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Avoiding Unpaid Partnerships: Best Strategies to Ensure Payment
In the complex world of business relationships, the question of whether to formalize agreements with contracts often arises. Especially when it comes to partnerships, joint ventures, or ongoing professional relationships, the decision to have a contract in place to ensure you get paid is a crucial one. While legal counsel frequently advocates for written contracts, there are scenarios where the costs and benefits need careful consideration. In this article, we will explore the factors that can guide your decision and introduce a cutting-edge approach that’s emerged in the realm of contracts in 2023.
The Essence of Business Relationships
Whether you are considering a partnership, a joint venture, or a sales rep relationship, the question remains: Is having it in writing crucial? While many lawyers will tell you that every agreement should be documented in writing, it is essential to understand that not every business relationship warrants this approach.
The Cost-Benefit Analysis
When pondering whether to invest in a written contract, it’s essential to weigh the potential financial gain against the cost of drafting one. Let’s consider a scenario: if having a lawyer draft a contract costs $1,000 and the potential benefit of the relationship is $3,000, with equal risk, does it truly make sense to allocate a significant portion of your potential earnings to a contract? This is where a nuanced assessment is required.
Factors to Consider Before Drafting a Contract
1. Leverage in the Relationship
Having leverage means you hold a certain power or advantage over the other party. If you are providing services that the other party regularly requires, this creates natural leverage. Therefore, if you have leverage, your chances of receiving payment are far higher than if you simply submit a product and wait for cash to arrive. This implies that you might not need to have a formal written contract.
2. Reputation and Integrity of the Other Party
Knowing the other party can give you a sense of security. If they are family or a well-established company with a solid market reputation, the chances are they’ll pay. On the other hand, startups or entities with little to no assets or reputations might pose a higher risk. Therefore, you might think about whether you actually need a contract depending on their likelihood of paying and whether having a written contract has an impact on that.
3. Amount of Money at Stake
If significant sums are at play, it is more justifiable to have your contract in writing. Smaller amounts might suffice with informal agreements like an email outlining the terms.
The Pitfalls of Online Templates
Turning to online contract templates can be tempting. But remember, these templates often come with standard terms that might not always apply to your unique situation, so resorting to generic online contract templates isn’t advisable. The essence of a contract lies in capturing the unique terms both parties have agreed upon, not to force-fit a template. To this end, customization is key.
The Power of AI in Contract Drafting
2023 has brought in a revolution. Platforms like ChatGPT, Claude AI, and Lama are changing how small businesses approach contract drafting. These AI tools can help you outline basic terms, initiate discussions on clauses, and prompt you to consider crucial aspects you might overlook. AI can provide a more customized approach than generic templates, although they aren’t a replacement for a specialized attorney.
When using AI for contract drafting:
- Feed Detailed Information: Engage in a dialogue with the AI tool of your choice. Detail the context, parties involved and key terms. The more specific you are, the better the contract.
- Engage in Dialogue: Ask the AI about potential missing terms or other considerations and suggest any additional clauses or factors to consider.
- Review: Always review any contract drafted by AI. Remember, even though AI tools are advancing rapidly, running the draft by a legal professional remains a best practice.
However, while AI has come a long way, especially with the advancements of GPT-4, it still has its limitations. It’s recommended to run any AI-drafted contract by an attorney, especially if the stakes are high.
To ensure a paid partnership or any business relationship, consider the nature of the relationship, the stakes involved, and the parties’ reputation. If in doubt, or if the risks are high, it is always best to consult with a legal professional. In cases where hiring an attorney to craft a contract is impractical due to the transaction’s scale, turning to AI-powered platforms offers a middle ground. For small business owners seeking to establish some legal framework, this approach holds promise. While AI can provide an intermediary solution, nothing replaces the expertise and insight of a dedicated attorney.
Do You Need a Contract to Ensure You Get Paid in a Partnership?
So imagine you have an important business relationship. It might not technically be a partnership. It might be a joint venture. It might be a sales rep relationship. But whatever this ongoing relationship is that you have, do you need to have it in writing?
Balancing Benefits and Risks
Most lawyers will tell you, “Of course, you have to have it in writing. Every contract has to be in writing.” but I think it is important to acknowledge that not every relationship is big enough to be in writing. Often, the stakes are not high enough to justify spending the money to have a lawyer draft up a contract in 2023. Let’s say it costs you a thousand dollars to have a contract written up. And let’s say the relationship that we are talking about having put in writing has a benefit of $3,000 and a risk of $3,000 because, say, for example, you are hoping to get paid. Does it really make sense to spend a third of that $3,000 on having a contract?
The Leverage Advantage
Here are some of the factors I would recommend considering when determining whether to actually hire an attorney or not. First off, “Do you already have leverage in the relationship?” For example, if you are providing work each month in exchange for getting paid each month and they need your work, you have some leverage there because the other side needs you to provide ongoing work. So if you have leverage, you are far more likely to get paid than if you just send a product and you are hoping the payment comes in for that. So if they need you for some reason, you may have leverage, which suggests that perhaps you don’t need to have that contract in a formal written form.
Role of Reputation
Second, based on what you know of the person, are they likely to pay? And perhaps more relevant, would a written contract improve the likelihood that they are going to pay? Sometimes a written contract doesn’t matter either way. Maybe it is a family member of yours, and you know they always pay. They have high integrity. Or maybe it is a large company with an important reputation in the marketplace and plenty of assets. Statistically, they are far more likely to pay than some startup companies with barely any assets and no reputation. So you might consider whether you actually need to have a contract based on their likelihood of paying and whether that is affected by having a written contract.
Next, I would look at, “Is there a lot of money at stake?” If there is a lot of money at stake, that suggests you should have your contract in writing. If there is not, then that suggests having it in an email with bullet points or something like that is sufficient.
The Limitations of Contract Templates
Now let’s say you decide that it just doesn’t make sense to hire an attorney to put together a contract for you. At that point, you might be tempted to use a template online, and I encourage you not to do that because templates often include a bunch of terms that are standard for a particular relationship. But the important question is, “Are they relevant to your agreement with the other side?” The purpose of a contract is to put the agreement and the terms that you have both accepted in writing, not to adopt a template. A lot of times clients ask me, “Hey, can you send me a template for this?” Well, I have thousands of templates, and often I will spend the first 30% of my work for a client understanding what are the terms of their engagement, and then trying to find the closest template that matches it. But always, I have to make changes to the template because I have never had a template in one situation that works for another situation, even clients, hiring a CEO, hiring an independent contractor, agreeing to license a trademark or the sale of a business. Never once have I not had to modify the substantive terms in the contract.
How AI Can Draft Your Contract
But you might be saying, “Okay, well, if I have to decide between paying an attorney and having nothing at all, I guess I will just have nothing at all.” But that feels really ineffective and risky. And so if you are in that situation, I have one new idea for you, which I have been incredibly impressed by. This is an option that never in history has been available to people until 2023. And that is using AI to put together a rough contract for you. I have spent extensive time using ChatGPT. I have spent some time using Claude AI. Both of them are surprisingly good at helping you at least get some basic terms in place for a relationship. Now, I would never rely on what AI puts together for a large contract because every time I ask AI to put together a contract, it is missing a number of key pieces.
Leveraging AI in Contract Drafting
But it is usually better than an email with just some bullet points in it. And so I have some other videos talking about how to use AI, but I think the key here is to put into ChatGPT or Claude the scenario you are dealing with, the names of the parties, the important terms, and then you can even ask it, “What other terms should we consider for a contract of this type?” And then have a little conversation with AI about, “What else should I consider? Am I missing anything else? Are there other factors I should consider?” And then when you get done with that conversation, you can say, “Using the information above, please draft a contract for me and this other party.” and then of course review it. Now, should you run this by an attorney? Absolutely. Is this a perfect contract? No. But it is better than an email with some bullet points written by a non-attorney.
And so if you are in a situation where the transaction is just too small and it doesn’t justify spending money on an attorney, better than having no contract at all is a contract that you have put together and understand using the power of artificial intelligence. ChatGPT, Claude, Lama, or any of the others that are available. The GPT-4 is probably the best I have seen right now, but all AI keeps improving and changing. So if you are a small business owner and you can’t afford an attorney to draft a contract, take the approach I have discussed here to get together at least a rough contract using AI. And if the stakes are high, if the other side is unlikely to pay, or if you don’t have leverage, those are great reasons that justify paying an attorney to draft a contract for you.
If you would like more information about any of these topics today, if you are interested in a business owner and getting educated on common mistakes business owners make and how to avoid them yourself, you can go to aaronhall.com/free and sign up to get a number of videos and other resources to help equip you to prevent problems in your business.
This is for entrepreneurs. startups, business owners, and CEOs. Generally, I am thinking about companies with under 500 employees, even as few as one or two, because for you as a business owner or a future business owner, you can either prevent these problems or pay the much more expensive cost of having the problem and having to clean it up afterward.
The purpose of this YouTube channel is to help you avoid problems, grow your company, provide great value to your customers and clients, create a great environment for the people that you work with, and experience the success that comes from having a good company built on best practices.
I am Aaron Hall, an attorney for business owners and entrepreneurs. If you have questions about any of this, feel free to put them in the comment section below. Look forward to seeing you next time.