Contracts & cash flow
Is a long payment term worse than a weak indemnity for a startup's cash flow?
How to price both clauses in dollars and days, so you know which one to push on before the redline call.
Yes, for most startups the long payment term is the worse clause. A payment term moves real cash every month, for certain, while a weak indemnity describes a loss that may never happen. If you don't have a balance sheet to carry a customer's invoice for 90 days, price that clause first. The exception is an uncapped indemnity, which can turn a contingent risk into a sudden one.
Net 90 costs you money before anything goes wrong
Your first big customer sends back its own paper. It has net 90 payment terms and an indemnity you don't love, and you have room to push hard on one. Most founders pick the indemnity. Here's why I'd pick the payment term, and how to check it for your own deal.
A payment term is a loan you make to your customer. You deliver the product, run payroll, and pay your vendors, then wait three months to be paid for any of it. Nothing has to go wrong for that to hurt. It happens on every invoice, for the life of the contract.
Here's the math on one deal. Say a customer signs at $120,000 a year, invoiced annually. On net 30, you carry that invoice for a month. On net 90, you carry it for three, and again at every renewal. If you spend $40,000 a month, that invoice is three months of runway arriving 60 days late.
The clock can also start later than the number says. If you can only invoice after the customer accepts the work, and acceptance takes 30 days, net 60 is really net 90. Service credits and renewal pricing work the same way: they change what you collect every single month. If your customer's paper reads like this and you can't tell what it costs you, tell me about your deal.
Isn't a weak indemnity the scarier clause?
It's the clause most reviews fight hardest. The usual checklist starts with the limitation of liability, then indemnification, then data protection, and grades each one against what's market. Payment timing gets handed to the business side as a commercial detail. That order fits a company with cash reserves to absorb a slow-paying customer.
For a startup, I read it the other way. A liability cap describes a loss that may never happen, and limits how big it gets if it does. A payment term moves cash every month, and for a company without a balance sheet, running out of cash is the risk that can end it. So I run each clause against your revenue and your cash position, not against a market norm.
There's one real exception. An uncapped indemnity, or one that makes you pay defense costs as they come in, can turn a contingent risk into a sudden cash drain. Don't give that up to win a shorter payment term.
I practiced at large established firms, Baker Hostetler, Baker Donelson, and Kutak Rock, before launching my own practice.
Finance law is where I learned the discipline of building on top of an idea: asking which risk actually drives funding the next stage. That's the question I bring to a contract.
“She catches the things that would have cost us later. Having finance-trained counsel review our contracts has been a real advantage.”
Four checks before your next redline call
Run these on the customer's paper before you decide what to push back on. Each takes minutes with the contract and your bank balance in front of you.
- Put both clauses in dollars and days.Take the invoice, the extra days you'd wait, and what you spend in a month. Then ask what the indemnity could cost you, and how likely that is.
- Find what starts the clock.Check whether you invoice at signature, at delivery, or at acceptance. Add any acceptance window to the payment term to get the real wait.
- Read credits and renewal caps as price.A service credit is a discount you give when you miss a target. A renewal cap sets your price for years. Know both numbers before you agree.
- Pick the clause you'll give on before the call.If the indemnity is capped and the payment term isn't workable, spend your asks on the payment term. If the indemnity is uncapped, fix that first.
Then when net 90 shows up in the redlines, you'll know what it costs and whether it's worth the fight.
Working on something like this? Tell Charlotte about it.
Tell Charlotte about your dealPayment terms are one of several places margin leaks
My essay on reading a contract the way a finance professional reads cash flows walks through the rest: credits, acceptance language, renewal pricing, and what each one does to your margin. Two more questions from it:
