Last week Y Combinator announced The Handshake Deal Protocol [no longer available online – apparently because of the Protocol’s shortcomings discussed below]. A “handshake deal” is an oral commitment to a funding transaction between a startup’s founders and an investor. This sometimes is considered necessary in Silicon Valley because, in the world of startups, one must move quickly.
As Y Combinator notes, however, a handshake deal can create problems:
Unfortunately, things don’t work as smoothly in Silicon Valley as among diamond dealers. This is not a closed community of pros who deal with one another day after day. Many participants in the funding market are noobs, and some are dishonest.
As concerns oral agreements, the statement that “a verbal [sic] contract isn’t worth the paper it’s written on” erroneously attributed to Samuel Goldwyn actually is pretty close to the mark.
Sometimes I am asked whether oral agreements (as contrasted to those that are written) are enforceable. This post will answer that question but will explain why, even when oral agreements are enforceable, they should be put in written form, anyway.
Oral Agreements Generally Enforceable
Generally, oral agreements are enforceable in California. There are, though, many exceptions. For example, agreements for the sale of land or any agreements to the extent that they will require performance after one year must be in writing (Civil Code Section 1624), as must premarital agreements (“prenups”) (Family Code Section 1611). Also, written agreements generally may be amended only in writing and not orally (Civil Code Section1698).
I just made available on the Downloads page (sign up using the drop-down list in the sidebar) “Top Ten Legal Tips for Independent Contractors,” a document that describes how independent contractors can avoid exposing themselves to unnecessary legal risks.
Here are the titles of the ten tips, which are discussed in greater detail in the document:
- Choose the right type of legal entity for your business
- If you choose a corporation or LLC, comply with applicable formalities
- Buy the right types and amounts of insurance
- Identify and protect your intellectual property
- Use your form of client agreement whenever possible
- Be careful when assigning or waiving intellectual property rights
- Be careful when collaborating or subcontracting
- Be careful with nondisclosure / confidentiality agreements
- Avoid oral agreements whenever possible
- Understand what distinguishes independent contractors from employees
For more information about distinguishing independent contractors from employees (tip 10), please see Avoiding the “Independent Contractor” Trap.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.