Hiring a developer to build your website, app, or custom software is an exciting step in launching or growing your startup. However, the process is filled with potential pitfalls that can lead to project delays, unexpected costs, or not owning the final product – issues which can all be avoided with a good software development agreement.

I’ve personally gone through this process and worked closely with numerous startup founders to help them develop and launch software and apps. Through this experience, I’ve learned just how easy it is for things to go wrong and what’s important to cover.

Below I’ll break down the key elements of a software development agreement to help you avoid common mistakes and minimize risk.

Here are some real-life examples of what can happen if you don’t have a good software development agreement:

• A startup paid $20,000 for an app, only to realize months later that the intellectual property (“IP”) was never transferred to the founders/startup but instead stayed with the developer. Later, when the founder was trying to get an investment, he had to pay an extra $15K just to get ownership that was really his to begin with.
• A team of developers was paid 70% of the project fee upfront but abandoned the project halfway through. The founders were left without the funds to complete the project elsewhere and with half-finished code that no one would touch.
• A web app was delivered, but the first version wasn’t what the founders envisioned. Disputes arose over who should pay for further revisions and corrections. The disputes led to threats, and the project was never completed.

These situations aren’t rare, but they are preventable with the right contract and practical steps in place.

Why a Software Development Agreement is Important

A software development agreement isn’t just another document – it helps to manage expectations, protect your interests and guide both sides on how the process should work. The agreement covers numerous topics such as the scope of work, project timeline, payment terms, intellectual property ownership, use of open-code, quality assurance (QA), rounds of corrections and how disputes will be resolved.

Without a comprehensive agreement, even simple projects can spiral into costly, drawn-out problems.

When should I use a Software Development Agreement?

Both customers and developers have a strong interest to have a software development agreement in place. As mentioned, this aligns expectations, helps avoid misunderstandings and clarifies issues such as IP ownership and payments. Additionally, as developers, this makes you look more professional. That said, if the value of the project is lower than the cost of the contract (common contracts for startups and their costs), then it might be enough to sign a shorter order form that covers the main issues (some of which are mentioned here below).

The Main Issues That Need to be Covered in a Software Development Agreement:

1. Description of the Services / Project

It’s important to include a detailed description of the services and the project in the agreement. This usually appears as an annex (at the end). The more detailed the better because if later there’s any argument about what was supposed to be done – this section will help. It will also help with debates about IP ownership. If you don’t know all the details yet, add a description as best you can, and update the annex as things evolve (so long as both sides sign off on the updates).

2. Defining Clear Milestones, Rounds of Corrections, and Deliverables

Misunderstandings often arise when project milestones are vague. It is crucial that each stage or milestone is clearly defined. This includes:

• What each milestone includes (e.g., working prototype, full-feature app – which features…).
• The date of completion of each milestone/stage.
• How many rounds of corrections / revisions are included for each stage. For example, two rounds per milestone and additional rounds are at an hourly fee of X.

QA and Testing: define who is responsible for quality assurance (QA)? How long the testing period lasts, and what happens if bugs are found.

3. Intellectual Property Ownership – Make Sure It’s Yours

One of the biggest mistakes founders make is assuming they automatically own the software their developer creates. In reality, ownership isn’t always transferred unless explicitly agreed upon.

What you need to include in the agreement:

• Full Ownership: Make sure that there is a section that states that you own all the code, designs, updates, and modifications developed as part of the project. Be careful of exceptions.
• Assignment of Rights: Developers must sign over and transfer any IP rights to the work, ensuring you’re the sole owner, and waive any moral rights. In some cases, the assignment might be connected to payment – which is something you need to review and be careful with.
• Third-Party Code: If open-source or third-party libraries are used, the agreement needs to state that the licenses allow the commercial use and modification of that code.

4. Payment Structures – Tie Payments to Milestones

Paying developers upfront might feel like a goodwill gesture, but it can lead to major issues if the project stalls. As a developer you’ll want to get at least some of the payment upfront. To protect yourself:

• Milestone Payments: Divide the project into phases (e.g., wireframes, beta version, final delivery) and tie payments to the successful completion of each phase, stage or milestone. It’s ok for developers to ask for a small down payment – not all clients are fair or honest and they too need to protect themselves. But this shouldn’t be more than 5%-15% (the more expensive the project, the lower the % and vice versa).
• Retention of Final Payment: Hold back at least 20% of the total project fee until after a defined support period (at least 2-3 weeks for websites, 1-3 months for apps and software). After that period, agree in advance on a support fee.
• Approval Process: Clearly state that milestone payments require your written approval of the deliverables after they’ve been checked.
• A Copy of the Code: Always receive a copy of the code before or directly after making the last payment.

5. Open-Source Code – Mitigating Risks

Developers often use open-source code to speed up development. While this is very common (it saves time and costs) – it has its’ risks if the right licenses aren’t used. To avoid mistakes, make sure that:

• Relevant license: Any open-source code used has a license permitting commercial use and modification.
• Clear Documentation: Require developers to list all open-source components and their licenses.
• Limit: Where possible, limit the use of open-source code.

6. Avoiding Third-Party Infringement

Your agreement should include warranties from the developer confirming that all materials used (code, images, and assets) are originally theirs or legally licensed to them or you for commercial use and that the materials don’t infringe on any third party’s (another person’s) rights – and that if any claims arise that they will indemnify you. As a programmer, you want to limit the indemnification.

7. Confidentiality and Non-Compete

Be sure to include sections that protect the confidentiality of your information and IP. Additionally, you’ll want to include a non-compete section – preventing the developer from directly competing with you (note that this is usually limited to a specific time frame because they will often work on similar projects for different clients).

8. Jurisdiction – Addressing Enforcement Challenges

Many startups hire developers from other countries, which can complicate dispute resolution. The software

development agreement should clearly define the jurisdiction and governing law in the event of a dispute.

It’s important to understand that enforcing a contract across borders can be complex and expensive. Consider adding a compulsory arbitration or mediation process and select the identity of the arbitrator or mediator in advance. If jurisdiction is an issue, consider using a trustee who holds the payments in case of a dispute.

Final Thoughts – a Strong Agreement is as Important as the Code Itself

The difference between a successful project and a failed one often isn’t in the quality of the code but in the strength of the software development agreement. Whether you’re hiring a solo freelancer or a large development house, having the right legal framework and a startup attorney to review the agreement can save you from costly mistakes.

If you need assistance drafting or reviewing a software development agreement, feel free to contact me.