Is the “Handshake Deal” Still Legal?

Yes, a verbal agreement or the “handshake deal” is still legal according to the Canadian Bar Association. Did you know there is a protocol for the “handshake deal”? According to Paul Graham in his article Y Combinator,

According to the protocol, you have a handshake deal if and only if the following happens:

  1. The investor says “I’m in for <offer>.”
  2. The startup says “Ok, you’re in for <offer>.”
  3. The startup sends the investor an email or text message saying “This is to confirm you’re in for <offer>.”
  4. The investor replies yes.

Unless and until this process is completed, there is no handshake deal. So it is in the interest of investors to complete the 4th step, because until they do the startup is under no obligation to take their money.

Although Graham is using startup and investor as an example, this is good information for anyone participating in a verbal agreement.

Even though a “handshake deal” is legal, it is not recommended you use this type of agreement for forming partnerships. Which contracts should a small business use? You need a partnership agreement, confidentiality agreement, and independent contractor agreements. Nellie Akalp, Small Business Trends, gives you the details of these contracts in her article 3 Contract Agreements Every Small Business Should Have.

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