Founders sign contracts under time pressure. That's where bad contracts get through.
The investor wants the term sheet signed by Friday. The vendor won't ship until you sign their master services agreement. The partnership feels too good to slow down for legal review. So you skim it, miss the uncapped indemnification clause, and find out 18 months later that you're on the hook for a liability your whole company isn't worth.
This doesn't happen because founders are careless. It happens because contract review is slow, expensive, and not interesting enough to prioritise until something goes wrong.
Lex, Veqiro's AI legal assistant, reviews contracts in under 5 minutes. Here are the 12 red flags it's trained to catch — and what to do when it finds them.
The Ground Rules Before We Start
Three things worth saying clearly:
Lex is not a lawyer. AI contract review is a flagging tool, not legal advice. Lex identifies clauses that deviate from market-standard terms and explains what they mean in plain English. For anything with material financial or legal exposure, you need a human attorney.
Market standard varies by contract type. An NDA has different market norms than a SaaS vendor agreement, which has different norms than an investment term sheet. "Normal" depends on the context.
Your negotiating leverage depends on your stage. Some red flags are worth fighting for. Others aren't worth the relationship cost. Knowing which is which requires judgment, not just clause identification.
With that said — here are the 12 clauses that hurt founders most often.
The 12 Red Flags
1. Uncapped Liability
What it looks like:
"Customer shall indemnify and hold harmless Vendor from any and all claims, damages, losses, and expenses arising from Customer's use of the Service."
Why it matters: "Any and all" means exactly what it says. If the vendor's service causes a data breach that harms your customers, you're on the hook for every dollar of damages — potentially more than your company is worth.
What market standard looks like: Liability caps at 12 months of fees paid, or a specific dollar amount. Both parties capped at the same limit.
Lex's fix: Flag it, quantify the risk, request mutual caps.
2. Broad IP Assignment
What it looks like:
"All work product created by Employee in connection with their duties shall be the exclusive property of Company, including any inventions, discoveries, or improvements whether or not related to the business of Company."
Why it matters: "Whether or not related to the business" language can claim ownership of side projects, personal work, or inventions you developed entirely on your own time.
What market standard looks like: IP assignment limited to work product related to the company's actual business, developed using company resources.
Lex's fix: Add carveout language for personal projects predating employment; limit scope to company-relevant work.
3. Auto-Renewal With Short Cancellation Windows
What it looks like:
"This Agreement will automatically renew for successive one-year terms unless written notice of cancellation is provided no fewer than 90 days prior to the renewal date."
Why it matters: You miss the 90-day window once, and you're locked in for another year. Enterprise software companies make significant revenue from companies that forget to cancel in time.
What market standard looks like: 30-day cancellation notice or less; month-to-month options for SaaS.
Lex's fix: Negotiate to 30 days and add a calendar reminder for every contract with a renewal date.
4. One-Sided Termination Rights
What it looks like:
"Vendor may terminate this Agreement at any time for any reason with 30 days notice. Customer may only terminate for material breach not cured within 60 days."
Why it matters: You can't leave freely, but they can. If the vendor terminates your critical infrastructure with 30 days notice, your business may not survive the migration.
What market standard looks like: Mutual termination rights; if asymmetric, the party with more leverage is named explicitly.
Lex's fix: Request mutual termination rights or get a longer notice period in your favour for service-critical vendors.
5. Unfavourable Jurisdiction
What it looks like:
"This Agreement shall be governed by the laws of Delaware, with exclusive jurisdiction in the courts of New Castle County, Delaware."
Why it matters: If you're in Bengaluru and the contract says Delaware courts, any dispute means flying to the US for litigation. The cost of enforcement makes it practically impossible to sue even if you're right.
What market standard looks like: Jurisdiction in your home country/state, or mutual agreement on a neutral venue, or arbitration.
Lex's fix: Request your local jurisdiction or AAA arbitration with remote hearing option.
6. Unlimited Data Use Clauses
What it looks like:
"By using the Service, Customer grants Company a worldwide, irrevocable, royalty-free license to use, reproduce, modify, and distribute Customer's data for any purpose including service improvement."
Why it matters: Your customer data, product usage data, and business intelligence — shared freely with the vendor, including for training AI models, building competing products, or selling to third parties.
What market standard looks like: Data use limited to service delivery and improvement; no third-party sharing without consent; explicit AI training opt-out.
Lex's fix: Negotiate deletion rights, data use limitations, and an explicit AI training exclusion clause.
7. Evergreen Confidentiality Obligations
What it looks like:
"Recipient's obligations under this Agreement shall continue in perpetuity."
Why it matters: Perpetual confidentiality obligations on general business information are increasingly unenforceable — and they create ongoing compliance risk for information that's become publicly known or irrelevant.
What market standard looks like: 2–5 year confidentiality obligation for general business information; perpetual only for trade secrets.
Lex's fix: Request a term-based obligation for general information; perpetual only for specifically identified trade secrets.
8. Mandatory Arbitration With Unfavourable Terms
What it looks like:
"All disputes shall be resolved by binding arbitration administered by [Vendor's preferred arbitration body] under [Vendor's preferred rules] with hearings in [Vendor's location]."
Why it matters: Arbitration clauses themselves aren't necessarily bad — they can be faster and cheaper than litigation. But when the arbitration body, rules, and location are all chosen by the vendor, the deck is stacked against you before the case starts.
What market standard looks like: Mutually agreed arbitration body (AAA, JAMS), neutral venue or remote hearing option, consumer-protective rules for small claims.
Lex's fix: Negotiate to AAA or JAMS with remote hearing option.
9. Waiver of Consequential Damages (One-Sided)
What it looks like:
"In no event shall Vendor be liable for consequential, indirect, or incidental damages. Customer's liability is not so limited."
Why it matters: Vendor is protected from consequential damages. You aren't. If their service failure causes you to lose a major customer, you have limited recourse — while remaining fully exposed yourself.
What market standard looks like: Mutual waiver of consequential damages, or mutual removal of the waiver.
Lex's fix: Request mutual application of any consequential damages limitation.
10. Broad Non-Compete or Non-Solicitation
What it looks like:
"For a period of 24 months following termination, Employee shall not engage in any activity competitive with the Company's business in any market where the Company operates or has operated."
Why it matters: "Any activity" in "any market" for 24 months is often unenforceable but always costly to fight. The broader the scope, the more legal fees you spend challenging it.
What market standard looks like: Geographically limited, specific to actual business activities, 12 months maximum for most US states.
Lex's fix: Request geographic and scope limitations; reduce to 12 months.
11. Assignment Without Consent
What it looks like:
"Company may assign its rights and obligations under this Agreement without prior written consent of the other party."
Why it matters: The vendor can sell the contract to whoever they want — including a competitor. You're now under contract with a company you never chose.
What market standard looks like: No assignment without consent, or consent not to be unreasonably withheld, with carveout for change of control scenarios.
Lex's fix: Add "subject to prior written consent, not to be unreasonably withheld" language.
12. Undefined "Material Breach"
What it looks like:
"Either party may terminate this Agreement upon written notice if the other party has committed a material breach."
Why it matters: "Material breach" is undefined. What counts as material? The party claiming breach gets to make that argument first — and an experienced legal team can characterise almost anything as "material" if they want out of the deal.
What market standard looks like: Specific enumerated breach events that qualify as material; cure period of 30–60 days for remediable breaches.
Lex's fix: Define specific material breach events; add cure period for remediable breaches.
How to Use AI Contract Review in Practice
With Lex, the workflow is:
- Upload or paste the contract. PDF, DOCX, or plain text.
- Specify the contract type. NDA, SaaS MSA, employment agreement, vendor contract, etc. This calibrates which clauses Lex applies which risk models to.
- Receive a flagged brief. Within 5 minutes: a section-by-section summary, flagged clauses with plain-English explanations, risk severity ratings, and suggested redlines.
- Decide which flags to push on. Not every flag is worth the negotiation cost. Lex gives you the information; you make the call.
For routine NDAs and vendor agreements, this process replaces attorney review entirely. For material agreements, Lex's flag brief goes to your attorney as a pre-read — cutting their review time and your bill.
Most founders sign bad contracts not because they're naive, but because they're fast. AI contract review closes that gap — without slowing you down.