Inefficient contract redlining can stall a deal in the endzone.
Imagine you have a verbal agreement with a potential client. All you need to do is finalize the contract. The paper is with you, but you’re waiting on the sales lead and CFO to respond to counterparty redlines. One edits in the Word document and shares it over Slack; the other sends edits in the body of the email. Both use the same filename as the original document. Neither account for the edits the other made.
Founders understand the pain of spending valuable time consolidating multiple edits into a single document. A quick two-day turnaround turns into two weeks. The client becomes frustrated and may back out.
But thisinefficiency is avoidable. With the right tools and processes in place, founders and legal operation teams can streamline redlining and keep contracts moving. This article provides a guide for efficient redlining and highlights common pitfalls to avoid.
What is contract redlining?
Contract redlining is the process of marking up an agreement with edits, insertions, deletions, and comments as parties negotiate before signing.
The “red” in “redlining” originally referred to the red pen counsel would use to mark up a contract before returning it. Some lawyers still prefer to work with physical copies. But most have embraced technology, using Track Changes and similar editing tools.
Not every contract requires the same amount redlining. Smaller contracts might not need any at all, while higher-value contracts can demand significant edits and customizations.
When to redline a contract
Contract redlining happens whenever you or the other party need to adjust the terms of a proposed agreement. Redlining specifically comes up during:
- Counterparty negotiation: Counterparty negotiation is the back-and-forth that allows contract parties to define their business relationship. Both sides edit the terms to ensure they properly allocate risk and define responsibilities.
- Internal stakeholder alignment: Internal stakeholders redline a contract to make sure it represents their needs. If you have a sales team, for example, they might edit the renewal terms to make upselling easier. Or your risk managers might want to limit indemnification to controllable risks.
- Template updates: If sales representatives or human resources personnel send standardized agreements themselves, you’ll need to redline out-of-date templates. Updating templates ensures only approved terms are sent out and saves time on making small tweaks every time employees share a contract.
- Revisions to legacy agreements: You might need to modify legacy agreements after they’ve been signed to protect your business. New data privacy regulations, for instance, can require you to add compliance reporting obligations that aren’t in existing contracts.
Common contract redlining challenges
Whether due to unclear approvals or inconsistent naming conventions, contract redlining can slow you down and introduce risk into your business relationships. Here are some potential issues to consider.
- Poor version control: Poor version control happens when parties work from multiple drafts, and it’s unclear who made what changes and when. Using different tools to edit and store an agreement increases confusion and muddles the audit trail.
- Untracked edits: Redlines highlight changes made to a contract document. When those changes aren’t tracked, it’s unclear what has been edited or agreed to. Untracked edits undermine the audit trail and lead parties to sign off on terms they never agreed to.
- Broken formatting: When a contract has multiple iterations, it’s easy for tables to lose formatting or for numbered clauses to get shuffled. Cleaning up broken formatting lengthens the time to close.
- Slow return times: Between tracking down contract versions and reconciling file types, even simple redlines can drag on for weeks. These delays can cause a deal to lose momentum.
How to redline a contract, step by step
Many early-stage startups don’t have an in-house legal team. The founder wears the legal hat, and redlining can feel especially chaotic. Here’s a step-by-step workflow founders can follow to improve the efficacy of the process.
Step 1: Read the document in full and get aligned internally
Redlining is strategic. Before you start making edits, do a first pass on the contract and ensure stakeholders are all on the same page about the company’s position. Circle up with finance about payment terms and the product team about roadmap commitments. Once everyone is aligned, redlining can begin.
Step 2: Track changes and leave clear comments
It’s good redlining etiquette (and an efficient practice) to track the changes you make. Tracked changes are easier to distinguish and respond to than direct edits. Also, limit unnecessary back-and-forth by writing clear comments that explain why a change was made. For example, rather than simply rejecting an edit, comment “we can’t accept unlimited liability due to uninsurability.”
Step 3: Exchange redlines with your counterparty
If the contract is on your counterparty’s paper, you make the first redline, and vice versa. Work from a single source of truth, rather than parallel versions, to capture every change. Take turns making edits until you’ve reached a mutually satisfactory agreement. And avoid editing the document at the same time as the other person. Simultaneous editing can cause confusion and delay final signing.
Step 4: Resolve open issues and finalize copy
Walk through the final document and accept or reject remaining changes and resolve comments. Unaddressed comments or redlines leave open questions about whether or not something was agreed to.
How to review redlines before signature
Before you sign, double-check that all negotiated terms are present in the final version of the contract. Ensure nothing has been added, as stealth edits can sometimes make it into the final draft of a contract. A quick scan isn’t enough, especially when you’ve been rereading the same contract for weeks, and your eye is apt to miss changes due to editing fatigue. So, while a manual scan is a good first step, a blackline comparison is essential.
A blackline (also called document comparison) identifies the differences between drafts. Pre-signature, run a blackline between the final draft and the one before it. Word processors often have a “compare” feature that automates this work. Easily missable changes, like a 72-hour versus a 24-hour notice period, are more efficiently tracked with blackline.
How to streamline contract redlining
Done manually, redlining a contract can take weeks. With software, a disorganized, weeks-long process can whittle down to a few days or less. Here are two options.
Contract management software and dedicated redlining software
Contract lifecycle management (CLM) software such as DocuSign, Ironclad, and LinkSquares streamlines every part of the contract process, from drafting to renewal. These tools have a centralized repository that preserves version history and tracks who made what changes. Many CLMs have built-in redline and blackline comparison features as well as workflows for faster approvals to facilitate a seamless contract review process.
AI-assisted redlining with lawyer oversight
AI-assisted redlining removes a lot of the tedium of contract review and redlining. AI takes the first pass at an agreement and flags issues for lawyer reviewers to dive into more deeply. In addition to lowering contract review time, AI-assisted redlining frees up lawyers for higher-ticket issues.
How Crosby helps
At the end of the quarter, you’re likely more concerned with setting up your team up for success and getting deals over the line. The last thing you want to do is reconcile redlined documents.
That’s where Crosby comes in. Crosby does an AI-assisted first pass to flag issues. Licensed attorneys supervise the work, delivering the quality of Big Law with quick turnaround times and flat-fee pricing. Talk to Crosby.
FAQs
Blackline vs redline: What’s the difference?
Redline tracks the edits made to an active version, while blackline compares complete drafts to show the differences in text. Redlines help reviewers see edits on a line level, and blackline comparisons provide a holistic view of changes made and agreed to across versions.
Who should redline first?
Usually, the counterparty redlines first. If the contract is on your paper, it already represents your company’s position. Sharing an original agreement with active redlines would just cause confusion.
How long does redlining usually take?
The time it takes to redline a contract depends on its complexity and how quickly the counterparty returns edits. Simple contracts can take a few hours or a couple of days to redline. More complex, high-value contracts with detailed customizations (for example, an MSA between enterprise companies) could take several weeks.
When should I escalate a redline to a lawyer?
When redlines start to affect your organization’s risk exposure or damage its financial health, it may be time to bring in a lawyer. Also, when dealing with specialized terms, it’s smart to engage counsel with expertise in that area.