Don’t Let Your Lawyer Kill Your Deal
Each and every startup founder needs a good legal counselor to provide sound advice. I use the term “legal counselor” instead of “lawyer” or “attorney” intentionally. Yes, we rely on attorneys to draft agreements and prepare filings. But I believe that the most important role an attorney can play for a startup is that of counselor — providing sound legal advice. Founders need to understand the legal implications of their decisions. And this is where a good attorney can help. However, there is a tendency among some founders to abdicate decision-making authority to their lawyers. This is a mistake that can cost founders dearly in terms of lost deals, strained relationships with customers or investors and sub-optimal deal terms.
Lawyers are trained to identify every possible risk and potential pitfall, no matter how remote. That’s what we pay them to do — to make us aware of potential problems. It is critical for founders to then take that information and filter it, apply the perspective of a startup founder, and evaluate the risk-reward tradeoff. Attorneys are not decision-makers; they are counselors. Entrepreneurship involves understanding how to measure, weigh, and manage risk. Attorneys’ guidance should be an input to your decision-making process, not the sole determinant of your conclusion.
Let me use an example. You are the CEO of a software startup negotiating a very lucrative contract with a Fortune 500 company. It would be your first six-figure deal. Your standard contract includes a provision that says that if the customer terminates the contract, it must scan all computers it owns to ensure your software is removed from all of its systems. The potential customer pushes back on this point because it would be too difficult and time-consuming for it to scan all of the computers in all its offices around the world and guarantee with certainty that no instances of the software would remain. Besides, they say, we won’t be able to use the software if you turn it off by deactivating the license. So, you ask your attorney for advice. He tells you that if the company doesn’t delete your software, they could reverse engineer your code and build it in-house. They might even consider making it commercially available, competing with you and potentially putting you out of business.
Sounds like a significant risk, right? After all, you don’t want this Fortune 500 behemoth reverse engineering the code you’ve been perfecting for the last three years and putting you out of business. “Momma didn’t raise no fool,” you think. Remember — an attorney’s job is to make you aware of the risks. Heck, if he doesn’t make you aware of a risk and it occurs, you might sue him for malpractice. It’s much safer for your attorney if you don’t do the deal.
This is where you need to apply perspective. You are an entrepreneur, and entrepreneurs live in an environment of risk. First you need to understand the risks and then you need to determine how likely they are to occur. Then, you can make decisions based on probability-weighted risk. You need to apply a reasonableness test. Some risks are extremely unlikely to occur or wouldn’t be costly if they did occur. Abandon the idea of trying to eliminate every possible pitfall. Your job is to weigh the risks, factoring in their likelihood and potential ramifications, against the rewards. And make a decision that’s in the best interest of your company. What are the odds that this Fortune 500 company will actually reverse engineer your software and develop its own competing product? If they like using your product, wouldn’t they just continue working with you? Are they in the business of selling software like yours? Are they likely to go into this market?
Another trap to avoid is constantly wordsmithing the terms of a contract. Attorneys can waste hours suggesting alternate language when a customer or investor pushes back. Don’t subject your potential customer or investor to this. Understand the relative importance of the terminology your attorney suggests and then make a business decision about whether another round of negotiations with the potential customer or investor is worthwhile. The goal is not to have a contract so perfect it could be featured in a law school textbook; the goal is to identify the most likely major risks and eliminate or mitigate them straightforwardly. Persistent, ongoing wordsmithing is pointless and sours relationships. And it takes too much of your precious time. Make sure the wording conveys the meaning and leave it at that.
Attorneys generally advise clients not to share information with potential investors before having a signed non-disclosure agreement (NDA). However, as a venture capital investor, I can tell you that this is completely unrealistic. Institutional investors will not sign NDAs and asking them to do so (a) makes you look like a neophyte, and (b) could kill any interest in your company they may have. Good CEOs know when to rein in their lawyers.
Finally, it’s tempting to delegate contract negotiations to your attorney. “He’s the legal expert, after all,” you figure, “so I’ll get out of the loop and let him talk directly to my potential customer.” Big mistake. Huge. For the reasons I just explained. Your attorney is trained to look at the deal through one lens: what can go wrong. They don’t have the full appreciation for all of the nuances of a deal, they don’t know the potential customer like you do, they don’t appreciate how meaningful the revenue would be for you or the value of having a marquee client. If you are talking to a business person and not the other side’s lawyer, you should be the one doing the talking and sending the emails. By all means, seek advice from your attorney. But then filter it using a reasonableness test, weigh risk and reward and make your own decision.
Phil Nadel is the Co-Founder and Managing Director of Forefront Venture Partners (www.forefrontvp.com). Follow him on Twitter: @NadelPhil or on Medium at https://medium.com/@pnadel.
