Startups
7 Contract Mistakes That Kill Startups
Startups fail for many reasons—bad product-market fit, running out of money, team conflicts. But one silent killer that rarely makes headlines: contract mistakes. One bad agreement signed in the early days can haunt a company for years, or kill it entirely.
Here are 7 contract mistakes we've seen destroy otherwise promising startups.
⚠️ Mistake #1: No Founder Agreement
The #1 startup killer. Co-founders start building without defining equity splits, vesting schedules, roles, or what happens if someone leaves. When conflict arises (it always does), there's no framework to resolve it.
Fix: Get a founder agreement before writing a single line of code. Include vesting (typically 4-year with 1-year cliff), decision-making authority, and exit scenarios.
⚠️ Mistake #2: Giving Away IP to Contractors
You hire a developer to build your MVP. The contract doesn't include an IP assignment clause. Surprise: they own the code, not you.
Fix: Every contractor agreement must include explicit "work for hire" language and IP assignment. Have a lawyer review before signing.
⚠️ Mistake #3: Personal Guarantees on Business Contracts
Landlords and vendors often ask founders to personally guarantee contracts. If the startup fails, they come after your personal assets.
Fix: Negotiate to remove personal guarantees, or at minimum, cap them. Never guarantee more than you can afford to lose.
⚠️ Mistake #4: Exclusivity Clauses with Early Customers
An excited first customer asks for exclusivity in their industry. You agree. Later, you realize you just locked yourself out of 80% of your market.
Fix: Resist exclusivity. If absolutely necessary, make it narrow (geographic, time-limited) and expensive.
⚠️ Mistake #5: Signing VC Terms Without Understanding Them
Liquidation preferences, anti-dilution clauses, participating preferred—these terms can wipe out founders even in a "successful" exit.
Fix: Hire a startup-savvy lawyer to review term sheets. Understand how different exit scenarios affect founder payouts.
⚠️ Mistake #6: Auto-Renewing SaaS Contracts
You sign up for a tool with annual billing. It auto-renews without notice, charging you ₹5 lakh when you're broke.
Fix: Track all contract renewal dates. Negotiate for 30-day cancellation windows, not 90-day.
⚠️ Mistake #7: No Exit Clause in Partnerships
You enter a "strategic partnership" with a big company. The contract has no exit clause. Now you're stuck in a bad relationship with no way out.
Fix: Every partnership should have termination clauses for convenience (30-60 day notice) and cause (breach remedies).
The Common Thread
All these mistakes share one thing: founders signing contracts they didn't fully understand. In the excitement of early traction, it's tempting to just sign and move on. But contracts are legally binding—and ignorance isn't a defense.
Don't Let a Contract Kill Your Startup
Upload your contracts to Contract Shield and catch dangerous terms before you sign.
Analyze Your Contract →Startup Contract Checklist
- ✅ Founder agreement with vesting in place
- ✅ IP assignment clauses in all contractor/employee agreements
- ✅ No personal guarantees (or capped ones)
- ✅ Clear termination rights in all partnerships
- ✅ Track all auto-renewal dates
- ✅ Lawyer review before signing anything over ₹5 lakh