If you’re reading this post, you’re probably a software developer trying to work as a consultant or, more generally, a knowledge worker who trades expertise for money. Like me, you probably spent years honing your technical skills, perfecting your craft. Then you read a couple of books about negotiation, felt like you learned what you needed and you were off to the races.

But let me tell you how skipping 30 minutes of corporate due diligence and a bit of extra one-time work cost me $20,000 and taught me more about business than a dozen MBA courses.

The Expensive Lesson

The project started like many others: an acquaintance reached out; he was working at a small company and had an interesting technical challenge—one that fit my skill set almost perfectly&mdash. We had great initial calls and really quickly aligned on the scope, timelines and financial terms. So they sent over their consulting agreement.

I thought I was doing everything right: I carefully read it, made sure that it properly memorialized what we had discussed, and… well… signed it. What else to do right?

So the work began and progress was made at a good clip. And just like that, it was time for the first invoice to be sent. And then the real education began.

That invoice went unpaid. “Just a temporary cash flow issue,” they said. “We’ll sort it out next week.” but next week, it turned into “we’ll roll it into the next invoice.” After eight weeks of increasingly concerning excuses, I started doing the research I should have done before signing.

The LLC that I contracted with wasn’t in good standing in Delaware, its state of incorporation. And while it had been registered to do business in Nevada, the State their office was in, that license had also lapsed.

Dealing with that situation cost me a lot but also taught me a lot and changed the way that I engage when engaging in consulting agreements.

Due Diligence: The Non-Negotiable First Step

When you hear about due diligence you’re probably thinking venture capitalists and M&A lawyers. But, at its core, it’s about knowing who you’re doing business with and making sure they are legitimate instead of only appearing to be.

Typically, you will be contracting with an LLC or other corproate entity. The first question to ask is “What entity will I be contracting with?” You want to find out the name of business and the State that it is registered with.

In the U.S. every state maintains its own business entity database. Collectively, these databases are the ground truth of corporate existence. Think of them as the birth certificates of companies. Delaware is a popular choice, and even if your client isn’t headquartered there, there’s a good chance they’re incorporated there. A majority of Fortune 500 companies are, and startups often follow suit for a number of reasons that are beyond the scope of this blog post. Nevada is also a popular choice.

Knowing the name and the State, you want to search for your client’s name in that State’s records. You’re looking for several things:

• Formation date (newer isn’t always worse, but it’s important context)
• Standing status (Good standing? Forfeited? Void?)
• Annual report filings (Missing reports are red flags)

Some States, like Nevada, offer this service for free; others, like Delaware, charge fees. It’s money well spent: you’re about to trust this entity with thousands of dollars of your time.

Typically, making sure that the company is registered and in good standing is enough. If they’re doing business in other states it’s always a good idea to check that they have a business license to operate in those states as well. Depending on the specifics, they may not need a license for every state, but at the very least if they have a physical presence they will have to at least have one.

Corporate Structure: Playing Detective

Here’s where it gets interesting. Companies, especially startups, often exist in complex corporate structures. The entity you’re contracting with might be:

• A subsidiary of a larger company
• A holding company
• A recently acquired company operating under its old name
• A joint venture

While this isn’t always relevant for our purposes, knowledge is power. So it may pay to ask some direct questions and document the answers:

• “Is this entity owned by or affiliated with other companies?”
• “Who has signing authority for contracts and payments?”

The Power Move: Your Own Agreement

After you’ve verified the company, here’s the next crucial step: never sign their contract. This isn’t about being difficult. It’s about survival.

Remember, that their agreement is written to protect their interests, not yours.

You want the agreement to have:

• The right legalese, especially for jurisdiction and proper venue for arbitration/adjudication (i.e. where and how disputes will be adjudicated);
• Clear, unambigious payment terms with actual teeth (i.e. late fees that accumulate);
• Documented scope, timelines and deliverables (i.e. what you have to, how you give it to them and by when you have to do it);
• Details about licensing or transfer of intellectual property; and
• Tying of IP transfer to payments.

That last one is important; you’d be amazed how quickly payments arrive when the IP won’t transfer until the check clears.

And of course, your agreement should be drafted by a laywer. Again, this may sound excessive. After all, a quick search will likely produce a consulting agreement and cost nothing, so why not use it and save some money? It’s possible that some agreement out there fits your situation, but there’s a lot there and a lot that can bite you if it’s not just so. Plus, a lawyer can tailor the agreement to perfectly suit your needs. And if it ever becomes necessary to file a suit, you already have a lawyer and they’re familiar with the agreement.

The Math of Protection

All this sounds like a lot of work, and it is. But ;et’s do some consulting math that would make your accountant proud:

Due diligence costs:

• Time: 60 minutes
• State database fees: ~$50
• Lawyer-drafted agreement: $3,500 (one-time cost)

Potential savings on a single project:

• Average consulting project: $10,000
• Legal fees to pursue payment: $15,000+
• Time lost to collections: 40+ hours
• Opportunity cost of that time: $8,000+
• Stress-induced therapy sessions: Priceless

So your ROI on the first avoided issue: it’s approximately infinity.

Handling Pushback Like a Pro

It’s not unreasonable for a client to want to use their own agreement for many of the same reasons that you want to use yours. But their agreement, in addition to being structured to protect their interests over yours, is also likely more generic and won’t include the important items yours will, including details about the project, scope, timelines and deliverables.

If this happens, your best best is to respond with professional confidence: “My agreement includes standard protections for both parties, lays out the project scope, deliverables and timelines clearly. It also include your Parent Corporation as guarantor of the payment. If you have concerns about specific provisions in the agreement I am happy to review them.”

Notice what this does: it demonstrates you’ve done your homework and frames the discussion around specific provisions rather than whose agreement to use.

The Real Lesson

The most expensive part of consulting isn’t unpaid invoices—althought unpaid invoices can be expensive—it’s the opportunity cost of dealing with payment issues instead of serving good clients. Every hour spent chasing payments is an hour you could have spent building your business.

Thirty minutes of due diligence ahead of time coupled with your own agreement may be the difference between getting paid and writing blog posts about not getting paid.

The professionals you admire didn’t get where they are by trusting blindly. They got there by treating due diligence as a non-negotiable part of their process.

Oh, and of course, you’re doing all your consulting through your own properly formed LLC, right? (If you just felt a twinge of anxiety, don’t worry - that’s a topic for another post about protecting your personal assets. Subscribe to get notified when it goes live.)

Will some potential clients balk at this level of professionalism? Yes. And those are probably the ones you needed to avoid anyway.