What Founders Get Wrong About Their First 10 Contracts

The Ten Contracts No One Warns You About Continued...

What follows is the list of the ten contracts that quietly shape early-stage companies, what founders and growing companies most commonly get wrong about each one, and what the cost of the mistake actually looks like when it surfaces. The list isn't exhaustive—every business has its own legal pressure points—but if you are reading this before you have legal counsel actively reviewing your agreements, this is where to focus.

1. THE CO-FOUNDER AGREEMENT

The most consequential contract in any company is the one between its founders, and it is also the one most often handled with the least care. The pattern is consistent: two or three founders agree on equity splits over coffee, sketch out a few terms in a Google Doc, and either sign nothing or sign a template they downloaded from the internet. The contract that defines who owns the company they're about to spend years building gets a few hours of attention.

Co-founder agreements deserve their own treatment, and Lex & Lever has published a separate guide on this topic. For purposes of this list, the short version: the equity split is the easy part. The hard part is the vesting schedule, the protective provisions, the buy-sell mechanics, the rules for what happens when one founder wants to leave or be removed.

What founders most often get wrong: skipping the conversation about what happens when something goes wrong. Co-founder relationships fail at roughly the same rate as marriages. The agreement is the prenup.

2. THE FIRST CUSTOMER AGREEMENT

Your first paying customer is a milestone. It is also a moment when most founders and early-stage companies accept terms they would never accept later. The pattern: the customer sends over their standard procurement contract or master services agreement. The founder, eager to close the deal, signs more or less as-is. That signed contract becomes the template for the next ten customers, who are presented with the same terms because that's what your first customer accepted. By the time you realize the terms are bad for you, they are encoded in your business.

What to actually read for

• Indemnification scope. The customer is asking you to protect them from third-party claims. The questions are which claims, capped at what amount, and whether the customer has reciprocal obligations. "Mutual indemnification" is what you want.
• Limitation of liability. What is the cap on your financial exposure if something goes wrong? Aim for liability capped at fees paid in the 12 months preceding the claim, with narrow carve-outs.
• IP ownership. If the customer's template says you assign all work product to them, you may be giving away your platform, your methodologies, or your reusable code. The right structure: customer owns their data and custom deliverables; you retain ownership of your underlying technology.
• Termination for convenience. Can the customer terminate the contract at any time, for any reason, with 30 days' notice? If so, the multi-year contract you're celebrating is actually a 30-day contract.
• Auto-renewal. Some customer templates renew automatically; some require affirmative renewal. The first protects your revenue; the second protects the customer.
• Most-favored-customer clauses. If the customer requires that you offer them the lowest price you offer any other customer, you have just constrained your future pricing strategy.

3. THE INDEPENDENT CONTRACTOR AGREEMENT

The first developer who builds your product. The designer who creates your brand identity. The marketing consultant who runs your launch campaign. Most early-stage companies are built by contractors before they have employees, and the contracts with those contractors determine who owns the work.

Two questions you must answer before signing

The first question: Are they actually a contractor? Federal and state law (and the IRS) have specific tests for whether a worker is a contractor or an employee. Misclassification is a meaningful liability. The tests focus on control: who decides when, where, and how the work is done; whether the worker has other clients; whether they use your equipment.

The second question: Who owns the work? In the United States, work created by an independent contractor is owned by the contractor by default, not by the company that paid them. If you want the company to own the work, you need a written assignment of intellectual property in the contractor agreement. Without that assignment, the developer who built your product owns the code. The designer who created your logo owns the design.

The IP assignment paragraph

Every contractor agreement should include a present-tense, irrevocable assignment of all intellectual property created by the contractor in connection with the work. The phrase "Contractor hereby assigns to Company all right, title, and interest in and to the Work Product, including all intellectual property rights therein" is a reasonable starting point. If your contractor agreement doesn't have this language, the company doesn't own the work.

4. THE NON-DISCLOSURE AGREEMENT

Founders and business leaders sign and request NDAs constantly. NDAs are also the contract people most often sign without reading, because they all look the same. They are not all the same. The differences usually come down to four questions:

• One-way or mutual? A one-way NDA protects only the disclosing party's information. A mutual NDA protects both parties.
• What is "Confidential Information"? Narrow definitions cover only marked or written information; broad definitions cover anything disclosed in any form. Broad definitions are easier to enforce.
• How long does the obligation last? NDAs typically have terms of two to five years. Some have perpetual obligations for trade secrets.
• What are the carve-outs? Standard carve-outs include information that was already public, was already known to the receiving party, was independently developed, or was disclosed under legal compulsion.

A practical note: NDAs are often refused by sophisticated counterparties. VC firms generally do not sign NDAs to look at pitch decks. In those situations, share less than you think you need to in order to advance the conversation, and save the genuinely sensitive information for after the contractual relationship is established.

5. THE OFFICE LEASE OR COWORKING AGREEMENT

Real estate is one of the largest fixed costs most companies incur, and lease agreements are designed by landlords to favor landlords. Business leaders often sign leases without recognizing that they are entering into multi-year financial commitments with significant personal exposure.

The personal guarantee question

Most early-stage commercial leases require a personal guarantee from the founder. This means that if the company defaults on the lease, the landlord can pursue the founder personally for the full balance owed. For a five-year lease at $5,000 per month, that is a $300,000 personal liability.

Personal guarantees are not always required, and even when they are, they can often be limited. A "good guy" guarantee, for example, limits the founder's liability to amounts owed up to the date the company surrenders the space—capping personal exposure at typically three to six months of rent rather than the full lease term.

Ask explicitly about these structures. Landlords will not volunteer them.

Coworking agreement traps

• Auto-renewal at the end of an initial term, with notice requirements buried in the fine print
• Significant price increases at renewal that the company is locked into
• Personal guarantees from founders even for month-to-month memberships
• Restrictions on what kind of business activities can be conducted in the space
• Mandatory arbitration in jurisdictions inconvenient to the company

6. THE SaaS TERMS YOU CLICK THROUGH

Every modern company runs on dozens of SaaS subscriptions. Each one comes with terms of service that someone on the team almost certainly clicked through without reading. Most of those terms are unremarkable. A few of them quietly contain provisions that matter.

What's actually in those terms

• Data ownership. Who owns the data you upload to the service? Most reputable providers say the customer owns its data, but some grant themselves a broad license to use the data for any purpose, including training AI models.
• Data location and security. Where is your data stored? What security standards does the provider maintain? If you are subject to regulatory requirements (HIPAA, GDPR, financial services regulations), the provider's standard terms may not give you what compliance requires.
• Termination and data export. If you cancel the service, can you export your data, in what format, and for how long after termination?
• Liability and indemnification. Most SaaS terms cap the provider's liability at fees paid in the previous 12 months. If the provider's product fails in a way that costs you a customer or causes a data breach, the provider's exposure is limited.
• Changes to terms. Most providers reserve the right to change their terms at any time, with continued use deemed acceptance.

Practical advice: maintain a list of every SaaS service that touches sensitive customer data, financial information, or proprietary intellectual property, and review those terms at least once a year.

7. THE FIRST EMPLOYEE OFFER LETTER AND AGREEMENTS

The transition from contractors to employees is a meaningful one. Employees come with payroll taxes, benefits obligations, employment laws, and a different set of contracts. The agreements you put in place with your first employee become the template for every subsequent employee, which means the mistakes compound.

What needs to be in writing

Every employee should sign:

• An offer letter documenting the role, compensation, start date, and at-will employment status
• A confidentiality and IP assignment agreement (PIIA). This ensures the company owns the work the employee creates.
• A non-solicitation and confidentiality agreement, if appropriate to the role and jurisdiction
• Equity grant documentation, if equity is part of the compensation package

State-specific considerations

Employment law varies dramatically by state. California prohibits most non-competes entirely. New York limits non-solicits in many circumstances. Several states require specific language in offer letters or have rules about wage payment timing. If you have employees in multiple states, you cannot use a single template—you need state-specific employment agreements for each jurisdiction.

8. THE FIRST INVESTOR DOCUMENTS

If you raise capital, the documents that govern that capital are some of the most important your company will ever sign. Convertible notes, SAFEs (Simple Agreement for Future Equity), priced equity rounds—each instrument has its own mechanics, and each contains terms that compound across future rounds in ways founders often don't anticipate.

SAFE and convertible note pitfalls

• Pre-money vs. post-money SAFEs. Y Combinator changed the standard SAFE from pre-money to post-money in 2018. Post-money SAFEs dilute founders more aggressively than pre-money SAFEs at the same valuation cap.
• Stacking SAFEs. If you raise on multiple SAFEs at different caps over time, the cumulative dilution at conversion can be significantly more than founders expect.
• Most-favored-nation clauses. Some SAFE investors require an MFN clause that lets them upgrade to better terms if you offer better terms to a later investor.
• Pro rata rights. Investors often request the right to participate in future rounds to maintain their ownership percentage.

Side letters

Investors—particularly larger or more sophisticated ones—often request side letters that grant them rights beyond what other investors receive. Side letters are negotiable. The first time a founder sees one, they often sign without realizing that the rights granted will need to be honored across all future rounds.

9. THE BANK ACCOUNT AND PAYMENT PROCESSOR AGREEMENTS

Two contracts that growing companies rarely think of as contracts: the agreement that opens the company's bank account, and the agreement with the payment processor that takes credit cards on behalf of the company. Both are typically signed without negotiation because they're presented as standard. Both contain provisions that have caused companies meaningful pain.

Bank account agreements

Banking agreements typically include language giving the bank broad discretion to freeze, hold, or close accounts. For most companies, this language is invisible. For companies in industries the bank later becomes uncomfortable with (cannabis-adjacent, crypto, certain types of consulting work), the language becomes the basis for sudden account closures with limited recourse.

If your business is in a category that has historically had banking difficulties, ask the bank explicitly about their policies for your industry before opening the account. Diversify across multiple banks if you can.

Payment processor agreements

Payment processors (Stripe, Square, Braintree, and similar) operate under terms that allow them to hold funds, freeze accounts, or terminate the relationship. Companies should:

• Read the prohibited business activities list carefully and confirm their business model is permitted
• Maintain a backup payment processor for critical operations
• Understand the payout schedule and reserves
• Document any communications with the processor's risk team in case of disputes

10. THE PARTNERSHIP OR RESELLER AGREEMENT

Sometime in the first year of operations, many companies are approached by a potential partner. Sometimes it's a reseller who wants to sell your product to their customers. Sometimes it's a complementary service provider who proposes co-marketing. These conversations almost always start with an enthusiastic call and end with a contract.

Partnership and reseller agreements are where growing companies most often give away things they didn't realize were valuable, in exchange for what turns out to be less than they expected.

Specific traps

• Exclusivity. The partner often asks for exclusivity in some defined market, channel, or category. Exclusivity is the most expensive thing you can grant.
• Territory restrictions. Some partnership agreements restrict where you can sell or operate.
• Most-favored-customer pricing. Partnership agreements often require that the partner receive the best price you offer any customer.
• IP licensing scope. If the partnership involves the partner using your IP, the scope of the license matters enormously.
• Termination consequences. When the partnership ends, what happens to existing customers, ongoing obligations, and shared IP?

WHAT TO ACTUALLY DO ABOUT THIS

Reading this list is one thing. Operationalizing it is another. Most early-stage companies cannot afford to have a lawyer review every contract they sign in the first year. But there is a middle path between "sign everything without review" and "send every contract to counsel."

The four-question screen

Before signing any contract, ask:

1. What is the maximum financial exposure under this contract?
2. Does this contract assign or license intellectual property?
3. Does this contract create exclusivity, restrict your business, or grant the other party most-favored-customer rights?
4. What happens at termination?

If the answer to any of those questions raises a concern, that's a contract that warrants legal review. The cost of review is almost always less than the cost of getting one of these provisions wrong.

When to bring in counsel

There is a common pattern among successful founders and leadership teams: they hire a fractional general counsel earlier than they think they need one, and they consider it one of the highest-leverage decisions they made. The reason is that the value of legal counsel is highest when it prevents mistakes, not when it cleans them up.

Lex & Lever works with founders and leadership teams as fractional general counsel—handling the contracts that shape growing companies before the mistakes become expensive. If you are about to sign your first major customer agreement, raise your first round, hire your first employee, or enter your first partnership, that is the moment when legal counsel pays for itself most clearly.

Schedule a Founder Consultation

If you are evaluating any of the contracts described in this guide, or if you want a structured review of the agreements your company has in place, schedule a 30-minute consultation.

Visit lexandlever.com or email hello@lexandlever.com