The Four Kinds of Contracts Every AI or Robotics Company Should Have
Startup artificial intelligence and robotics companies face constant business challenges, especially in this year of COVID-19 and the resulting economic downturn. Startup companies are looking to weather the storm, while some entrepreneurs, perhaps out of necessity, are beginning new businesses. With limited budgets for legal fees, what kinds of contracts do startup AI and robotics companies really need?
Non-disclosure Agreement (NDA)
First, every AI and robotics company should have a nondisclosure agreement, abbreviated as “NDA.” In an NDA, the company and some other business or individual agree that some kinds of information will be treated as confidential information. That confidential information must not be disclosed or used without authorization. And the party receiving confidential information must take steps to protect it from unauthorized access. Sometimes NDAs are one-way, in which one of the two parties is providing confidential information, and the other party has to protect it. Other NDAs are mutual, meaning that the parties are exchanging confidential information and both have to protect the confidential information of the other.
The NDA is a fundamental tool for protecting your confidential information. You might use an NDA with potential vendors, business partners, or customers. Signing an NDA is often a requirement to kick off negotiations of some business deal. The vendor, business partner, or customer may not want to reveal any sensitive information to you without it. You may not want to share any sensitive information with them unless you have an NDA to protect your confidential information.
Proprietary Information and Invention Agreement
Second, every AI and robotics startup should have signed proprietary information and invention agreements with its employees. Startup companies frequently run into problems when their employees leave and start competitive companies or start working for a competitor. They may also have problems when it comes time for a sale of the business and they find out that their employees may individually have some rights in the intellectual property vital to the company, and the company is unable to complete the sale.
A proprietary information and invention agreement is both a nondisclosure agreement between an employer and employee and an invention assignment agreement. Let’s break down those two parts. Employees may have general legal obligations of loyalty to their employees. Still, to provide certainty and give employers an additional enforcement tool against employees that leave the company to compete, the proprietary information and invention agreement requires employees to hold in confidence specifically called-out categories of confidential and proprietary information of the company. Employees are not allowed to disclose that information to others without authorization, and they cannot use or exploit that information for their own purposes, for example, to compete against the employer.
Also, proprietary information and invention agreements contain statements saying that the intellectual property created by the employee belongs to the company. They also have assignments by which the employee assigns his or her intellectual property rights to the company. Companies with proprietary information and invention agreements with all their employees can be certain that when the business is sold, it has ownership of all intellectual property rights. The purchaser can be confident that it will be able to acquire the valuable intellectual property it is seeking from the deal.
Sales Agreement
Third, every AI and robotics company needs some kind of sales agreement. The company is in the business of making money by selling or licensing products or services. Most customers know they need a contract in order to protect themselves. Therefore, if you want to make money, you need to provide a form agreement of some kind for the customer to sign to show that the deal is closed.
Sales agreements are key for an AI or robotics company because it makes clear what the company will deliver and when, how much money it will receive and when, and what happens if it doesn’t get paid. It sets expectations for each side so that both buyer and seller know clearly what they have to do. Sales agreements are also backed up by law. Accordingly, if your customer doesn’t pay, you have the legal right to sue the customer to collect the money you are owed.
Sales agreements should also contain sections that limit your liability in ways that the law might not without a contract. For instance, there may be “disclaimers” that say your business is not responsible for some kinds of events or damage that could occur. You should also have “limitations of liability” that limit the kinds of recovery your customer can obtain from you and a limit on the amount of money that the customer can seek from you in a lawsuit. Having these limitations greatly reduce your legal risk. Failing to have these kinds of limitations in your contracts means that an accident, malfunction, or other bad event resulting from your product or service could trigger a lawsuit that puts your company out of business.
Website Terms and Conditions
Finally, every AI and robotics company should have a website terms and conditions page. We take it for granted that every AI or robotics company these days will have a website. But what are the terms and conditions for a user to use it? What are users allowed to do with the content you put on the website? What if the site has community pages allowing users to share their experiences with your products or services with other customers? What are they allowed and not allowed to say on your site? These are examples of topics your website terms and conditions should answer. If you provide no guidance in a website terms and conditions page, users may misuse your information or use your site for illegal or damaging purposes.
AI and robotics startups can use these four key contracts to make sales, manage their legal risk, set proper expectations, and protect their legal rights. They are the key first legal documents that startups need. Of course, they are only a start. Nonetheless, before drafting other legal documents, startups should begin with these four documents.