A handshake deal usually begins with trust. Two people know each other, believe in the same idea, share the same urgency, or want to avoid making the relationship feel cold and transactional. They tell themselves they will work out the details later because everyone is acting in good faith.
The problem is that good faith is not a structure. It does not define ownership, authority, compensation, exit rights, intellectual property, decision-making power, or what happens when the relationship changes. I have seen this pattern in small businesses, nonprofits, founder disputes, and crisis-driven matters. The conflict often does not begin because people were dishonest from the start. It begins because they never created a shared legal record of what they thought they had agreed to.
Trust Does Not Define Terms
Trust can explain why people start working together, but it cannot tell them what their legal rights are. A founder may believe sweat equity gives him ownership. A friend may believe an early loan became an investment. A contractor may believe repeated work created a continuing business relationship. A board member may believe informal approval was enough. Without a written agreement, each person may be operating from a different understanding.
That difference may not matter when the relationship is healthy. In the beginning, people often avoid hard questions because asking them feels disruptive. No one wants to discuss termination, control, profit sharing, or ownership when everyone is excited about building something. But those are exactly the questions that matter most when expectations diverge.
A written agreement does not mean the parties distrust each other. It means they respect the relationship enough to define it. The discipline of putting terms in writing forces people to clarify what they are actually promising, what they are not promising, and what will happen if the arrangement no longer works.
Money Changes The Relationship
Many handshake deals survive until money appears. Revenue comes in. Expenses increase. A grant is awarded. A contract is signed. One person does more work than expected. Another person believes the risk was theirs from the beginning. Suddenly, the informal understanding that felt easy becomes a dispute over who is entitled to what.
Money also changes memory. People remember early conversations differently when the business becomes valuable, when the nonprofit receives funding, or when the project begins attracting attention. A casual statement about “sharing everything” may later become an alleged ownership promise. A discussion about “helping out” may become a claim for compensation. A vague assurance that someone will be “taken care of” may become the centerpiece of a lawsuit.
This is why documentation matters before success arrives. A written agreement should address ownership, compensation, reimbursement, authority, profit distribution, decision-making, and exit terms while everyone is still aligned. Waiting until there is money to fight over almost guarantees that the conversation will be harder, more emotional, and more expensive.
Informal Authority Creates Real Exposure
Handshake deals often create confusion over who can bind the organization. In small businesses and nonprofits, people may use titles loosely, sign documents casually, make commitments by email, or represent that they have authority because no one has clearly said otherwise. That can create legal exposure even when the organization never formally approved the arrangement.
For businesses, this may involve vendor contracts, leases, debt obligations, licensing agreements, employment promises, intellectual property assignments, or customer commitments. For nonprofits, it may involve grant obligations, fiscal sponsorship arrangements, donor restrictions, event contracts, contractor relationships, or promises made on behalf of the board. In both settings, informal authority can become very real when the other side relies on it.
Outside counsel can help prevent that confusion by clarifying who has authority to approve, sign, spend, hire, terminate, borrow, or commit the organization. Those controls may seem administrative, but they protect the organization from being dragged into obligations it never intended to assume. They also protect individuals from being accused of acting beyond their authority after the fact.
Exit Terms Prevent Ugly Endings
The most overlooked part of a handshake deal is the ending. People think about how the relationship begins, not how it might end. They assume no one will leave, no one will burn out, no one will disagree, no one will get divorced, no one will move, no one will need money, and no one will change their mind. That assumption is almost always wrong.
Exit terms are not pessimistic. They are practical. A good agreement should explain what happens if a founder leaves, if a partner stops contributing, if a board member has a conflict, if a contractor relationship ends, if intellectual property was created during the relationship, or if one side wants to buy out the other. Without those terms, the breakup itself becomes the negotiation.
That is when lawsuits often become unavoidable. By the time people are separating, they may no longer trust each other enough to solve the problem cooperatively. The written agreement they avoided at the beginning becomes the agreement they desperately need at the end. The absence of that agreement leaves everyone trying to reconstruct rights from memory, fragments, emails, and assumptions.
Serious Relationships Need Paper
Putting a deal in writing is not just a legal formality. It is an act of discipline. It requires the parties to confront ambiguity before ambiguity becomes leverage. It helps preserve relationships by reducing the number of future fights. It gives everyone a reference point when memories fade or circumstances change.
That does not mean every arrangement needs a fifty-page contract. Some matters call for a simple written agreement, board resolution, engagement letter, operating agreement, memorandum of understanding, or email confirming essential terms. The right document depends on the relationship, the stakes, and the risk. But some record should exist.
My perspective is straightforward. If a relationship is important enough to rely on, it is important enough to document. Handshake deals become lawsuits because people mistake trust for clarity. The better approach is to protect the relationship while everyone still wants it to succeed.
About the Author: Nick Harrison is the Managing Partner of Harrison-Stein, PC, a Washington, DC law firm serving small businesses, nonprofits, servicemembers, and individuals facing high-stakes legal and institutional challenges. He is an attorney, military officer, veteran, and former federal program manager whose practice draws on experience in civil litigation, nonprofit governance, military law, entrepreneurship, public policy, and crisis response.
