Episode 12: Matt Weill on contracts

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May 31, 2017

Our guest today is Matt Weill, who is my attorney as well as a good friend.

Matt began his legal career as an Associate at Skadden Arps and then he became a partner at the firm of Golenbock, Eiseman, Assor Bell & Peskoe.

His legal practice is primarily focused on business and transactional matters for a wide range of clients, including private equity and venture/growth capital funds and their related portfolio companies and investments.

Matt  routinely counsels entrepreneurs, startup and growth-stage companies and investors in connection with the structuring and formation of new business ventures, private placements, capital raising transactions, and agreements among founders.

Matt has extensive experience working with independent professionals, and for Umbrex he has prepared three contract templates – a contract between an independent professional and a client; a contract that an independent professional can use to engage a subcontractor, and a non-disclosure agreement.

If you email me at unleashed@umbrex.com, I will send those files to you. Please note: these are just a starting point and don’t constitute legal advice – you should get an attorney yourself to customize for your particular situation. That said, these templates can jump start that process and save you time and money.

In the show today, Matt walks us through the contracts, explaining the key things we should watch out for. He also answers questions submitted by listeners, including steps you can take to get paid on time, how to negotiate non-circumvention clauses, and why you should read the fine print of the indemnity clause.

HIGHLIGHTS

Will Bachman: Tell me a bit about your firm and the type of work that you do. 

Matt Weill: My firm is Golenbock Eiseman Assor Bell & Peskoe. We’re a boutique, full-service law firm in Manhattan. We have about 50 attorneys covering all the major practice areas: corporate, intellectual property, real estate, employment, litigation, tax.  My practice consists largely of smaller growth companies, independent professionals, and some private equity M&A work. I represent independent consultants in their engagements with larger corporate clients as well as on the company side — I see both sides. 

You’ve prepared three model documents that we’ve uploaded to our website for people to reviewa consulting agreement that independent consulting professionals would use with their clients, a template for independent professionals who want to engage a subcontractor, and a non-disclosure agreement. Why do contracts always include the address? 

If one party needs to deliver notice or communication to the other party, it will do so at a listed address. There needs to be some way for each side to know where to communicate with the other side. 

What else needs to be in every contract? 

It’s important to be clear in your statement of work as to what the scope of the services will be. It’s in everyone’s best interest in terms of expectations. A consulting agreement  should contemplate an initial statement of work, and if there’s follow-on work or a new project for that particular client the same agreement would continue to roll forward and form the basis of the standard terms and conditions for the engagement. The particulars of any future project would be described on a new statement of work, which you can attach or sign off as an additional SOW that’s subject to the original consulting agreement. 

If you’re going to have a fixed term, you want your end date to be sufficiently far in advance that it allows you to complete all the services. Another way to structure these arrangements is to have a master services type of agreement that continues to roll forward and doesn’t necessarily have an end date until one party terminates with some prior written notice to the other party.  

Can you negotiate the terms of a client’s standard contract? 

Absolutely. You should read the standard form contract that you’re provided, and if there are provisions that you view as problematic or not applicable to your particular engagement, companies are generally receptive to reasonable comments — some more so than others. You shouldn’t feel bad about asking for changes to a client’s standard form. 

What levers does an independent consultant have for getting paid by clients?  

You should be clear in your contract as to what the payment terms are. Some people will try to include the concept of penalty interest if an invoice remains unpaid for an extended period of time, but in my experience, larger corporate clients will push back on that. If it’s a unique situation where the engagement requires significant upfront time or expenditures, you could consider asking for a retainer upfront. The same goes for reimbursement of expenses. If you are expecting reimbursement for regular expenses as part of the engagement, it’s important for you to provide for it in your contract. 

You include language spelling out that the consultant is an independent contractor. Why? 

It’s important to be clear upfront that you are not the client’s employee. There’s a multi-part test that the IRS and Department of Labor use that looks to the level of control that the client exerts over your activities. Typically, if you’re working for multiple clients and not unique to one particular person or entity, and if you’re able to do things on your own timeline using your own equipment, those are good factors which suggest that you’re an independent.  

If you’re doing all of your work for one client for an extended period of time, you should talk to your lawyer or your accountant to make sure there’s no adverse consequence to you. From a tax standpoint, if you’re an independent contractor, payments to you will generally be gross payments and you will be responsible for paying taxes, where if you’re an employee, payments to you would be subject to withholding and employment-related taxes.  

What type of things should be included in a non-disclosure agreement? 

Clients are entrusting you with their secret and proprietary important information, and as a condition they will expect that you keep that information confidential and not use it other than in the context of the services that you’re performing for them. But it’s important to clearly define what constitutes confidential information. It’s not every piece of paper that you receive from your client. It should not include information that was already in your possession or in your control before you started working for the client. And if you independently receive something from someone else, that shouldn’t constitute confidential information.  

Courts generally enforce confidentiality obligations, and confidentiality obligations can extend indefinitely. There is a legitimate business purpose to preserving confidential business information. The way that you mitigate that risk on the contractor’s side is that you have all of the customary exclusions from the definition of what constitutes confidential information in the first place. 

What is indemnification and why is it important? 

Indemnification is an obligation by one party to hold another party harmless for losses, liabilities, or expenses that the second party may incur as a result of something. There’s usually a standard around what the indemnification applies to, and that’s typically a negotiable point. 

It’s a risk allocation issue, and has the effect of shifting responsibility for third party claims, as well as attorney’s fees and costs associated with defending most third party claims from one party to another.  

It should really be tied to bad acts. It shouldn’t just be that you, the consultant, are indemnifying the client for any losses the client may sustain related to the services you’re performing for them. That’s not a fair standard. It should be if you’re grossly negligent, or engage in some type of willful misconduct or fraud, or other bad acts in connection with providing the services.  

How does that relate to limitation of liability? 

Limitation of liability is also about capping the exposure of the consultants to the company. It says, “In no event is either party liable to the other for lost profits or punitive special indirect, incidental, exemplary, or consequential damage related to this agreement even if the party was advised of the possibility of those damages.” These are categories of damages that exceed the actual out-of-pocket costs to the aggrieved party. We’re trying to tie it to actual out-of-pocket costs and the fees that you were paid under the contract. If you only were paid $50,000 under an engagement, you shouldn’t have potential exposure beyond that $50,000.  

What’s your suggestion for when clients’ contract requires an insurance requirement that is out of reach for an independent consultant? 

I’ve seen clients be flexible and other that aren’t. I think understanding up front what their insurance requirements are and getting that level of insurance is probably the best proactive way to address that issue. 

What’s your advice on negotiating non-circumvention clauses when you’re known in an industry? 

There’s a question about enforceability of that type of restriction. The legal test is whether or not you’re protecting a legitimate business interest, whether there’s adequate consideration for the covenant, and whether the restrictions are reasonable in duration and scope. It really depends on the context. There are different levers that you can pull here. The duration of the obligation is an obvious one. If the intermediary is requesting two years or 12 months, you can try to push back and ask for six months or nine months or something like that. If they’re trying to exclude you from an entire industry, in my view that’s unreasonable if you’re in the business of providing independent contractor services and your expertise is in that particular industry.  

You need to review these types of restrictions carefully. 

What does an independent contractor need to include in a subcontractor agreement beyond the basics?  

If you need to bring in a subcontractor, it’s important that they understand what obligations you have to your client. You’re on the hook for the subcontractor’s performance, so you need to make sure that they’re adhering to whatever standards you’ve agreed to. On fees and expenses, you don’t want to be in a position where you need to pay the subcontractor before you’ve been paid by the client, so you include terms saying that once you’re paid, you’ll pass through the applicable portion of that fee.  

You need an early termination fee in case the client wants to terminate early. The key points to negotiate are what fees are payable upon a termination. Sometimes it’s easy and clear because it’s calculated on an hourly basis or a weekly basis, but if the engagement is deliverables based and you haven’t yet gotten to a particular deliverable, you need to think about what the appropriate termination payment should be. Also, if it’s not working out with the sub for whatever reason, you want to preserve flexibility to remove that person and bring in someone else.  

Are there things that independent consultants should include in their contracts surrounding intellectual property rights? 

Typically, a client would expect that the work product you create for them would be owned by them. That’s normally not an issue unless you’re a contractor with unique expertise, or you’re bringing some of your own preexisting intellectual property to the engagement, or you’re creating a deliverable that you want to be permitted to use with other clients or in your own business. If any of those situations apply, you need to take a careful look at those clauses. 

What should an independent contractor look for when choosing an attorney?  

Getting referrals from people who you trust is a very important first step, and if it’s a referral from someone in your industry, all the better. I think it’s important to interview multiple attorneys: you don’t want to overwhelm yourself and interview five or six, but maybe you can narrow it down to two or three.  

You want to know whether they work with people like you. A lot of attorneys will say that they can do anything, and to some extent that’s true. But I think getting someone with industry-specific expertise is helpful, and someone who works with clients of your type and your size is helpful too. Responsiveness is a very important quality in an attorney, so press on that in your questions and let them know it’s really important to you to get questions answered in the same day, then see what their answer is. Fee structure is important, understanding what the hourly rates are, what their billing practices are, whether you’d be working principally with a partner or with an associate, and how they staff their projects.  

 Lastly, I think meeting in person is good, even if you only go in and meet for 15 or 20 minutes. Seeing the person face to face, how their demeanor is and whether you interact well with them.  

What’s the best way for people to get in touch with you? 

 I can be found on my firm’s website, which is www.golenbock.com. The website includes a short bio of me as well as well as all the other attorneys, and some information about the firm more generally. My personal email is mweill, M-W-E-I-L-L, @golenbock.com. My phone number here is 212-907-7317, and I’m always happy to answer anyone off questions that anyone may have.