How To Read A Contract For First-Time Founders
Contracts and other legal documents can be intimidating if you're not a lawyer. They're filled with so much information and fancy language it can be really hard to decipher if you're not used to them.
I like to make sure I have an understanding of the contract myself before hiring a lawyer, that way I can point out any confusing sections, points of concern, or areas where the lawyer's summary doesn't match my understanding.
Reading contracts before sending them to lawyers will get you a better bang for your buck (and you should ALWAYS consult a lawyer before signing a legal document).
I've surprised myself with how accurate I've been reading and summarizing my own contracts compared to the lawyer's summary, so I figured it might be valuable for you to see how I go about it so you can read over your own contracts.
I'm NOT a lawyer and this isn't legal advice. I'm a developer. This is just my two-cents.
Tip: Take Notes
Easy: if you see anything you don't understand or don't like, write it down. These notes will be helpful for your lawyer and will help them provide feedback or suggestions for you. If you don't write things down, you're gonna forget.
Tip: Read the Definitions
Every contract usually has a definitions section after the summary at the beginning. These definitions will help explain whatever the heck the document is talking about.
Tip: One Section at a Time
Most of the time with contracts and legal documents, each section is trying to make one point. If you can find that one point, one section at a time, you'll be golden. Each subsection is really just another level of specificity for the main part, usually outlining what happens in hypothetical situations.
Tip: Look Up Words You Don't Know
If you come across a term you don't know, look it up and mentally replace that word with the definition. For example, the term pro rata was coming up a bunch in one of my contracts. I looked it up and it was a fancy word for proportionally, so every time I saw that phrase later in the contract I mentally read it as proportionally.
This is a good way to simplify the lawyer talk.
Tip: Look Out for Dilution and Vesting
If you're signing a document regarding ownership, understand and look out for these terms. In short, dilution is how your shares are affected when new shares are issued. Do you own less? Do you get a chance to buy more shares? Make sure your contract doesn't leave room for squeezing your ownership out.
Vesting is a timeline for when your ownership kicks in. The contract will probably say you can potentially own x amount of shares. However, you don't get all of that right after signing. You may get 25% of it after signing, then 25% after a year, then another 25% the next year, and another 25% the next until you officially own all of your shares. This timeline is called a vesting schedule. Make sure it's reasonable.
Tip: Don't Skip Anything
Read every section! Even if the title doesn't sound important, if it's in the contract, it's important.
Even if you skim through looking for important words, don't skip the entire section.
Tip: Hire a Lawyer that Operates in the State of the Contract
Usually, lawyers are only licensed to practice in one or two states. If the contract is about forming a company in New Jersey, hire a New Jersey lawyer. If you try to hire an out-of-state lawyer, be prepared for the "we're not licensed yadda yadda" speech.
An in-state lawyer will be more prepared to deal with the document and will be more experienced with the state laws that govern the contract.
Tip: Be Real With Your Lawyer
Find a lawyer you like (surprisingly hard). Send the entire contract with your notes attached, including what confuses you and what concerns you. They'll appreciate your diligence and will 100% address your concerns. Your lawyer is on your side, so be real with them. Tell them how you feel about the contract. They'll either reinforce your concerns and give you next steps to address them, or put you at ease.
Contracts look big and intimidating but they're not too bad when you take it slow.
Get it done, son!