Sales Contracts Overview
Special thanks to Danielle Hedden for collaboration in developing this resource. For more information or office hours with Danielle, see her Operator Network profile here.
Contract management is an integral part of the sales cycle. Developing a process around creating, approving, and renewing sales contracts will dramatically decrease your time to close and improve your renewal process. This guide will cover the basics of sales contracts, why they’re important, and how to work with legal to enhance your contract management process.
What Are Sales Contracts?
A sales contract is a binding agreement between a company and a client. It ensures the delivery of your product or service(s) in exchange for payment. From the initial contract request and approval through renewals, amendments, and expirations, a strong sales contract process will ensure your company is maximizing its sales cycle and providing a quality customer experience.
Why Are Sales Contracts Important?
Sales contracts are the foundation of successful partnerships. Whether it's a small-scale transaction or a large-scale purchase, all companies can benefit from a structured contract process.
Effective contract management can offer several key benefits:
- Increasing the predictability of your company’s business transactions, earnings, and revenue margins
- Minimizing risk and protecting your company’s interest in the event of a disagreement with a customer
- Helping to acquire more customers and increase sales velocity and volume
Most Common Types of Sales Contracts
Sales contracts provide protection and clarity to both the company and customer. There are many types of sales contracts, but the following are the most common:
General Sales Agreement
A written agreement between you and the customer specifying the necessary information to sell your product to the customer. This information includes (parties involved, how the services are being delivered or implemented, liability terms, etc.
Order Form
A standard ordering document that lists the products or services a customer is buying from your company. It includes any special terms related to the purchase and references MSA standard link terms or an executed MSA. Once the form has been accepted and signed by both your company and the customer, it becomes a binding agreement.
Master Service Agreement (MSA)
An agreement signed by you and the customer that sets expectations for an ongoing service or a long-term business relationship. It serves as a framework for future transactions between you and the customer and helps ensure both sides have a clear understanding of their roles and responsibilities.
You can see an example of business terms used in an MSA here.
Professional Service Agreement (PSA)
Generally used when a customer wants to hire a highly skilled consultant with specific qualifications, high-level experience, or certain technical capabilities. It lays out general terms and conditions between you and the customer, and a separate document called a Statement of Work outlines the objectives, deliverables, and timeline of the project. PSA can be used in conjunction with a MSA to help assist the customer with the use of the service purchased.
Statement of Work (SOW)
An agreement that outlines the scope of work and deliverables for a project or service.
Note: A PSA covers more general terms and is open-ended and a SOW is not. SOWs should be specific and changes need to be made through change orders.
Change Order Form
A document used to modify or amend an existing SOW.
Master Partner Agreement (MPA)
Typically used when onboarding strategic partner relationships. The MPA sets out general terms and conditions of the partnership and includes exhibits to specify the type of partner relationship (reseller, systems integrator, training, etc.).
Elements of a Sales Agreement
A strong sales contract is straightforward, reduces risk, and ensures a positive outcome for the company and customer. The main components of a well-structured sales agreement include:
Parties Involved
Details about the buyer and seller, such as names, addresses, and contact information.
Payment and Term Details
The terms of the service/product, any applicable renewal terms (i.e., automatic, notice period) , the due date of payment, late payment fees, and tax responsibilities. All fees are typically set forth in the applicable Order Form and/or SOW.
Description of the Product or Service
The scope of the product or services that are being delivered, including the license grant and restrictions, documentation and user guides, and any applicable support and maintenance. The documentation also describes technical and operational measures the company takes to protect customer data and can vary by product.
Delivery
How the seller will provide the product or service, including any applicable support or warranty terms (you can see examples of what types of support and warranty terms may apply in the MSA example above).
Risk Allocation Terms
Outlines liabilities, indemnities, or other risks involved and the responsibilities and obligations of your company and the customer.
Confidential and Proprietary Rights
Limits the distribution of confidential or proprietary information, including non-public data. Some customers may require a Non-Disclosure Agreement (NDA) prior to engaging in more in-depth discussions with the company during the sales cycle.
Resolution
Describes how the buyer and seller will resolve any disagreements, including governing law, jurisdiction, and venue if necessary (see MSA example for more context).
Contract Management
Most startups don’t have a well-tested process for moving an interested customer from contract request to signing. Without a proper process, the timeline for a signature can take much longer than intended, putting the entire sale at risk. To mitigate these delays and streamline the experience for the customer, we recommend implementing a structured contract management process from Day 1.
In addition to streamlining timelines, contract management supports an effective renewal process, ensures proper documentation and compliance, and creates a tight working relationship between legal (inside or outside) and the sales team.
The Contract Lifecycle
The sales contracting lifecycle closely resembles the sales lifecycle, moving from a contract request to renewals and expansion.
Pre-Onboarding
Contract Request
The customer requests an agreement for your product or service.
Creation
Drafting and sending the contract to the client.
Negotiation and Approvals
The back-and-forth process of redlining and discussing the terms of the contract including obtaining all necessary approvals.
Signature & Storage
Once the contract is finalized, it's sent to the customer for signature.
Onboarding
After the contract is executed, store the document in a CLM (referenced below) or organizational tool that’s visible to cross-functional teams so they can properly onboard the customer.
Post-Onboarding
Once a new customer is onboarded it is an ongoing obligation to manage, renew, and keep up with changes to the contract.
Renewals
Periodically, contracts should be reviewed to add any new compliance or regulatory requirements as well as ensure both parties are continuing to receive value from the agreement.
Add-Ons
During any term or renewal period, you and the customer can extend the term or add more or new products to the existing contract.
Develop a Contract Management Process
Have a contract management process that's clearly outlined for sales, cross-functional teams, and anyone involved in executing sales contracts. Building contract guidelines will allow you to set and manage expectations about the process early on with customers.
Note: You will likely need to work with outside or in-house counsel to set up this process. They will have more experience and insights to ensure compliance.
Outline Your Contract Management Flow
To efficiently manage your sales contracts, it’s important to first identify the types of sales contracts your company will typically manage and the specific processes and requirements that are involved in each type of contract.
Next, map out the steps involved in the contract management process for your company, from initiation to execution to renewal or termination (you can use the contract lifecycle section above as a starting point). By outlining this process, you can identify and address any bottlenecks or inefficiencies
Determine Your Stakeholders
Determine all of the individuals and teams that will be involved in the contract management process, including sales, legal, finance, etc. Clearly define the roles and responsibilities of each team or individual involved. This will ensure everyone knows what is expected of them and can effectively contribute to the process.
Track and Monitor All Sales Contracts
All contracts should be easily accessible and organized in a repository or database. It is ideal to invest in a contract lifecycle management system (CLM) that integrates with your existing CRM even if just using basic functionality.
The main benefits of having a CLM are:
- Improved Efficiency: A CLM system automates many of the manual tasks involved in contract management, such as document creation, routing, and approval. This can help reduce cycle time and improve overall efficiency.
- Increased Visibility: A CLM system provides a central repository for all of an organization's contracts, making it easier for teams, particularly as you grow and hire more people, to access and track the status of contracts.
- Better Collaboration: Allows for more collaboration and communication between sales and legal, enabling faster decision-making and closing contract deals.
- Reduced Risk: Minimizes risk and errors by making sure the latest contracts have been reviewed and signed.
Existing sales CRM may already include CLM capabilities, and you can upgrade to a more robust version as you scale.
While a formal CLM is the ideal choice for teams with a consistent sales pipeline, for earlier stage companies it’s still recommended to use some organizational tool (CRM or project management tool) and upgrade to a CLM as you run into inefficiencies.
Create Templates and Resources for Your Teams
Have templates, FAQs, playbooks, and training in place to give team members tools and guidelines to engage with customers and address customer needs and expectations.
In your later stages, you can include sales contract training and materials in the initial sales onboarding as well as continue to provide ongoing training to those teams.
Below is an example outline of what to include in your training materials:
- Type of Commercial Contracts: Includes all relevant agreement types and when used
- Master Subscription Agreement template (“MSA”): Discusses the use case that falls under the MSA and include a chart for sales to easily determine if this is the correct agreement type for their customer
- Order Form and MSA Process, Including:
→ Order Form Review: This is a critical stage in the process that can reduce time-to-close drastically. For order form review, train your sales team to reference the MSA standard link terms included in the Order Form when a customer requests the agreement for review.
→ MSA Request and Approval Process
→ MSA Redline and Negotiation Process
→ MSA Execution Process
→ MSA Email Templates
→ Standard MSA Business Term
→FAQs for Customer - Constantly Modify and Amend your Process to Reduce Cycle Time: Iterate on your process and see where you can revise and eliminate friction.
Common Challenges to Anticipate
Every stage in the contract lifecycle has a set of unique but predictable challenges. As you build your company’s contract process, develop measures that can be taken to address each of these challenges BEFORE they come up in client conversations.
Clients Want to Use Their Own Contracts
It’s common for larger companies to attempt to gain leverage in negotiations by sending their own contracts developed by in-house counsel instead of using your agreements. Part of this is risk mitigation, and part of this is trying to leverage more favorable terms. It is important to equip the sales team with talking points to explain how using the customer's contract will create more risk for the customer and provide unnecessary delay (you can include this language in email templates and training materials referenced above).
Ensure that your contracts are developed well before the client requests the documents. Work with your legal team to build easy-to-navigate contracts that can be shared before deal terms are finalized.
Specific Industries May Require Additional Terms
Depending on the customer industry; customers may need certain security certifications or specific language included in the contract. They may also require a different type of license grant or a different type of agreement than anticipated, which may cause a longer negotiation and approval process.
While it might not be possible to get ahead of highly specific contract terms, it’s important to try to build contract playbooks that address the common needs of clients by target industries (i.e., govt, healthcare, NGO, etc.).
Lengthy Approval Times
Contract negotiation times will vary by customer and industry; some contracts can take as long as 18 months, while others can take as little as a week. The important thing is to invest in your contract process and collect data about typical timelines by customer type. This will help your sales team to set expectations and effectively anticipate and manage redlines and areas of pushback.
Getting Started Before Contracts Are Signed
There will be times when a customer is in a rush to purchase and begin their project and there is not enough time to negotiate the agreement as intended.
In this scenario, you can prompt the customer to purchase the minimum amount necessary with the minimum term allowed under the standard MSA link terms included in the Order Form to ensure both you and the customer will come together quickly to negotiate a new MSA prior to the next purchase.
Contract Management Best Practices
Act as if You're a Public Company
Avoid side deals and follow the outlined contract guidelines. Compliance issues can result in delays and roadblocks for a potential IPO or acquisition down the line. Make sure your contract database is built out and always ready for an audit.
Ensure Collaboration Between Sales and Legal
Create a two-way relationship with sales and legal. The more the two are intertwined, the more you can drive growth.
Measure Your Progress
Identifying areas in your contract lifecycle that are prone to delays and analyzing how much revenue your contracts generate will help make your contract process more efficient. Here are a few metrics to keep track of when first developing your contract management process:
- Renewal Rate: The percentage of customers who renew their services. This is an essential metric for tracking customer retention.
- Total Contract Value (TCV): How much a contract will be worth to your company over the course of the contract’s duration.
- Time to Close: Tracking how long it takes from the contract request to execution. This will help identify pain points and friction in your contract workflow. Can also provide metrics on time to close by size of deal, company size and/or industry. These metrics can be shared in your contracts process, guidelines, and training to set expectations with the sales team on average time to close.
Scaling the Legal Function
In the early stages, creating agreement templates, outlining your contract process, and closing deals may require working with outside counsel.
When leveraging outside counsel, make sure they have a direct line of communication with relevant internal teams to learn about your specific business and products. This may involve building a relationship with your sales leadership, CFO, and overtime in-house counsel.
Once familiar with your product or service, they can create various centralized contract playbooks to be utilized by teams to help expedite the process. They can also generate additional agreement templates, a contract repository, email templates, and internal sales and customer facing FAQs to help negotiate with customers.
What to Look for in Third-Party Counsel
You may want to work with the same firm that helped incorporate your business. Another option is to start with a firm that is known for dealing with sales contracts, like DLA Piper or Baker McKenzie.
Lightspeed has a list of lawyers that many portfolio companies have worked with over the years that can be found here.
Bringing Legal In-House
While outside counsel may help with early support, they can often cause unnecessary roadblocks in the sales contracting process. Hiring an in-house counsel can shorten cycle times and create tighter integrations with the sales team resulting in a more efficient deal process and a higher customer close rate.
When to Hire In-House
Here are some indicators that you would benefit from bringing your legal team in-house:
- Your primary customers are large enterprises.
- The amount you're spending on outside legal support exceeds the amount for an experienced in-house counsel. The goal is to make better decisions faster which an in-house attorney is much more capable of achieving.
- You’re anticipating an accelerated increase in the volume of transactions and want to make sure you are able to meet demand.
In addition to contract volume, if your company is larger than 100 employees and the sales team is continuing to grow then an in-house team is likely needed to provide bandwidth and support demand.
What to Look for in Your First Legal Hire
When hiring a General Counsel, look for a GC with corporate experience at a startup or fast-paced company. While they should have the knowledge to help the company navigate other areas of risk, their main focus should be supporting the sales engine in closing deals and establishing processes for developing your legal team as you grow.
Sales & Legal Partnership Over Time
In an ideal partnership, sales is empowered to manage new client agreements with very little legal involvement. The legal team can provide this flexibility and independence to sales by creating tactical information and tools to help them negotiate with the customer, such as pre-approved or fallback terms, FAQ pages, guidelines on contracts process, sales email response templates, etc. Legal should also run regular training on contract terms and processes.
The goal is for sales and legal to work collaboratively, getting ahead of extensive redlines and changes and anticipating roadblocks. This close partnership will lead to a smooth and straightforward approval process.
Here are some common challenges that can arise when sales and legal teams work together on contracts, and some ways to overcome these challenges and improve collaboration.
Templates & Resources to Build Over Time
Contract Repository
Early startups can streamline their contract management by implementing a contract lifecycle management system or creating a contract database. This will provide an internal, centralized repository for all contracts and ensure visibility.
Contract Playbook
A contract playbook lists the terms and conditions of typical contracts and provides the legal team with guidance on alternative or fallback provisions and any applicable approvals required. Playbooks are critical in ensuring the legal team can work independently, reducing delays and friction during negotiations.
A good contract playbook provides negotiation guidance for each term in the contract including potential customer issues, information/background on what term means and why it is important, alternative language/fallback clauses and required approvals.
You should create separate playbooks for various agreements and templates (MSA, MPA, PSA, DPA, Order Form for Product and Business Special Terms, etc.).
Agreement Templates
Have your outside counsel or legal hire create agreement templates and playbooks early on to provide consistency across contracts, reduce contractual risk, financial or otherwise.
