Common Contract Management Mistakes to Avoid

Scaling any company in the software as a service (SaaS) industry is tough. As you get started there are a lot of things that can go wrong which will cause trouble further down the road. One of those things is how you manage your sales contracts. The are several easily avoidable mistakes in contract management. Effective contract management is crucial for the smooth operation of startups and it gets more and more important the larger you grow. However, managing contracts isn’t always straightforward, most startups fail at it in their early stages and try to get things in order later, it’s easy to fall into certain common pitfalls. Here are six key mistakes that SaaS startups should avoid for more efficient contract management.

1. Inadequate Contract Clarity

   One of the biggest mistakes is not defining terms and conditions in clear, understandable language. Standardizing your startup’s contract language from the start is very important. This doesn’t just apply to your contracts but also to how your sales team and legal team speak to customers about your contracting process. Ambiguity can lead to misunderstandings, disputes, and potential lawsuits. It’s vital that every provision, including payment terms, scope of services, termination clauses, data protection, and intellectual property rights, are clear and well-articulated.

2. Neglecting Key Stakeholder Involvement

   It’s not uncommon for SaaS startups to entrust contract creation to a single team or individual. However, excluding key stakeholders—like the product, sales, and legal teams—from the contract creation process can lead to a lack of essential input and perspectives. Contracts effectively cover every product and service you provide, and often your sales team will deviate from what is standard during their negotiations to get something across the line. Involving all relevant parties ensures that the contract covers all areas and aligns with the business objectives.

3. Ignoring Scalability

   Startups often negotiate contracts that are ideal for their current situation but ignore future growth. A contract should be flexible enough to accommodate the evolution of your SaaS business. Anticipating contracting scalability needs can prevent contractual roadblocks that could hinder growth. One of the hardest things to get right from the beginning of your contract scalability is capturing the data that is in your signed PDF contracts so that you can ask questions about the data more easily without having to read through pages and pages of contracts to find what you need.

4. Lack of Compliance Monitoring

   SaaS contracts often have strict compliance requirements. Startups need to implement mechanisms for monitoring and documenting compliance, such as auditing rights and data security provisions. These requirements should be documented and your product and engineering teams should be aware of these. Failing to adhere to these requirements can lead to legal penalties and damage the startup’s reputation.

5. Ineffective Risk Management

   Risk is inherent in every contract. A common mistake is not having a risk management plan in place. Startups should identify potential risks, like customer churn, non-payment, or data breaches, and develop a strategy to mitigate them. You should have an understanding of the cumulative effect of the risk that you’ve agreed to. Understanding the level of contract liability your company has agreed to or can agree to is an important part of this. This proactive approach can save considerable time, money, and stress in the long run.

6. Poor Contract Lifecycle Management

The contract lifecycle doesn’t end once a contract is signed. It requires continuous management—monitoring deliverables, renewals, renegotiations, and terminations. Without a robust contract lifecycle management system, startups risk missing crucial deadlines, contract non-compliance, or lost business opportunities when it comes to renewals. Understanding if and when a customer needs to renew is one of the most important parts of scaling your business and growing your annual recurring revenue.

Avoiding these common mistakes in contract management can help SaaS startups manage contracts more effectively, align contracts with business objectives, and position their business for growth with less risk. Always remember, that each contract is an opportunity to foster strong relationships with clients and partners. Therefore, it’s imperative to handle it with the care it deserves.

Remember that these are guidelines, not rules set in stone. Every SaaS startup is unique and may face different challenges. Every company will have different risks when it comes to mistakes in contract management. Yet, by being aware of these potential pitfalls and how to avoid them, startups can set themselves up for success from the beginning. Let’s dig into two of the common contracting areas that cause issues for companies as they grow.

Contracting Scalability Issues

Scaling your contracting is a very hard thing to do. A lot of companies, especially those selling to mid-market or enterprise customers get stuck in repeated manual management of their contracts. Some of the most common issues that relate to SaaS companies when trying to scale their contracting processes are:

1. Inefficient Manual Processes: When a SaaS company is small, manually drafting, reviewing, and managing contracts can be manageable. However, as the company grows, this approach can become time-consuming, error-prone, and inefficient. You need to understand how to move away from this manual work and automate as much of it as possible. You’ll never be able to automate the need for human intervention from a legal perspective but you can look to automate a lot of things around it.

2. Inconsistent Contract Language: Without standardized contracts, terms and conditions can vary significantly, causing confusion and potential legal issues as a company scales. Understanding what can be negotiated and tracking what changes have been made becomes very important at scale.

3. Lack of Oversight: It’s challenging to keep track of deadlines, renewals, or changes to contracts as the number of contracts increases. Understanding how to automate notifications without creating an overwhelming number of notifications is almost an art form.

4. Compliance Management: As companies grow, they must comply with more laws, regulations, and contract obligations, making compliance management increasingly complex.

Here are some common tools companies use to address these challenges:

1. Contract Management Software: Tools like Contract Sent provides a centralized location for all contracts, helping to avoid mistakes in contract management and manage the entire contract lifecycle, from creation to renewal or termination.

2. AI-Powered Contract Analytics: Tools like Kira Systems or LawGeex use artificial intelligence to analyze contracts, extract key information, and highlight potential issues.

3. Contract and NDA Template and Clause Libraries: Standardized contract templates and clause libraries can ensure consistency, improve efficiency, and reduce legal risks. They can be used in conjunction with contract management software.

4. Integration Tools: Integrating contract management with other business systems like CRM (Salesforce), ERP (SAP), or accounting software (QuickBooks) can streamline the contract process and improve oversight.

5. Compliance Management Tools: Software like ComplySci or LogicGate can help SaaS startups manage and track their compliance obligations, reducing the risk of non-compliance as they scale.

These tools can provide solutions to the challenges of scalability, yet it’s critical for SaaS startups to evaluate each tool carefully, considering their specific needs, goals, and resources. Effective scalability isn’t just about adopting tools; it also requires strategic planning and proper implementation.

Understanding contracts as part of due diligence for raising

Due diligence is a place where all of the hard work that you’ve put into contract management takes shape and you are rewarded (or punished) for your systems. It is a critical step for venture capital (VC) investors as they evaluate potential investments in startup companies. In the context of reviewing sales contracts, the due diligence process typically follows these general steps:

1. Collecting All Relevant Contracts: The first step is to gather all the startup’s sales contracts. This includes agreements with current and past customers, as well as any draft contracts that might be in negotiation.

2. Contract Review: The VC’s legal team will then review these contracts. They are looking for things like:

   • Contractual obligations: What are the startup’s obligations under these contracts?

   • Payment terms: How and when does the startup get paid? Are there any unusual payment terms that could affect cash flow?

   • Duration and termination clauses: How long do these contracts last, and how can they be terminated? Are there any automatic renewal clauses?

   • Intellectual property: How are intellectual property rights handled? Does the startup retain ownership of its IP?

   • Liability and indemnification: What are the startup’s liability and indemnification obligations under these contracts?

   • Compliance with laws and regulations: Are the contracts compliant with relevant laws and regulations? This is particularly important for SaaS startups, which often deal with data privacy and security regulations.

3. Risk Assessment: After reviewing the contracts, the VC will assess the associated risks. This involves determining whether any contractual obligations could hinder the startup’s growth or expose it to legal or financial risk.

4. Validation of Business Model: The contracts review also helps validate the startup’s business model. The terms and conditions in the contracts, the duration, the renewal rate, the churn rate, etc., all can give a good perspective on the viability and scalability of the business model.

5. Reporting: Finally, the VC will prepare a due diligence report, outlining their findings from the contract review. This report will inform the VC’s decision on whether to proceed with the investment.

It’s worth noting that this is a high-level overview and the specifics of the due diligence process can vary based on the investor, the startup, and the industry. All of that contract management and organization work that has been put in will act as pre-due diligence and make your life a lot easier. It will ensure their contracts are in order and mitigate any potential issues between signing a term sheet and getting the money in the bank.