5 Contract Traps That Sink SMBs (and How to Avoid Them)

1. The NDA That Doesn’t Match the Data

‍At IBM, we had to balance agreements across a broad set of businesses. A startup might only need to protect one product line, but a large company needs very different NDA terms depending on the stage of the material. Early-stage research sometimes requires protection lasting ten years or more, while data already in production might only need one or two years.

‍Lesson: NDAs should align with the type of data, not a one-size-fits-all term.

‍2. Forgetting Work Made for Hire

Many small and mid-sized businesses leave this out of their contractor agreements. That means the developer, designer, or consultant legally owns the work they created — not the company that paid for it. While I haven’t seen a contractor sue, the risk is real, and it can scare investors during due diligence.

‍Lesson: Always include a clear “work made for hire” or IP assignment clause in contractor agreements.

‍3. Ninety-Day Payment Terms

‍Extended payment terms are poison for startups. Cash is already out the door, and now you’re stuck tracking multiple unpaid invoices for three months. This problem is even worse when you’re in ongoing transactions where expenses and receivables overlap.

‍Lesson: Push for 30 days or less. If that’s not possible, build in deposits or milestone payments to keep cash flow steady.

‍4. Jurisdiction Surprises

‍That boilerplate “governing law” line at the end matters. New York and Delaware law are generally business-friendly and predictable. California, by contrast, has additional requirements around employment agreements, contractor classification, and certain warranty obligations. A founder who signs a California-governed contract without realizing it could find themselves bound by rules they never anticipated.

‍Lesson: Negotiate for your home state or neutral ground. Avoid clauses that force you into jurisdictions with heavier compliance burdens.

‍5. Hidden Clauses That Change Everything

‍Sometimes boilerplate is more than just fine print. I have seen license agreements where clauses on bankruptcy, termination, or IP transfer had huge impacts down the road. For example, transferring IP into a holding company or going through a restructuring can trigger rights you did not intend to give away.

‍Lesson: Do not assume the back pages are harmless. The “standard” terms are often where the biggest risks hide.

‍Final Thought

‍Startups don’t need more contracts — they need the right contracts. By aligning NDAs with the data, securing IP from contractors, keeping cash moving, choosing the right jurisdiction, and watching the fine print, founders can avoid pitfalls that cost far more to fix later.

Gary Lipson, Esq.

New York attorney focusing on intellectual property, licensing, and strategic transactions.

This article is for informational purposes only and does not constitute legal advice.