Startups need to have a great lawyer, accountant, patent attorney, etc. But founders need to know how to ask for their advice and when to ignore it.
Why Entrepreneurs Hate Lawyers
I was having coffee with a friend who teaches at the U.C. Berkeley Boalt Law School and runs their entrepreneurship program. Our conversation led us to Scott Walkers post Why Entrepreneurs Hate Lawyers and why we both recommend that entrepreneurs print it out and tape it to their wall.
I remember when I encountered bullet #1 on Walkers list.
You Can’t Sign This Deal
After being in business for all of seven months, one of our first deals at Epiphany was with a software company called Visio, (now owned by Microsoft.) After some heroics from our CTO in extracting data from SAP, the Visio CFO loved our product, thought we could save them a ton of time and money and wanted it installed ASAP. We were excited that we were getting our first six-figure check and a reference customer. Then Visio gave us their boilerplate contract.
We passed it to our law firm who promptly threw up all of it.
“You guys can’t sign this. It has you putting your software in escrow, giving them all of your source code if you go out of business, indemnifying them from all possible lawsuits, not selling to competitors, first rights on a number of irrelevant issues and has a clause about promising them your first-born children.” I stopped listening for a while as it dawned on me that the deal I thought we had was probably now gone. I was feeling pretty deflated. I tuned back in when our lawyer said, “Let us start negotiating better terms with Visio’s company counsel.”
When I was a younger entrepreneur my answer would have been, “Ok. See if you can get us better terms. Call me when you’re done.” This time I said, “Make a list of the issues in bullet form, send them to me and I’ll get back to you.”
Strategy Questions Not Legal Questions
The issues our lawyer had raised about the contract, while correct, were strategy questions the founders needed to answer, not legal questions. Negotiating deal points before we thought through our strategy at best would have cost us a ton of money with little progress.
Looking at the Visio contract the question we were faced with was; how bad would the short term consequences be in signing the deal? The answer to that was easy – none. We’d have money in the bank and a reference customer.
The next question was, how bad would the deal points Visio was asking for screw us in the long term? This was more complex. Some of them would have limited our ability to sell to other software companies. Those were clearly unacceptable. Some of their other requests were just “comfort” issues like putting the software in escrow to protect Visio in case our startup went out of business.
Finally, there was a class of what I call “business development contract terms.” This happens in every company when a contract is passed around for review and everyone feels they have to mark it up with extraneous demands to feel like they had their say. Most of these points might have sounded great in law school but were impossible for a startup to deliver.
So we had to decide what deal points we could live with that wouldn’t kill our company. For example, I could agree to put our software in escrow if Visio would pay for all the legal and logistical expenses (knowing full well it was a “see, we’re doing our job” issue the Visio lawyers were insisting on, but one that Visio would never implement.) Other deal points, which my lawyers said were fatal, were also easy to agree to – don’t sell to competitors? We could easily agree to a 90-day non-compete as a sign of good faith (what Visio didn’t know is that we had no bandwidth to take on another customer while we were getting their software installed.)
My co-founder and a few board members brainstormed to make sure we weren’t missing anything. Then we got on the phone.
Why Lawyers Don’t Run Startups
We realized that our goal 1) was to get a deal done, 2) on terms we could live with and 3) it required talking to someone senior at Visio with the authority to make decisions on their side. Only then could we have our lawyer spend any time on the contract.
We called the Visio CFO.
We explained that their boilerplate contract was something we couldn’t sign because it would put us out of business. We said we would be happy to work with him in providing assurances on issues that were of importance to him and his company.
We suggested that we see if we could agree to them in this call. But we wondered if he had the flexibility (meaning the authority) to overrule his lawyer on their standard contract? (It now became a matter of pride that he could.) We said that if we agreed on the big issues we could send the deal back to our lawyers. (He was surprised to hear about half of the things in his own contract. “It says what?!”)
We agreed to the major points in a half hour. The lawyers had the final contract done in two days.
- Lawyers provide a service; they are not running your company.
- If you find a lawyer who talks about solutions not problems, hold on to them.
- In every company that gives you a contract there’s someone who wants a deal. When you run into contract issues, call them first for advice.
- Recognize whether you have a legal problem or strategy problem.
- The web has great blogs by lawyers who get it. Read them.
Post by Steve Blank teaches entrepreneurship at U.C. Berkeley, Stanford University and the Columbia University/Berkeley Joint Executive MBA program. He also wrote about building early stage companies in his book, Four Steps to the Epiphany. This post was originally published on his blog, and it is republished here with permission.
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