I’ve seen a few startups recently who want to have their customers sign contracts to get started.

The logic being that you can guarantee recurring income for your business (for the length of the contract) or you’ll have some recourse if the person fails to pay.

But there are two flaws with this thinking:

1. If your product is actually good, customers will stick around whether you have a contract or not
2. If the customer owes you less than a few thousand dollars, it’s not even worth your time to sue them

So if you are left with a contract that you’ll never enforce, why even ask for it in the first place?  All you’re doing is creating a hurdle to getting new customers to try your product.

Google Adwords is a good example.  Most agreements in the advertising world are still done with paper contracts, but Google decided to let anyone start advertising on Adwords in just a few minutes with no up front cost or contracts.

If you fail to pay your Adwords bill, Google isn’t going to sue you for $500.  It’s not worth their time.  They simply shut down your Adwords account until you pay your bill.  If two years later you are finally ready to try Adwords again, hey – no hard feelings – you can just pay it and your account is instantly re-enabled.

When I see an internet company asking for contracts up front, it feels like their product must not be very good – otherwise why wouldn’t they just let me try it knowing full well I’m likely to stick around?

Brian Armstrong

P.S. I certainly don’t mean to imply all contracts are bad.  For independent contractors, real estate, anything involving larger sums of money, etc it can make perfect sense.  But most internet companies are charging relatively small sums of money per person.  

P.P.S. Another way to look at is "what would it cost you if the customer doesn’t pay?"  Most internet companies have low marginal costs in their products (ad space, some CPU time, etc).  If you’re in a high margin business you can afford to give away all sorts of "free trials" in the form of people not paying after signing up.  It’s often worth it just to get your product in the hands of more people.

P.P.P.S.  Most companies (including Google) still make you agree to a "Terms of Service" by clicking a checkbox.  Don’t confuse this with a contract though.  The terms of service is usually there to prevent *you* from suing them, not the other way around, and it’s a sufficiently small hurdle that it probably won’t affect your signup rates.