Contract clauses, one at a time

Many deals can be signed before they can be finished: the landlord has not yet approved the lease transfer, the licence is still in someone else's name. A condition precedent clause lets the parties commit now and complete only when those pieces fall into place.

A lender does not want to be the last to know. A cross default clause links a borrower's loans together, so a default with one creditor gives every lender with the clause the right to act, which is why the threshold and wording matter so much to borrowers.

Equal ownership feels fair on day one and becomes a trap the first time the owners disagree about something that matters. A deadlock clause decides in advance whether the tie is broken by talking, by a third party, or by one owner buying the other out.

Most buyers of a private company want 100 per cent of the shares, so one holdout with a few per cent can block a deal everyone else wants. The drag along clause removes that veto, which is why minority holders focus their attention on the protections attached to it.

A mortgage is lent to a person, not to whoever owns the house next. The due on sale clause is how a lender stops a buyer simply taking over a borrower's loan, and federal law carves out the family and estate transfers where calling the loan would be unfair.

Sellers believe in next year's growth; buyers pay for last year's results. An earn out splits the difference by paying for the growth if it happens, and the clause has to make sure the measurement is fair once the buyer is running the business.

An events of default clause is the trigger list in a loan or finance agreement: if any listed event happens, the lender can act, usually by demanding the whole balance and enforcing its security. Cure periods, materiality and Australia's ipso facto stay decide how quickly that can happen.

Investors buy into a private company planning to sell one day, while founders may be happy running it indefinitely, and that difference is best surfaced before the money goes in. The exit clause turns an unspoken expectation into a process with dates, an adviser and consequences.

Founders leave for every reason from illness to misconduct, and shares held by someone who fell ill should not be treated like shares held by someone who walked out to join a competitor. The classification is what gets fought over, because it can move the value of a stake by millions.

Minority investors in a private company have very limited statutory access to its books, so what they see in practice is whatever the agreement promises. For founders, the clause sets a reporting workload that has to be realistic for a small finance team.

When a startup is sold, the headline price is only the start of the question. The liquidation preference decides who receives the first dollars, and in a modest sale it can mean investors are repaid in full while founders receive far less than their percentage suggests.

Between signing a deal and closing it, things can go wrong. A MAC clause decides which bad news lets a buyer walk away. Courts set the bar high: in decades of Delaware litigation, a buyer has rarely succeeded, and Akorn v Fresenius in 2018 stands out because it did.

An unsecured lender is paid alongside other unsecured creditors if the borrower fails. A negative pledge keeps it there, rather than behind a queue of secured lenders that arrived later, by forbidding the borrower to grant new security without consent.

A buyer spends real money on lawyers, accountants and management time once it agrees terms in principle. A no shop clause is how it makes sure the seller is not using that work to shop for a better price elsewhere.

A personal guarantee puts a director's own house and savings behind a company's promise to pay. Lenders, landlords and suppliers ask for one when a company has few assets of its own. The clause decides how much the guarantor can lose, for how long, and whether the guarantor can ever be released.

Every new share issued to someone else shrinks each existing holder's percentage, so this clause is the main defence against being diluted without a say. It also shapes how quickly a company can raise money, which is why investors and founders negotiate its exceptions as hard as the right itself.

A prepayment clause decides what happens when a borrower wants to pay a loan off early: whether it may, how much notice it gives, whether part payments shorten the term or lower the instalments, and what it pays for the privilege. On a fixed rate loan, break costs are the usual sticking point.

A profit sharing clause decides who gets what out of a partnership or joint venture: the percentage split, the accounts profit is measured from, when it is distributed, what partners can draw during the year and who carries a loss. Partnership acts share profits equally unless the partners agree otherwise, so unequal partners need the clause in writing.

A reserved matters clause takes certain decisions away from the board or the simple majority and requires everyone, or a set majority, to agree. It is how a minority investor protects itself in a company or joint venture, and the list, the thresholds and what happens on a deadlock decide whether it protects or paralyses.

Private company owners care who they end up in business with, and this clause is the usual way they keep control over it. It also affects the price a seller can get, because an outside buyer knows its offer may simply be matched.

Without a tag right, a founder can sell control of a company at a premium and leave the minority holding shares in a business now run by a stranger. The clause makes sure any premium for control is shared, and that nobody is left behind when the people who built the company move on.

Equity handed out on day one assumes everyone will stay, and without vesting the co founder who leaves in month four keeps half the company. Vesting ties ownership to contribution, which is also why investors expect to see it before they put money in.

Every promise about data handling, pricing or security is only as good as the ability to check it. Audit rights are rarely used, but a supplier that knows they exist behaves differently from one that knows they do not.

Data crosses borders far more often than contracts admit, through offshore support desks, cloud regions and subcontractors in other time zones. The clause makes the supplier say where the data will actually go, so the customer can decide whether that is acceptable.