Most crypto businesses are not used to signing written contracts and operate on the basis of handshake deals and Telegram conversations. However, using clear written contracts can help founders protect themselves and their interests. In this article our Legal Mind Martin Repka explores four contracts crypto businesses should be aware of even when working with this disruptive technology.
Why is a written agreement important?
Before exploring some of the types of contracts to keep in mind, having a written agreement doesn’t just help you sue the other party if needed. In fact, most well-drafted agreements never end up in court. More importantly, entering into a written agreement helps you define the terms and conditions of a specific transaction by providing an opportunity to discuss the specific terms and any eventualities before you enter into cooperation. Being on the same page with your partners and service providers is essential if you want to avoid misunderstandings and legal issues down the line.
With that said, here are some of the most critical types of contracts that crypto businesses need to use.
Contractor Agreements
As a crypto business, hiring full-time employees can be a daunting task. That’s why contractors are often the go-to solution for building your product. This may include software development, marketing, treasury management, or legal services. It is quite likely that even you are a contractor if you provide services to your project and get paid in return. To ensure everyone is on the same page, contractor agreements are critical. These agreements outline the duties of each contractor, their pay, and important terms such as NDAs, limitations of liability, and ownership of code and other intellectual property. Without a contractor agreement, you risk disputes over payments, misunderstandings about the scope of work, and ownership of the work product. In addition, establishing a proper arrangement with contractors can help you attract quality talent from more traditional industries.
Market Making Contracts
Hiring market makers has become a standard practice for projects to provide liquidity for their tokens, stabilize the market and meet exchange requirements. Market-making contracts set out the terms of cooperation with the market maker, including terms like KPIs and payment terms. One crucial aspect is setting out a notice period for termination to ensure that the market maker cannot stop providing their services overnight if they find a more lucrative deal. This prevents being delisted from exchanges and causes liquidity concerns among the token purchasers. Additionally, some market-making services, like price manipulation, are in the regulatory gray zone or are outright illegal. Having a clearly defined agreement that specifies the services requested from the market maker can prevent any allegations of unethical behavior.
Token Listing, OTC Trading, and other contracts
Other essential contracts that crypto businesses should consider include token listing agreements, OTC trading agreements, and agreements with third-party service providers. Token listing agreements define the terms of listing your token on a cryptocurrency exchange. These contracts outline the fees, requirements, and other details for listing your token on an exchange, including whether the listing is exclusive or non-exclusive. OTC trading agreements are necessary when trading large amounts of cryptocurrency outside of exchanges. These agreements cover the terms of the trade, including the purchase price, delivery date, and any other important details. Finally, agreements with third-party service providers, such as security auditors or wallet providers, can help ensure that you receive the services you need and that your interests are protected. By having these contracts in place, your crypto business can operate with greater confidence and minimize the risk of misunderstandings and disputes.
Non-Disclosure Agreements (NDAs)
A classic but still important agreement to know about and implement. It’s very likely that you have a wealth of sensitive information that must be safeguarded at all costs. Think of any data that could be used by competitors to create similar products, information that could be exploited by hackers to manipulate your smart contracts or details that could be used against your own product by former team members. NDAs provide a reliable shield for any sensitive information you may share with partners, team members, or providers. Without an NDA in place, the risks of trade secrets falling into the wrong hands or suffering damage to your reputation due to leaks are simply too high. By having an NDA in place, everyone involved understands that they can get into trouble if they misuse your confidential information. Fortunately, NDAs are now standardized and can be quickly implemented with a simple two-page document.
Looking for legal assistance in drafting any of the above documents? Get started by reaching out to our Crypto team either by joining our Discord or reaching out at hello@sparring.io.
