Wide availability of private funds today means that most of the startups would decide to raise private funds longer before going for the IPO route.
Due diligence is a crucial step towards raising that coveted private fund. Unless, you do not have any material number of Contracts, the Funders would generally be interested to know whether your Contracts would still be operational, post the fund infusion and structural change, if any.
Also, it is needless to say that during and post Covid-19, the Funders are more cautious than ever and therefore, the scrutiny has gone up inevitably. So, you need to be cautious as well.
And, the ability to transfer the obligations would be governed by the Assignment Clause, which more than ever would be under scrutiny. So what do you need to know about the same?
Firstly, this type of clause is very commonly found across Contracts and is generally treated as a boilerplate.
An assignment may be made to anyone, but it is typically to a subsidiary or a successor. A successor might be a business (Company B) that buys a business (Company A). A subsidiary is a business owned by another business.
The Key Mantra should be that one must be able to transfer the obligations to their Successor without much hassle while have a control if their Vendor transfers the obligations to their subsidiaries.
Now, the process of assignment allows one person or business to transfer or assign rights or benefits or obligations to another person or business.
So, before one sign a business contract, one must make sure that if there is an assignment clause, it is clear and straight-forward (eg. It is advisable to not get trapped in an escrow for code upon Assignment).
But, if this is creeping with dangers, why is an assignment clause important?
To put down in layman terms, the importance is captured in following points:
• Contracts exist to have a well-laid-out document that details how business between two entities should go about in a business relationship. Having an assignment clause in a contract is vital for a couple of reasons:
• It lays down clearly the intent of both parties in the business relationship.
• It is vital to a good relationship between two business entities, as it is a show of hands regarding how they want their businesses to interact when certain circumstances arise.
• It lays down the groundwork to a more transparent and more stable relationship between the businesses.
• It protects both parties from the uncontrolled transfer of obligations and rights on covered contracts.
• As mentioned before, the lack of assignment clauses can cause uncontrolled transfers of contractual obligations and rights from one party to another without consent.
• With the existence of an assignment clause, there will be more orders on such contractual obligations, and the necessity for such transfer is reviewable, if necessary.
• It makes both parties aware of the contract expectations.
• In contracts, you can detail your expectations for your business and how it will perform with the help of the other party.
• With the help of an assignment clause, you can start to think about the future and decide what you want with a company, as well as what you expect should the trigger for an assignment clause happen.
It is generally found that on the buy-side Contracts, assignment clauses extremely useful for businesses.
They serve as a form of security for customers who might be inconvenienced by a change of hands in the business or ownership of intellectual property.
Without the existence of an assignment clause, your vendor will be free to execute these obligations and transfer liability without any limits.
What is the way forward?
As a business owner looking to raise fund, here is how you should be handling an Assignment Clause:
Check. Clarity and unambiguity is going to take you places. Do not treat assignment clause as a boilerplate. Check whether it obstructs your ability to transfer the Contract to your successor without leading to a termination. Also, check whether your critical vendors have assignment Clause which can lead them to easily transfer obligations without your approval.
Negotiate. Negotiate the Contracts such that the definitions of successors are broad, and you are able to change hands to a successor without undue paperwork or termination.
Track. Of course, it is necessary to track every Contract, but moresoever where you are deviant from practices above. If the business reason to become deviant has exhausted, renegotiate at the next renewal cycle.
Yes, there are some risks come with assignments, so it’s always preferable to tread lightly when it comes to this part of the contract to make sure it is clear and straight-forward.