, the liability clause can be the most consequential provision in a commercial agreement.

The provisions to examine:

• What is the cap on liability and how is it calculated?
• Are there carve-outs that remove certain claims from the cap entirely?
• Do indemnity obligations sit inside or outside the cap?
• Is the cap mutual or does it apply asymmetrically?

The carve-out issue is where the most significant problems tend to arise. Many agreements include indemnity obligations (e.g. for IP infringement, data breaches or confidentiality breaches) that sit outside the liability cap entirely. A founder who has negotiated what appears to be a sensible cap may not realise that the indemnity obligations are uncapped until a dispute arises. By that point, in a dispute involving alleged IP infringement, the cap provides no protection at all.

The test to apply: read the indemnity provisions separately from the liability cap. Ask explicitly whether these indemnities are subject to the cap. If the answer isn’t clear from the drafting, assume they are not.

Red flag: indemnity obligations, particularly for IP infringement or data breaches, that are not expressly subject to the overall liability cap.

Non-compete and non-solicitation clauses appear in a wider range of commercial agreements than most founders expect. For example:

• Distribution and reseller arrangements
• Strategic partnership agreements
• Investment documentation
• Shareholder agreements
• Acquisition and earn-out structures

What founders often don’t know is that, under English law, a restrictive covenant is only enforceable to the extent it is reasonably necessary to protect a legitimate business interest. A clause drafted more broadly than that is, in principle, unenforceable. Even so, the English courts have shown a willingness to sever offending parts of a clause rather than strike the whole thing out.

That matters for two reasons. First, a founder who understands this is in a fundamentally stronger negotiating position. They can push back on overly broad restrictions with legal justification, not just commercial preference. Second, it means that even a restriction signed today may not bind a party in the way the other side intends. That said, no one should rely on that without first obtaining appropriate legal advice.

The questions to ask when reviewing a restrictive covenant:

• What activity is restricted and is the definition broader than the actual relationship?
• What is the geographic scope?
• How long does it last?
• Does it apply to sectors or markets the business hasn’t entered yet?
• Is there a legitimate business interest it is actually protecting?

The test to apply: take the restriction and map it against the actual commercial relationship it is said to protect. If the scope (whether in terms of activity, geography or duration) extends meaningfully beyond that relationship, there is no legitimate justification for it. A well-advised counterparty will know this. Going into that negotiation with the same understanding puts both parties on an equal footing.

Red flag: restrictions that extend to sectors, territories or activities beyond the specific commercial relationship they are said to protect, particularly where there is no corresponding obligation on the other party.

Growing businesses focus on winning contracts. They don’t always focus on getting paid. The two are not the same thing.

Payment provisions have a direct impact on working capital, and the drafting details matter more than founders typically appreciate. A contract can appear highly profitable until it becomes clear that payment is due 90 days after acceptance, and that acceptance is controlled entirely by the other party, with no objective criteria and no deemed acceptance mechanism. There are contracts where acceptance could, in practice, be delayed indefinitely.

The provisions to examine:

• Payment periods and when they start running.
• Acceptance procedures: who controls acceptance and on what criteria?
• Milestone structures: are milestones defined objectively?
• Rights to withhold or set off payment.
• Invoicing requirements: are there technical conditions that delay the clock?
• Termination rights for non-payment.

One statutory provision that founders rarely know about: the Late Payment of Commercial Debts (Interest) Act 1998 gives businesses a statutory right to claim interest at 8% above base rate on late commercial payments, plus fixed compensation of between £40 and £100 per invoice. Contractual payment terms that attempt to override this right are subject to a reasonableness test.

This provision has real practical value. In one recent matter, a local authority had repeatedly failed over many months to pay an undisputed invoice. A letter before action was sent claiming the sum due, plus interest under the Act and fixed compensation. The total amount claimed significantly exceeded the original invoice value. The letter had the desired effect and all amounts were paid swiftly.

The test to apply: read the payment clause and ask who controls when the clock starts. If the answer is entirely the other party, with no objective criteria and no longstop, the payment terms are not what they appear to be.

Red flag: payment obligations that depend on subjective acceptance criteria controlled entirely by the other party, with no deemed acceptance mechanism and no longstop date.

Christopher Perrin is a highly experienced solicitor, with in-depth experience gained from working in roles which include: Strategic Procurement & Outsourcing Leader at one of the Big 4 professional services firms; Head of Legal for Technology & Broadcast Operations at one of the UK’s biggest broadcasters; and significant top-tier private practice experience.