Closing Your First Customer Contracts

Lessons from Enduring Planet & Friends' Financing Series

Your first customer contract can help prove demand to investors. The terms you agree to can also lock you into pricing, exclusivity, or performance obligations that become difficult to manage as your company grows. Closing early deals can often mean making concessions. The question is which ones are worth making and what they'll mean for your business later.

At our latest Enduring Planet & Friends Financing Series, "Closing Your First Customer Contracts," Dimitry Gershenson (Enduring Planet) and Hannah Friedman (Lupine Finance) led a conversation with  Isabella Todaro (Founding COO at Aarden), Felix Fischer (Co-Founder & COO at Reverion), and Vikki Nguyen (Head of Commercial, Emerging Companies at Wilson) on landing early customers, turning interest into commitments, and negotiating contracts that work beyond the first sale. The discussion covered four themes: getting to yes, securing real commitments, negotiating the contract, and managing delivery risk.

Getting to yes on the first deal

Early customer contracts rarely follow a standard sales process. The product may still be evolving, so founders have to decide what they're willing to give up to get the first deal done.

Your first contract doesn't have to maximize revenue. Design partnerships can be useful while you're still developing the product. Sometimes the scope isn't fully defined when the agreement begins, and customers help shape the offering through testing and feedback.

Discounting can also be worthwhile. For example, a company might offer a lower price on an initial engagement before moving the customer to a subscription-based model at standard pricing. This gives the customer a chance to test the product while creating a path to stable recurring revenue. The company also gets a better understanding of what its customers need.

Discounts aren't always necessary. In closely connected industries, pricing information can circulate even when contracts include confidentiality provisions. Early discounts can therefore set expectations for future buyers. When demand is strong, you may have the leverage to hold firm on unit prices and other sales like unit maintenance agreements. Before making a concession, consider what you're getting in return and whether the terms will still make sense as you bring on more customers.

There are also relationship considerations. Once you've agreed to a discount verbally, walking it back or weaning off it up to full price can damage the relationship if expectations weren’t set correctly at the outset, even if the initial terms of an LOI or MOU weren't legally binding.

Turn interest into real commitments

Getting a customer interested is useful and exhilarating. But the next step is turning that interest into a commitment, often one that can withstand investor scrutiny.

A handshake is only the beginning. An agreement can be made before all necessary legal documentation is drawn up. Even when both parties have agreed on pricing and delivery, they need to work through concerns like liability, IP ownership, termination, and change of control. Depending on how change of control is defined, even a typical financing round could trigger contractual obligations.

Pre-orders can help qualify demand. Customers can sign pre-order agreements with refundable deposits. These don’t count as revenue, but they can still show customer interest in the product to investors and other key stakeholders.

The deposits can also help identify serious buyers. This approach works particularly well in markets with many potential customers. In more concentrated markets, with large enterprise/corporate customers, sometimes securing even an LOI from a major buyer can take months, making the same approach less practical.

Some provisions in a non-binding LOI may still be enforceable. Commercial terms may be non-binding while confidentiality, governing law, or exclusivity provisions are often surviving and enforceable. As a result, a startup could end up restricting its ability to work with other customers without securing a binding purchase.

Grants can help get first-of-a-kind pilots built. For hardware companies, grant financing or other risk-tolerant assurances can get a customer more comfortable for large pilot projects. 

Negotiate the business terms before the legal paper

Even when a customer is ready to commit, getting the contract signed can be difficult. Start with the business terms, not the redlines. Identify your must-haves and nice-to-haves before getting into legal drafting. It's worth asking to use your own contract, although large customers will often insist on theirs. Large enterprises often have standard agreements that don't fit new technology particularly well, and startups rarely have the leverage to rewrite everything.

Rather than negotiating every clause, focus on the provisions that matter most. First, get the business teams aligned on those points and then bring the agreed changes back to legal. This can save a lot of unnecessary back-and-forth.

Put limits on exclusivity and MFNs. Exclusivity can restrict sales if the product serves more than one customer. If you have to accept it, name the competitors it covers and set a fixed end date. Don't let the agreement end only when certain work is finished. Delays could keep you locked in longer than planned.

Most-favored-nation (MFN) clauses can cause similar problems, especially if they require you to offer a customer the best terms you give anyone else. If you agree to one, make sure it only applies to similar customers and deals, taking into account how much each customer buys.

Fixed prices can help close deals, but they also come with risks. Hardware companies need to plan for rising equipment and material costs. Software companies may find it easier to fix prices for the initial work and charge more for additional services.

In both cases, leave room to adjust prices if certain costs rise sharply, such as equipment, AI usage, or costs caused by changes in the law.

Protect your underlying IP. Some contract terms may give customers ownership of improvements you make to your product or platform. Be clear about what the customer owns, including anything you're expected to deliver. You don't need to negotiate ownership of everything. Customers can own their data and results without owning the technology behind them. In some cases, you can give customers permission to use what they need while keeping ownership of your technology.

Limit what you could owe and know when you can walk away. Some customer contracts don't set a limit on how much your company might have to pay if something goes wrong. Without one, you could face claims worth far more than what you earn from the contract. Make sure the agreement includes a reasonable limit.

Termination at the outset. It's also important to have a way out. Make sure you can end the contract if the customer breaks important terms and choose not to renew it. This matters even more if you've agreed to restrictions like exclusivity.

Make sure your supply chain can support the contract

After negotiating the customer agreement, you still need to make sure you can deliver on it. That might depend on suppliers whose commitments don't match your own.

More suppliers don't always mean less risk. Relying on one manufacturer for critical components creates a point of failure, while working with too many can create problems with standardization. One approach is to start with smaller orders, test and qualify suppliers, and increase volumes as the relationships develop.

Software companies are not exempt from this. Specialized data may come from public records, paid providers, or internal models. As previously hard-to-access data becomes more widely available, the advantage increasingly depends on what a company can do with it.

If your supplier can't guarantee it, you're carrying the risk. When a customer warranty or delivery commitment goes beyond what a supplier has agreed to provide, the company is responsible for the difference. The first step is to align those obligations as closely as possible. Where gaps remain, consider whether the risk can be covered through pricing or insurance.

Delivery also depends on working capital. Even with customer orders ready to sign, you may struggle to secure equipment, manufacturing, or delivery capacity without it. Plan for these financing needs before the orders start coming in.

Tactical Takeaways

A few things to take into your next customer negotiation:

• If you’re considering giving them, treat early discounts and design partnerships as opportunities to learn, with a plan for moving toward recurring revenue.
• Use pre-orders and deposits to qualify demand. Check cancellation rights before counting on the sale.
• Separate binding and non-binding provisions in LOIs and in the “emotional” part of the negotiation. Even informal promises can be difficult to walk back.
• Agree on business terms before redlining. Focus on IP ownership, liability, termination, and restrictions on future sales.
• Avoid or put clear limits on exclusivity, MFNs, and price locks. Define their scope, duration, and exceptions if you have to include them.
• Match customer promises to supplier commitments, and plan for the financing and risks involved in delivery.

Your first contract won't be perfect. You may need to accept a customer's standard agreement or make other concessions to get the deal done. Before signing, be clear about what you're agreeing to, what you can realistically deliver, and whether those terms will still work as you bring on more customers.

Thank you to Wilson Sonsini Goodrich & Rosati for sponsoring this series.

Follow our Luma calendar to register for upcoming Enduring Planet & Friends Financing Series: luma.com/enduringplanet.