The Contract Mistakes That Could Sink Your Startup - And the Legal Advice Every Founder Needs Early

When early-stage founders rush to hire, sign customers, or collaborate with partners, legal paperwork rarely feels urgent. But according to startup attorneys Alicia Dorner and Beth Lamontagne of Foley & Lardner, those early decisions can quietly shape (or jeopardize) the long-term survival of a young company.

In a conversation with Startup Boston, both attorneys pointed to a recurring pattern: founders don’t intentionally skip legal steps. They just underestimate how much is missing from the documents they do sign.

The Most Common Mistake: “They outline a few points, but not a real contract.”

One of the biggest issues Dorner sees is founders relying on incomplete agreements.

“Some of the most common mistakes founders make,” she said, “is entering into agreements that outline some of the terms they’re discussing…but not actually having a holistic contract in place.”

Often labeled as memorandums of understanding or lightweight templates, these documents skip essential business mechanics: ownership, payment terms, responsibilities, termination, confidentiality requirements and more.

And the cleanup? Expensive.

“It becomes more time-consuming and expensive to fix down the road than addressing it with counsel at the start,” Dorner noted.

The Clause Founders Overlook And Why It “Can Kill a Company”

Both attorneys repeatedly emphasized one theme: intellectual property.

“The most important clause that is consistently overlooked is any term that relates to IP ownership,” Dorner said. “It can absolutely kill a company if it’s not done right.”

Founders often assume the company owns what they build. But legally, that’s not true unless there is a signed IP assignment.

Dorner outlined two kinds of risk:

1. Internal IP

Does the company legally own what founders, employees, or contractors build?

“It’s critically important that the company actually owns that IP,” she explained. “You don’t want to find out two years down the road that a consultant actually owns everything they built.”

2. IP created with partners or customers

This issue is even more subtle.

“If something new, even a new kind of data, is created out of the relationship, who owns that?” Dorner asked. “It’s something that’s often glossed over…but usually comes back to be really important later.”

If You Can Only Pay for One Contract Review, Pick This One

Startup budgets are tight. So we asked: what’s the one agreement founders should always have a lawyer review?

Dorner didn’t hesitate, “If there’s one thing to get right, it’s your consulting and employment agreement forms,” she said. “They cover equity, compensation and IP ownership, all critically important to the health of the company.”

These agreements also appear in investor due diligence. Any inconsistency becomes a red flag.

The Truth About Online Templates

Founders frequently use templates from other startups, accelerators, or legal sites. But the attorneys warned that templates can be dangerously mismatched.

“Templates are great in theory, they make things simple,” Dorner said. “But it’s often a square peg, round hole.”

Some templates, like bylaws or NDAs, tend to be low-risk. Others, like employment agreements or consulting contracts, vary significantly by state.

“If you’re based in Massachusetts and grab a template from a startup in Wyoming, one difference nobody knows about could really bite you,” she said.

Co-Founder Agreements: Simpler Than You Think, but Not DIY

Founders often ask whether a downloadable co-founder agreement is enough. According to Dorner, that answer is almost always no.

“A cofounder agreement as a standalone document isn’t usually necessary,” she said. Instead, bylaws or a shareholders’ agreement typically govern co-founder relationships, and should be drafted to be “as plain vanilla as possible.” Overly bespoke documents, she warned, can cause more problems than they solve.

When Startups Scale, Which Contracts Need a Second Look?

While some documents (like IP assignments or employment agreements) stay relatively fixed, others evolve as a startup grows.

Commercial contracts shift the most.

“In the beginning, you may not have leverage,” Dorner said. “But as you grow, you may be in a position to push for terms that are more company-friendly.”

Investor agreements also evolve round to round, especially those that govern voting rights, control or investor protections.

The Hidden Red Flags in B2B and SaaS Contracts

Lamontagne works closely with startups selling into large enterprises and sees the same issues surface repeatedly.

1. Customers forcing professional-services contracts onto SaaS deals

“Software as a service is a service,” she said, “but it’s not professional services.” Yet large customers often send over contracts written for consulting firms. These may contain IP assignment or “work made for hire” provisions, dangerous for any software company.

2. Supplier portals and extra terms hidden in onboarding

“You sign up to be a supplier and you agree to a whole bunch of additional terms,” she said. These can include audit rights, security obligations or pricing commitments founders didn’t realize they accepted.

3. MFN pricing, change-of-control restrictions, and long-term commitments

Most favored nation clauses and early multi-year contracts may seem like wins, but limit flexibility later. “You want auto-renewal,” Lamontagne said, “but you also want to be careful about early three- or five-year deals when you’re giving favorable commercial terms.”

How Founders Can Balance Speed and Diligence

Every founder wants to close early deals fast. But Lamontagne cautioned against sacrificing critical protections. “Provide more favorable commercial terms,” she advised, such as pricing or longer payment terms, rather than giving away rights, IP ownership, or long-term control.

Legal Hygiene: “Get organized. Be consistent.”

When asked what habit every founder should adopt immediately, Dorner answered with two simple words: Get organized.

A clean data room (even just a Google Drive) with formation docs, equity records, contracts, and board approvals goes a long way. “It signals to investors that you have it together in more ways than one,” she said.

Lamontagne added a second principle: Consistency.

“As much as you can, take a consistent approach to your pricing model, contracting practices, and internal processes,” she said. Over time, those become the foundation for scalable policies and repeatable operations.

Where AI Fits In And Where It Doesn’t

Both attorneys agreed: AI is becoming a powerful tool for contract management, but not a replacement for legal judgment.

AI can quickly compare documents, flag differences or generate drafts. But when it comes to interpreting risks or weighing strategic decisions, the human attorney remains essential.

“I don’t see AI taking over the actual art of drafting and negotiating,” Dorner said. “But AI tools can be extremely helpful.” Lamontagne added that founders should ask their law firms how they’re using AI because the most efficient firms already are.

The Final Takeaway for Founders

If founders remember only one thing, Dorner hopes it’s this: “Don’t be afraid to ask for guidance.”

Whether that guidance comes from an attorney or another founder who’s been through a similar deal, experienced perspective is invaluable.

Lamontagne agreed, encouraging founders to learn legal the same way they learn product or sales: incrementally. “There’s an investment upfront,” she said, “but then you have those learnings and you can run with them.”

When to Bring in a Firm Like Foley

Though Foley works with startups at all stages, Dorner said the ideal time to bring in a large firm is clear: “We are best positioned to help when a company is ready to raise to global,” she said, “particularly before the first priced round or structured investment.”

Early work often includes formation, bylaws, IP assignment, NDAs and standard employment documents. Later-stage work centers on fundraising, investor rights, and long-term strategic contracts.