Best Practices for Software Contracts: Protecting the Small Developer

[ryanmaynard]

Title: Best Practices for Software Contracts: Protecting the Small Developer

Disclaimer: I am not a lawyer. The information below is based on my experience and is for informational purposes only. Consult a legal professional for legal advice.

Whether you are a freelancer or you have a few employees, you are eventually going to get work with a large corporation. The power dynamic will be wildly uneven. When that happens, it is crucial to include specific clauses in your contracts to protect yourself. Here are some advanced techniques to consider:

1. Payment Terms and Milestones

• Detailed Payment Schedule: Clearly outline the payment schedule with specific milestones and deliverables. Include initial deposits, interim payments, and final payments. Get at least two methods of payment on file, like a corporate credit card and their ACH info. Include in the contract that you have the ability to attempt charging both methods multiple times in attempt to collect past due payment unless an agreement is accepted in writing stating otherwise. Get securitization like a company vehicle or property. Ask your attorney what assets are best for securitization. In our case, we do convertible shares but that's a little too advanced for this post.
• Milestone Acceptance Criteria: Define clear criteria for what constitutes acceptance of each milestone to avoid disputes.
• Late Payment Penalties: Include clauses for interest accrual on late payments. Typically, a monthly interest rate of 1-2% can be stipulated.

2. Termination Clauses

• Non-Payment Termination: Explicitly state that non-payment within a specified period (e.g., 30 days) allows the developer to terminate the contract and cease all work. You may also include things like "upon termination, there will be a reinitiating fee and newly increased contract rates at the developer's discretion". Things like this are helpful when trying to collect. Non-payment usually means they have want they want and feel it cannot be taken from them. It is in your interest to rig that trap prior to forming a contract with them. Prepare for non-payment before you've ever even spoken to the client and the odds of you collecting will soar.
• Escrow for Source Code: Consider using an escrow service for the source code. If payments are not made, the source code remains inaccessible to the client.
• Pull-the-Plug Clause: Include a provision that allows the developer to stop work immediately if payments are overdue beyond a certain threshold. You will also want your legal professional to stipulate that you, the developer, are not liable for any ancillary damages that may occur as a result of a plug-pull.

3. Intellectual Property Rights

• IP Ownership and Licensing: Clearly state the ownership of intellectual property (IP). Ensure the developer retains ownership of any pre-existing IP and only licenses it to the client. This also affects taxes in most places. Selling a service isn't taxed the way selling a product (IP/license) is. Also, upon-nonpayment you can sell your IP to someone scarier and meaner and let them collect the debts. Large law firms are great for this. They have every tool imaginable to pry money from even the most bankrupt of clients and thrive at it.
• Conditional IP Transfer: IP transfer to the client should be conditional upon full payment of all dues, but again you can just grant indefinite license if you so desire. Particularly if you plan to build a SaaS or product in a similar market.

4. Scope and Change Management

• Detailed Scope of Work (SOW): Have a detailed SOW that outlines all deliverables, timelines, and responsibilities.
• Change Order Process: Establish a formal change order process for any additional work or changes to the original scope. Ensure that all changes are documented, approved, and billed separately.

5. Dispute Resolution

• Arbitration Clause: Include an arbitration clause to handle disputes more efficiently and privately than court litigation.
• Jurisdiction: Specify the jurisdiction and venue for any legal actions, preferably in a location favorable to the developer.

6. Confidentiality and Non-Compete

• NDA and Confidentiality Clauses: Ensure strong non-disclosure agreements (NDAs) are in place to protect sensitive information.
• Non-Compete Clauses: Include non-compete clauses to prevent the client from hiring your employees or contractors for a certain period after the contract ends.

7. Performance Guarantees and Liabilities

• Limitation of Liability: Limit the developer’s liability to a reasonable amount, such as the total amount paid under the contract or a fixed sum.
• Warranty and Support Terms: Define the terms of any warranties and post-delivery support. Limit the duration and scope to avoid indefinite liabilities.

8. Project Management and Communication

• Regular Reporting: Include clauses for regular status updates and progress reports to maintain transparency and manage expectations.
• Client Responsibilities: Clearly outline the client’s responsibilities, including providing timely feedback, access to necessary resources, and decision-making authority.
• Project Communication: If it isn't in writing, or on a recording (shout out to single party consent states like TN), it never happened. Document everything and force them to reply in documentable ways like email, text, letter, or recorded call. You will need this. Better to have it and not need it, than the opposite.

9. Retention of Code and Documentation

• Documentation Requirements: Require detailed documentation of the code, architecture, and user manuals.
• Code Backup and Retention: Include provisions for regular backups and retention of code until the final acceptance and payment.

10. Insurance and Indemnity

• Professional Liability Insurance: Specify that both parties should maintain appropriate insurance coverages.
• Indemnity Clauses: Include mutual indemnity clauses to protect both parties from third-party claims arising from the contract.

11. Exit Strategy

• Transition Assistance: Define a transition period and assistance terms in case the client wants to transition to another developer or in-house team.
• Data Transfer: Ensure there are clear guidelines on data transfer, including timelines, formats, and responsibilities.

Example Contract Clauses

Payment Terms
"Client agrees to pay Developer a total fee of $XX,XXX, to be paid in the following installments: 20% upon signing, 30% upon completion of Phase 1, 30% upon completion of Phase 2, and 20% upon final delivery and acceptance. Late payments will incur an interest charge of 1.5% per month."

Termination for Non-Payment
"Developer reserves the right to terminate this Agreement and cease all work if any payment is overdue by more than 30 days. All work completed to date will be delivered to the Client upon receipt of overdue payments."

Intellectual Property
"All intellectual property rights in the developed software remain the property of the Developer until full payment is received. Upon full payment, the Client will receive a non-exclusive license to use the software."

Change Management
"Any changes to the scope of work must be documented in a change order form, agreed upon by both parties, and may result in additional fees and adjustments to the project timeline."

Dispute Resolution
"Any disputes arising from this Agreement shall be resolved through binding arbitration in [Developer's Location]."

By incorporating these clauses and strategies, you can protect your interests as a small software developer when working with large corporations.

Disclaimer: This post is based on my personal experience. For legal advice, please consult a legal professional.