How to Protect Your Business From These 6 Startup Contract Risks
Will a “handshake” seal the deal?
As a startup founder, you already know this: written contracts establish the enforceable framework through which your startup operates, raises capital, transfers rights and enters key collaborations. Decisions like raising capital, licensing intellectual property, developing new products or hiring vendors and other business collaborators must rest on a clear contractual foundation.
Without clear, carefully drafted contracts, you risk confusion about invention ownership, access to key data, control of future product rights, liability when something breaks and even about who's allowed to speak publicly on the company's behalf. In life sciences and biotech, those problems compound quickly under complex, fast-moving regulations, creating some of the top legal challenges that can curtail a startup's growth.
What Are Startup Contract Risks and Where Do They Come From?
Let's take a moment to define what we mean by contract risk before we go any further. Put simply, it is any situation where you don't have written contracts or, if you do, the way your agreements are written, interpreted or carried out exposes your business to unexpected costs, legal disputes or operational breakdowns.
As a biotech founder, you are working at the crossroads of innovation, regulation and business, which are conditions that can turn small contract risks into major problems. So where exactly do these risks come from, and why do they continue to catch so many founders off guard?
Asymmetric Knowledge & Bargaining Power
Most life sciences startup founders are brilliant scientists, researchers or technical innovators, not trained negotiators. Meanwhile, their potential business counterparties, whether they are investors, pharmaceutical giants or clinical trial operators, have years of experience using contracts as tools of strategic control.
This uneven playing field creates contract risks that some founders don't see until it's too late. You may unintentionally sign away key intellectual property, agree to unfair payment terms or liability obligations or enter into a collaborationagreement that limits your company's future choices.
Fast-Moving, High-Stakes Environments
The urgency to hit milestones, close deals or move products forward often leads to contracts being signed under time pressure, sometimes without careful review or customization. These pressures may lead founders to sign agreements before aligning them with the specific needs of their business structures.
With limited resources and competing priorities, it's easy to fall back on generic templates or reuse existing contracts that were never designed for the current deal. This short-term mindset can create serious consequences later, like loss of intellectual property rights, liability exposure or missed protections that could have helped safeguard the company's future.
The Complexity of Innovation & Regulation
Innovation in life sciences is collaborative by nature. Startups work with universities, consultants, Contract Research Organizations (“CROs”), international companies and clinical sites, sometimes all at once. Each relationship creates a new set of obligations, rights and legal risks.
But when contracts do not clearly define who owns what, who handles regulatory filings or who bears liability if something fails, those layers of innovation become legal blind spots.
Compliance adds another layer. If you fail to assign internal accountabilities for reporting duties, data privacy responsibilities or submission rights, you could face regulatory penalties, or lose the ability to act when it matters most. In fast-moving biotech deals, the default is often to assume good faith. But the cost of missing one clause in a service agreement or research collaboration can be measured in lawsuits, stalled approvals or lost investor confidence.
The Six Pillars of Contract Risk in Life Sciences Startups
Now that we have traced where startup contract risks tend to come from, the next six sections break down the core structural risks that affect life sciences and other technology startups. These are the pressure points where vague language, mismatched terms or silent obligations can weaken your foundation.
Ownership Risk (Intellectual Property (“IP”) and Data)
Your intellectual property is likely the entire game. Yet this is exactly where startup contract risks hit hardest. Your agreements need to answer two urgent questions:
Who owns not just the invention, but the improvements
that follow?
Most contracts mention the core invention: a molecule,
device, platform, or algorithm. But they often skip what happens
after. What if the formula is improved? What if the delivery method
is refined?
Without clear terms, these future developments can spark ownership disputes you did not see coming. Some startup companies lose leverage not because they gave away their invention, but because they failed to contract for improvements, derivatives or follow-on rights related to their invention.
Who controls the data your business depends
on?
Contracts must draw a clear line between background IP (what each
party brings) and foreground IP (what gets created). That line
often blurs when data is involved.
Who owns the raw datasets? The analysis? The final regulatory submissions? Who has the right to submit to the FDA or publish results? If you are not specific, the other party may walk away with partial rights or full access, while you're left trying to untangle the mess after the fact.
Control Risk
You can own the invention, raise capital and build the strongest technical team in your space, but if your contract gives another party the right to say no when you need to act, you're just waiting for someone else to give you permission to move.
This is one of the most overlooked startup contract risks: you're leading the business, but a clause buried in your agreement controls the outcome. Before you sign anything, step back and ask the questions that reveal who has decision-making authority when it matters most.
Question 1: Can You Sublicense Freely?
Sublicensing is a practical way to generate revenue, extend your reach and form partnerships that help your startup grow without building every function in-house. In biotech, it often enables you to work with contract research organizations (“CROs”), regional distributors or pharma companies that can help advance or commercialize your intellectual property. But if your agreement requires prior approval to sublicense, your ability to move quickly or at all can depend on someone else's decision.
Before you sign that intellectual property license, look closely at how sublicensing is handled. Try to negotiate for rights that let you move without consent, at least in defined situations like working with specific partners or sublicensing within a particular field of use.
In some cases, agreeing to notify the other party, rather than seeking permission, can give you the breathing room to execute when timing matters. Even a narrow sublicensing right can make the difference between closing a deal and stalling out.
Question 2: Can You Assign the Agreement if You Get Acquired?
If a key agreement cannot be assigned during an acquisition, it can complicate, sometimes even jeopardize, the deal. Take an example where you signed an early-stage license with a university or small pharmaceutical company. That contract helped you move forward.
But years later, when a larger company shows interest in acquiring your startup, that same agreement requires written consent before it can be transferred or assigned. Suddenly, a clause that once seemed harmless becomes a gating issue.
The buyer may need to re-engage your original partner, which can delay diligence, shift leverage in negotiations or create pressure to revise key terms. In some cases, it can even raise enough concern to stall momentum entirely.
While outcomes vary, one way to reduce this risk is to negotiate an exception for transfer or assignment in the event of a merger, asset sale or change of control. You may still provide notice, but avoid giving the other party a veto over a decision that could shape your company's future.
Question 3: Can You Expand the Product's Use Into New Indications?
Field-of-use limitations can quietly box in your company's future. They often show up early, when you're licensing a molecule or method and accept a restriction that limits use to a specific application, like oncology or diagnostics. At the time, it might feel like a fair trade. But when new data opens the door to other indications, you may find you're locked out of your own science.
It's not always possible to get unlimited rights, but you can negotiate smarter terms. Push for broad field-of-use language where you can. If that's off the table, secure a right of first negotiation or a predefined option to expand based on clinical milestones or research triggers. That gives you a foothold to grow without having to start from zero or renegotiate when timing is no longer on your side.
Question 4: Are There Approval Rights Buried in Milestone Definitions?
Milestones can trigger payments, unlock new rights or signal readiness for the next stage. But when the agreement gives another party broad discretion over whether a milestone has been met, it can slow things down. Even if the work is complete, you might still be waiting on signoff, which creates uncertainty just when your company needs forward motion.
That risk doesn't always mean walking away, but it does mean tightening how milestones are defined. Use criteria that are specific, trackable and tied to external deliverables wherever you can. If approval is required, consider adding a response deadline or tying confirmation to third-party outputs or other objective measures, like lab reports or regulatory filings.
Question 5: Can You Make Decisions Without Having to Ask Someone Else to Bless Them First?
Some legal risks show up during day-to-day operations, when a founder tries to replace a CRO, bring on a scientific advisor, renegotiate a service agreement, adjust a clinical protocol or even start hiring employees. If every move needs signoff from another party, your startup company might be operational in name, but not in practice. Decision-making authority gets quietly outsourced.
Founders can push back on this dynamic early. Go through your contracts clause by clause. Where approval rights show up, consider whether they're really necessary or whether notification rights would work just as well. Save formal approvals for material changes that directly affect the other party's performance. This approach preserves your ability to act, even with limited resources, while keeping legal risks in check.
Financial Risk
The next contract risk is financial risk. It often hides in plain sight, baked into the contract terms you sign under pressure.
Payment Terms
You've heard the terms: upfronts, milestones and royalties. You know they matter. But what you may not realize is how quickly each of them can become a trap. Unless your agreements define these payment terms with precision, they can generate disputes with business partners, trigger tax implications you did not budget for or leave you unable to meet basic obligations.
- Take upfront payments. You need to spell out what they mean. Are they refundable? Are they tied to exclusivity? If you are licensing intellectual property, are you locked into minimum annual payments even when revenue falls short? These answers affect your ability to adapt as the business grows.
- For milestone payments, precision matters even more. What triggers the payment? Is it the submission of a regulatory dossier or its acceptance by a governing body? There's a world of difference between the two, especially when delays hit.
- Royalties carry their own complexity. You need to define how royalties are calculated. Is it based on gross revenue or net sales? And if net, how is that defined? Are distribution costs included? Are taxes deducted before or after? Who runs the numbers? What objective standards can be applied? If these key terms are vague, you could lose revenue or find yourself arguing over the spreadsheet instead of building the business.
Warranties and Indemnities
Many contracts you sign as a startup founder include a warranty, a promise that certain facts about your company are true. These typically cover areas like IP ownership, signing authority and noninfringement. In most agreements, they appear as standard language and often go unquestioned.
The risk arises when the warranties stretch beyond what you can actually guarantee. In biotech and other technology-driven startups, it is not unusual to see terms like “non-infringement” or “continuous availability.” These might sound routine, but they can quietly expand your liability.
Even when you rely on third-party components or external CROs, your startup might still be held responsible for outcomes it could not fully control. If something breaks, fails regulatory review or triggers a lawsuit, even without clear fault, you could find that an overly broad warranty gives the other party legal grounds to make you pay.
And that's where indemnity clauses come in. These are the provisions that say: if someone else suffers a loss connected to your product or services, you cover the cost. That might include litigation, settlement fees, lost profits or other damages.
Some indemnity clauses are capped and limited to specific events. But others are open-ended, covering “any and all losses,” whether foreseeable or not, and whether your team actually caused the problem. For startups operating with limited resources, those terms can expose the entire business to a risk that goes far beyond the value of the deal.
There is no one-size-fits-all fix. But there are steps you can take to manage this risk more deliberately. You can limit indemnity to what your company can reasonably control, like your own intellectual property rights or confidential information. You can ask for mutual indemnity clauses, so both sides carry the weight.
On top of that, you can negotiate a dollar cap tied to the total contract value or your insurance coverage. And finally, you can flag warranty language that feels overly broad or speculative, especially in industries where change, experimentation and third-party reliance are part of the business model.
Compliance Risk
A strong compliance framework reassures business partners, keeps regulators off your back and protects your startup's growth. But when compliance is handled passively or written on assumptions, it creates hidden startup contract risks.
If your agreements expect everything to go smoothly, you are gambling with your company's future. A smart compliance contract should:
- Specify who owns the regulatory submission and who holds the filing credentials or submission ID
- Assign responsibility for adverse event reporting and include a deadline for how quickly the other party must notify you
- Draw a clear line between raw data and analyzed data, because this distinction affects privacy, publication rights and data ownership
- Cap liability for compliance failures but still hold the other party accountable for gross negligence or recurring violations
- Tie payments to quality benchmarks, such as GxP-compliant[INSERT FOOTNOTE: This refers to industry and FDA standards for good manufacturing practices, good clinical practices, good laboratory practices and similar standards for development activities.] production or passing regulatory inspections
- Require a clear remediation plan if one side's actions trigger regulatory scrutiny, suspension or warning letters
- Mandate real-time audit access — not just “on reasonable notice” — because by the time you give notice, the damage is often done
- Link each contractual promise to a specific regulatory framework to eliminate ambiguity about what rules apply
A vague contract puts your business entity at risk. When disputes arise over confidentiality, product quality or regulatory obligations, it is the agreement that determines who pays, who owns what and who answers to the law.
Confidentiality & Trade Secret Risk
The next major startup contract risk is what your company knows and how well it protects it. For most startup founders, the value lies in the intellectual property that either gets patented or gets shielded as a trade secret.
And while patents get all the attention, trade secret risk is where many startups quietly lose control. If your confidential information isn't properly protected, contractually and operationally, you may not own it at all.
Is Your Nondisclosure Agreement (“NDA”) Enough?
It depends. A nondisclosure agreement (“NDA”) sounds like strong protection, but in reality, it's only as good as how it's written, who it covers and how it integrates with your existing contracts. Without the right structural support, even well-intentioned NDAs collapse under pressure.
To strengthen your NDA:
- Use precise definitions: Spell out what counts as confidential information. Go beyond vague terms. Include customer lists, datasets, formulas, designs, protocols, know-how, algorithms, unfiled patent drafts and research results.
- Restrict who can see what: List permitted disclosures clearly. If information can be shared with affiliates, advisors or independent contractors, define those terms and tie them to obligations in other agreements.
- Set clear timelines: Standard NDAs last three to five years, but if the information qualifies as a trade secret, your confidentiality obligations must last until that information enters the public domain lawfully, not arbitrarily expire.
Can You Lose a Trade Secret?
Yes, and faster than you think. If your startup does not treat something as a trade secret, the law won't either. That means putting up real barriers: controlling access, tracking who receives what and documenting efforts to keep that knowledge protected.
Courts ask whether you took “reasonable measures” to protect your trade secrets. And if you didn't? You may lose your rights, even if the value is obvious and the damage is real.
Exit and Termination Risk
Every contract ends. Some end with champagne, others with silence and some implode halfway through. But here's the truth: most startup founders only realize what their contract says about the end when it's already too late. This is the final, often invisible startup contract risk: exit and termination risk.
When your service agreement, licensing deal or joint development contract comes to an end, the next question is who keeps what. Do you still have access to the intellectual property? The datasets? The regulatory filings? If your contract doesn't say, assume the worst.
Termination for Cause
This type of termination happens when one side fails to hold up its end of the deal, like missing key milestones, breaching confidentiality or failing to follow regulations.
But if your agreement does not specify that you retain usage rights to co-developed intellectual property or shared work product, you may lose access to what you helped create.
Termination for Convenience
This provision allows either party to walk away without proving misconduct. Termination “for convenience” means either party can walk away — no explanation required. And while that sounds civilized, it can pull the rug out from under your company if your contract isn't designed to handle the fallout.
Here's what happens when this risk is overlooked:
- A technical partner exits and you lose access to critical infrastructure because the contract never guaranteed post-termination rights or backups
- You're forced to delete or return all deliverables, even though your startup helped build them and needs them to secure funding or regulatory clearance
Unless your exit clause includes transition rights, post-termination licenses and clear ownership of deliverables, a clean break can quickly turn into a disaster.
Takeaway for Startup Founders
We hope this guide gave you a clear, honest look at the startup contract risks every founder needs to understand. At Crowley Law LLC, we help life sciences and other technology startups build stronger foundations by drafting contracts that protect your business, clarify responsibilities and prevent disputes. Contact us at 908-663-8253 for a contract audit.
FAQs
How Do I Know if My Current Contracts Expose Me to These Risks?
Start by reviewing who owns the IP, who controls decisions, how termination is handled and whether indemnity or compliance obligations are clearly defined. Look for vague language, broad approval rights and missing exit provisions. A contract audit by legal counsel can help identify silent liabilities and patch legal blind spots
What Is the Difference Between Background IP and Foreground IP in a Contract?
Background IP refers to what each party brings into the deal. Foreground IP is what is created during the relationship. Contracts should clearly define who owns what, who can use it and whether improvements or derivatives are jointly owned, solely owned or licensed.
Can I Reuse NDAs, MSAs, or Licensing Templates From Past Projects?
Rarely. What worked for one deal may create risk in another. And simply marking up an agreement from another deal gives away all your initial terms that you failed to get in your prior deal. So, you're already starting from a compromised position. Terms like field-of-use, sublicensing, payment triggers or indemnities are context-specific. Using a generic contract without tailoring it to your current IP, business model and partners can lead to disputes or loss of rights.
What Protections Should I Ask for if I'm Entering a Collaboration With a Larger Entity?
Push for clear IP ownership terms, decision-making autonomy, narrowly scoped approval rights, access to work product after termination and reasonable indemnity limits. If possible, include transitional support and confirm your ability to assign or sublicense without excessive control.
NOTE: The foregoing analysis is for educational purposes only and does not constitute legal advice. You should engage an experienced lawyer to help you deal with any issues of this type as they apply in your unique situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
