Corporate & Securities Law

The Contract ROI Trap

By Ryan Roberts

Several weeks back, 37signals asked “Employment Contracts: What are they good for?” on Signal vs. Noise. Basically, they questioned the value of their employment contracts since they have never had an employment dispute:

“Why have we become so dependent on lawyers to control every relationship inside our companies? Why is ?just in case? the default answer when asking questions about contracts? It sounds more like insurance than legal counsel. And the premiums are sky high.”

I get it. No one likes to pay for anything without receiving a quantifiable ROI.

For example, I’ve worn my seat belt, bought cars with airbags, and paid for car insurance since I was 16. But I’ve never had an accident, moving violation, or even a parking ticket. Where’s my ROI?

But should I ditch my seat belt and/or car insurance because I’ve never been in an accident?

I am lucky that I haven’t gotten into a car accident. Who knows when and if my luck will run out? Also, my lack of tickets and accidents could also mean I’m just a really cautious, alert driver. I suspect 37Signals is just a really good employer, and maybe they have been a bit lucky to avoid employment-related issues thus far.

The best way to prevent employment issues is to install good employment practices (i.e. be a good employer). But if the shit hits the fan, you’ll be much better off with a great employment contract. Much like you’d rather have insurance, an airbag, and your seat belt on if you get into a car accident.

I don’t counsel new startups to vest their founders shares so that I can increase my “insurance premium” charge (and for what it’s worth, I don’t charge any more or less for drafting a stock purchase agreement with vesting or fully-vested shares). I counsel new startups to vest their shares since I’ve seen plenty of startups fail because their shares didn’t vest.

And I’m guessing 37signal’s lawyers have seen many clients go through painful employment-related disputes.

(Disclaimer: The author of this post gets paid to draft contracts.)

Full post as published by The Startup Lawyer on May 10, 2010 (boomark / email).