Starting an Online Business: Online Contracts

This section of the tutorial will review a subset of contracts that an online startup may require in order to launch. This is not an exhaustive list but rather representative of contracts that are often required.

Terms of Use & Privacy Policy

There are a number of legal issues and potential liability that a properly drafted terms of use and privacy policy may protect an online entrepreneur against. Court's have long recognized clickwrap contracts (agreements, licenses, etc.) if the user is provided ample opportunity to read and accept the agreement. Acceptance is foundational to contract doctrine. This is a concept that should make perfect sense even to a lay person. A contract that is not properly accepted is not valid and will not be enforced by a court of law. On the Internet it is now quite common (almost universal) to require acceptance by forcing users to click "I Agree" before proceeding (e.g. when registering on a social networking site).

Although the "I Agree" acceptance mechanism is almost universally used, what may not be as obvious is the required processes that need to underpin electronic acceptance. In short, it is now a recognized best practice to save the text of the terms of use and privacy policy (and of any other electronically accepted contracts), as well as the version of these documents, along with the other information that is captured during registration (i.e. saved in a database along with other information). Why? Because this provides the website owner with strong evidence of acceptance should a legal dispute arise down the road.

It turns out that process issues are important in any number of instances where an online contract is in play. For example, a privacy policy that contains flowery language regarding steps the website owner takes to protect user data without the necessary processes in place to actually provide the protection, is essentially a worthless document. The same holds true for DMCA Safe Harbor contractual language often found in a terms of use document. If you want to take advantage of the Safe Harbor then you need to have the appropriate processes in place, without the processes your Safe Harbor is likely to be in jeopardy.

In short, the Internet Lawyer you select to help guide your online startup should be prepared not only to draft electronic contracts in a manner that provides maximum protection, they must be prepared to discuss the underlying processes required to substantively underpin the contracts.

Advertising Contract

Many online startups will leverage advertising as a critical component of their monetization strategy. It is important to have the appropriate agreements in place with advertisers. An agreement with an advertiser will contain a number of required clauses, depending on the specifics of the arrangement between the parties, including definitions of widely used industry terms such as "CPM," "CPI," and "CPA" (i.e. so as to eliminate ambiguity); implementation and operations of advertisements including effective dates; right to refuse certain kinds of advertisements (if applicable); payments and refunds; renewal clauses; truth in advertising; etc.

Furthermore, the contract between a website owner and an advertiser should contain the necessary disclaimers including the fact that the website owner does not (and cannot) guarantee results based on advertisements. In addition, sensitive business information may be shared with the advertiser (e.g. traffic metrics and advertising rates) which the website owner wants to maintain as confidential. Therefore, the requisite confidentiality clauses must be expressly provided for and the necessary process steps taken.

Finally, as with all electronic contracts, the appropriate governing law, forum selection, and arbitration clauses must be incorporated. Although these clauses are often "negotiated" with advertisers, the website owner may be in a position to dictate these terms depending on the strength of the website's traffic.

Affiliate Contract

First of all we need to answer the question: "what is affiliate marketing?" As the previous link suggests, affiliate marketing is a subset of online marketing wherein a website drives traffic to another website in exchange for some form of compensation. Many of the Top 500 online retailers have implemented successful affiliate programs and there are few barriers to entry for online entrepreneurs that want to do the same. That said, you will want to pay attention to emerging legal issues that threaten to dampen the enthusiasm that has fueled affiliate marketing.

If you decide to launch an affiliate program you will likely want to have an electronic contract in place that makes it easy for prospective affiliates to join your program. This strategy allows your affiliate program to scale and reduces the administrative burden of contract management. So what are the terms and conditions that your affiliate contract should contain? The specific answer to this question will depend largely on the type of business you are in, but in general your affiliate contract will want to specify:

1) how links to your site are managed;

2) who owns the responsibility for maintaining the affiliate site;

3) restrictions that you want to place on affiliate conduct;

4) how commissions and tracking will be managed;

5) the term of the agreement and how it may be terminated by either party; and

6) the use of affiliate marks and logos.

The list of terms and conditions enumerated above are obviously not exhaustive. They simply reflect the kinds of issues you will want to think through, most likely with the advice of counsel.

Professional Services Contract

There are any number of professional services contracts that many online startups may engage in, but one in particular is almost universal in nature. Which one? The "website design and development" contract that you engage in with the third party that builds your website.

Obviously this assumes that you are not a technology startup, in which case you are likely building your own website. However, it does assume that your website is mission critical to your business and that it provides content that is unique and/or novel in order to attract potential customers. In short, your website is likely to be much more than a "business card website" and will require significant investment of capital (i.e. relative to your overall startup budget).

What are the legal issues to look out for? They are numerous and will partly depend on the type of website being built (i.e. the complexity of the code and content that underpins it). Here are some legal issues that almost always apply:

1) Determining ownership of the intellectual property ("IP") of your website. Unless specifically provided for in a contract prior to the commencement of design and development, you may be surprised to learn that you do not own the website that you paid for, but rather have only acquired a license to use it. First of all, what does it mean to own your website? Ownership in this context primarily means ownership of the copyright, trademark, domain name, and other IP rights attached to the work you have paid for. The legal issues surrounding ownership are quite complex and encompass copyright's work-for-hire doctrine as well the requirements that surround the assignment and transfer of copyright ownership as well as other analogous IP transfers. In short, a contract is always required so that the rights of the parties regarding ownership are clearly expressed.

2) Determining the scope of work and how to handle modifications thereto. Because the design and development of a website is a creative effort, it is next to impossible to specify all the requirements upfront. Therefore, a critical challenge that must be dealt with in the contract is how the inevitable modifications to the scope will be managed. Often, an iterative approach is used wherein the project is broken down into phases so that later phases can incorporate what was learned early in the lifecycle of the project. A failure to deal rationally with what is often referred to as "scope creep" will frustrate both parties and could result in a dysfunctional and/or disastrous outcome; both of which are obviously something to avoid.

3) Specifying the compensation schedule including reasonable late payment penalties where applicable. Given the rise of India and Brazil as economic powers in the information technology space, it is likely that many online startups will be working with international consulting companies. In this case, the payment currency should also be expressly provided for in the contract or statement of work. Working with international companies also raises issues regarding applicable law, jurisdiction and venue. All of these issues should be addressed in the contract in order to provide a semblance of certainty should a dispute subsequently arise.

4) Specifying suitable indemnification clauses often running in both directions. The online entrepreneur clearly wants indemnification against the consulting company violating the intellectual properties rights of third parties during the development of the website. Similarly, the consulting company may want indemnification regarding any intellectual property provided by the entrepreneur (e.g. photos, graphics, videos etc) for incorporation into the site.

5) Specifying reasonable non-compete, conflict of interest and confidentiality clauses. From an online entrepreneur's perspective, you certainly are not interested in paying to educate the consulting company on your specific Internet niche business in order for them to subsequently leverage this knowledge with a potential competitor. You need contractual assurances that the company you are hiring to build your website will not engage in this kind of behavior and that they will otherwise maintain all of the information you provide them as confidential. However, the consulting company will not be keen on limiting who they can do business with, for obvious reasons. Achieving the "right" degree of protection will have to be negotiated.

The issues described above are not exhaustive, but rather illustrative of the kinds of issues you can expect in a website design and development contract. Unless you are experienced in these matters then it is recommended that you seek advice of counsel before proceeding.

It is quite possible that an online startup, depending on the business model, could engage in any number of professional services contracts. It is important that the Internet Lawyer you select as counsel have a fundamental understanding of the intersection of legal, business and technology issues that are presented.

Intellectual Property Licenses

An owner of intellectual property ("IP") is entitled to exploit its IP rights for profit or other consideration. The owner ("licensor") may contract with third parties ("licensees") allowing these parties to use the IP as constrained by the terms and conditions of the agreement. Both the licensor and the licensees get something of value that they would not have gotten but for the license. Having the proper license also means that you have the legal permission to use the owner's IP.

For example, you cannot simply "borrow" photographs available on the Internet for use on your website. Photographs are copyrightable subject matter and the wrongful use of a photograph is infringement of the owner's copyright. However, if you need stock photos for your website there are a number of sites, including iStockphoto, where you can license the rights to use photos for far less than it would cost you to produce them yourself or for you to hire someone else to produce.

You obviously must either own or license all the IP that is used or your website or risk being sued for infringement. Furthermore, for certain types of websites wherein user generated content ("UGC") is allowed and encouraged (e.g. Facebook), your terms of use must grant you the necessary license to use UGC on your site in manner that inures to your benefit and/or, at a minimum, prevents you from being sued for infringement. A license is nothing more than a specialized kind of contract. Online startups will generally enter into many license agreements as part of their launch initiatives.

Non-Disclosure Agreement (NDA)

A non-disclosure agreement ("NDA") is a contract between two parties wherein one or both parties want to share information (on the one hand) but otherwise want to maintain said information in a manner that restricts it from being made available to the public. An NDA outlines the material, knowledge, or information that the parties want to share with one another confidentially. An NDA creates a contractual relationship between the parties to protect the information defined in the agreement and/or trade secrets.

Online entrepreneurs are well advised to make liberal use of NDAs, especially when working on early stages of the venture. Ideas, standing alone, cannot be protected under intellectual property doctrine and, therefore, one of the best ways to protect a great idea (i.e. one that you need to share) is with an NDA. An NDA is a standard business device used to protect ideas and other confidential information. You should not hesitate to leverage one.

Employment Agreement

There are a number of key terms and conditions that are almost always present in most employment agreements, including the following:

1) Job Duties & Responsibilities

2) Duration & Termination

3) Compensation & Benefits

4) Confidentiality & Non-Compete

5) Ownership of Intellectual Property

6) Dispute Settlement

Online startups will definitely want to have employment contracts with key employees. As discussed throughout this tutorial, there are any number of niche markets in the long tail that could prove to be quite profitable. Succeeding in the long tail will require a combination of technical and domain knowledge applied in ways intended to disrupt the status quo.

Given that online startups are generally monetized through intellectual property in some way, shape or form, it is important to have employment contracts with almost all early employees in a startup. Why? Because nearly all of them are likely to be key employees in the sense that they are likely to contribute significantly to how the niche is monetized, as the business model develops. In short, they are the ones that going to have knowledge of the secret sauce.

It is important that employment agreements be signed at or near the time that employment commences or is renewed, otherwise the agreement may not contain the necessary quiid-pro-quo (the necessary "consideration" in legal terms) to be enforceable.

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