I only need a contract when we exchange money…right?

I've heard from sooo many entrepreneurs that they don't need a contract because there's no money on the table (yet). And then they launch into their very excited spiel about how this potential client, partnership, pro bono project, or latest launch idea is going to put their company on the map and ONLY THEN will they need a contract. Because that's when money is in play. 

Unfortunately, I've seen this go wrong too many times. I'll be up front with you. Most of the time, the contract had nothing to do with it, but when I see something promising fail or get stolen because a contract wasn't put in place, it makes me want to scream and cry and beat my fists on the floor (and it's not even my loss). Money is not the determining factor for when you should put insist on a contract!

Despite having a law degree (don't hold it against me - I'm a business person like you, I swear), I take a very practical approach to contracts. Contracts are words on paper (or these days, a screen) until someone goes to court.  Really though, contracts are more than a legal tool. They are a business tool, even just as words on a paper.  I talk about this a lot, and I've written a whole blog post about it called What is the value of a contract (if you can't afford to sue anyway)?   When it comes to using contracts as a legal tool, however, money is not what it's all about.

Let's consider the NDA (Non-Disclosure Agreement), which is a contract used to protect private information about a business from being shared with the general public. The NDA is one of the most commonly used contracts in business, and it does not involve the exchange of money!  It involves only the exchange of information.  An NDA never mentions money and it never tries to put a monetary value on the information being shared. It exists solely to prevent information from being shared without permission.  So why do you need this contract, if there's no money? Well, consider that you are creating a new, innovative product. You don't want your competitors to know what you are building, how you are building it, what you sales plan is, or anything else about it.  But in order to build the product, you have to share some of that information with the manufacturer you are working with to produce the product. Doesn't it make sense to have some assurance that the manufacturer won't tell your competitors everything and try to get better business from them? What if you need to speak to several potential manufacturers about making this new product? Well, the more people you share information with, the more you lose control of that information.  So you put NDAs in place with each one to protect yourself.  And realistically, those manufacturers will be happy to have a mutual NDA so that anything they share with you about their equipment, special manufacturing processes, or business model remains confidential too. See, no money involved…but potentially a lot of money lost if those competitive advantages are not protected.

Now, you might be thinking that there's not much you can do if there is a breach of that NDA anyway. Suing is expensive, and once the information is out, it's out there forever and your business is ruined.  There is some truth to this, but with no contract at all, you have zero options. At least with a  contract in place you have some ways to pursue regaining control of your business and getting some financial compensation.

The NDA is the most common and simplest example, but there are many other contracts that don't involve the exchange of money. Like the NDA, they do protect the exchange of something of value. With the NDA it's information. With a Joint Development Agreement, it's the intellectual property in a new invention.  Remember, you have business assets that have more long term value than a single exchange of money with a single client or supplier. Protect them, and protect them well.