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Today, many successful startups have an associated software product or app. As one of the first major steps towards launching their business, many software startup founders will engage a developer. The technology that the developer produces will often form the foundation of the business. If the success of your software startup hinges on technology, it is crucial to make sure that your contract with the developer will protect your interests. This article explores some of the key clauses to include in the contract with your developer, and what might happen if you do not get it right from the outset.

Scope of Services and Payment Terms

It is crucial to make sure that your software developer is kept accountable and that clear targets are included in your contract with them. Disagreements with developers often arise due to differing opinions on the agreed scope of services and pricing. Key points to consider before signing the contract are:

  • the payment structure;
  • the maximum number of hours that your developer cannot exceed (if you pay  them on an hourly rate);
  • whether the contract will be on a one-off basis, or if you will engage them on an ongoing retainer;
  • the timeline and budget the developer is to work to; and
  • whether you wish to nominate a specific person to work on your project (if you are engaging a company to develop your app).

By making sure that your contract explicitly sets out all aspects of the business relationship, you will reduce the possibility of disputes arising.

Intellectual Property Ownership

Intellectual property (IP) ownership is a key concern for many software startup founders. The IP involved in software can include: 

  • trade marks;
  • patents; and
  • underlying code.

Before you sign a contract with a developer, you should make sure that you know who owns the intellectual property that the developer creates. Some software development companies will charge a lower fee for their services but will own the intellectual property that they create. Then, they will grant you a licence to use that IP when they complete the project. Depending on the terms of this licence, it may hinder your ability to commercialise your products or use that IP. 

For example, your software product may become highly successful, and you will want to: 

  • sell it to third parties;
  • make significant modifications to it; or 
  • engage a new developer to adapt it in the future.

In these circumstances, having a licence may not allow you to do these things. 

Ideally, you should ensure that you will have ownership of the IP that a developer creates.

Warranties

It is crucial to make sure that you have several warranties from the developer in your contract. Here, a warranty will be a promise that the developer makes in regards to your business relationship. Some key warranties to consider may include that the developer:

  • has the necessary qualifications and licenses to perform their services;
  • has not copied someone else’s code or used software without the appropriate licence; and
  • is not insolvent and must notify you if they think that they might be insolvent.

Acceptance Testing

If you ask a developer to build an app for you, and the product they deliver does not function as you intended, you will want to have the ability to ask your developer to fix the errors. 

By having a provision in your contract that allows you to test the technology before you accept them and request changes (called ‘acceptance testing’), you can ensure that you have a finished product that meets your requirements.

Legal Responsibility

It is important to make sure that your developer produces software that is to an appropriate standard, and does what it is supposed to do. If your developer includes incorrect or harmful code, you want to make sure that they can be held responsible for the effects of this poor service.

In a hypothetical situation, your startup offers software that assists in operating machinery. Due to a software malfunction, a piece of machinery falters and $100,000 worth of stock is ruined. If your client seeks compensation against you, you want to try as best you can to pass that legal responsibility on to the developer.

Termination

In some circumstances, the relationship you have with your developer will not work out. You should make sure that your development agreement gives you the opportunity to end the relationship when you wish to and to only pay the developer an appropriate portion of the agreed project fees.

You may also want the ability to request that they send the work they have completed over to you so that you can engage a new developer to complete the project. If you cannot get access to the work-in-progress, you might face increased costs for new developers to start fresh.

Key Takeaways

Engaging a developer to produce software for your startup is a crucial milestone. Before signing a development contract, make sure that your contract has clear terms surrounding: 

  • payment and scope;
  • assigning intellectual property;
  • allowing you to test final products; and
  • appropriately handling liability. 

If you have any questions about what to include in contracts with software developers, contact LegalVision’s contracts lawyers on 1300 544 755 or fill out the form on this page.

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