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 over 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.
Lessons Learned
- 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.
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Filed under: E.piphany |
I would more simply put rahter than
“Lawyers provide a service; they are not running your company.”
This
“Lawyers identify risk – legal or otherwise; it’s up to you to mitigate that risk.”
That’s their job. They give you the worse case scenario [often unrealistically] and it’s up to you to mitigate it. They would be sued to no ends if they didnt do this – because you could claim negligence.
You’re post talks more about risk mitigation. Lawyers identify risk – better lawyers identify ‘realistic’ risk while the best ones identify ‘realistic risk’ and help you figure out how to mitigate it for your business.
I wouldn’t always agree with this either
“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.”
The old saying “do not let your left hand know what your right hand is doing” suggests you should be doing both simultaneously. One – to identify the bullshit spin and get a judgement of character on who you are negotiating with – and secondly because it’s in your interests to know contractual implications before calling to discuss – otherwise the risk exists that you are agreeing to something that you really shouldnt be and will look more the fool when you have to go back and ask for changes.
Otherwise great post 🙂
I couldn’t agree with Steve or Tom more. As a business advisor with a legal background, I am often the person clients and colleagues turn to when attorneys tell them not to do something and see this sort of issue frequently.
As Tom says, “Lawyers identify risk.” Their job is to keep you out of trouble and tell you where trouble can come from. Their concern is not “getting a deal done,” they way it may be for management. Every contract you sign is going to involve some risk, giving up something in exchange for something else. Even a contract to buy office supplies carries the risk that the supplier will not deliver and you will lose the cash you spent. As such the “safest” you can be is never signing any deals, but we all know this is a poor way to run a business. There are some excellent attorneys who are aware of this and understand business enough to have meaningful discussions around business terms, but there are also plenty who are completely blind to the business side of a legal document.
As management, your goals with an attorney should be to 1) separate issues that relate to business terms from those that are purely legal terms.
2) allow your attorneys room to negotiate the purely legal terms, because there are terms that will be negotiated by lawyers that have little if any impact on the actual business terms.
3) understand what the business terms they have flagged really mean and be prepared to negotiate those with the other party’s business people.
Too often management let’s the legal departments do all the negotiations, even on matters that are not solely legal issues.
Tom,
You say that “the best ones identify ‘realistic risk’.” I would add that the best ones help you quantify that risk, in terms of probabilities and dollars, so that you can determine the expected value of the downside (e.g. if there’s a 10% probability of a $50,000 downside event, then the expected value of the downside is $5,000).
John
I’ve used Yokum Taku of WSGR http://www.startupcompanylawyer.com/ and he’s one of the keepers, IMHO. He is the exact opposite of 9 of the 10 items on Walker’s list. (No one at WSGR passes #3….)
Dave – I’ll still take the compliment even if we can’t pass #3.
Steve – I’m assuming that you’re referring to WSGR attorneys in the Epiphany story.
Great post and right on! I learned a long time ago that a lawyer or CPA that has spent their entire career in as a professional adviser vs. having spent time in an operating company tend to give advice that minimizes THEIR potential liability as professional advisers, rather than optimizing the outcome for the company.
In hiring a lawyer, I used to hate the ones that would give me just the pros and cons of a situation and then look at me for a decision. One of the best lawyers I’ve worked with I hired because during the interview he gave me the pros, cons, and then said “now here’s what you should do about it.”
One startup law blog I highly recommend is http://www.lawforentrepreneurs.com written by John Horn. (Full disclosure: John is my co-founder.) To your point about strategy vs. legal problem, his blog aims to give practical frameworks and tips to help entrepreneur’s think these issues through and distinguish between them.
Excellent advice Steve. This advice also should be heeded by business development people at larger firms – I used to run enterprise sales for the Australian sub of a large SaaS firm and the first time I ever had a deal fall over on legals was when the Telco lawyer we were negotiating with said, “I am no stranger to deals falling over through inability yo agree terms.” – WARNING!
I had been selling enterprise software for 15 years and had never had a deal die due to legals. She was true to form and managed to befuddle her business people sufficiently to make it too hard to transact, so they went with a solution offered by an incumbent supplier just because they didn’t have to renegotiate a Master Subscription Agreement; despite the business detesting that vendor and acknowledging that the solution was vastly inferior.
Conversely, I enjoyed a great working relationship with commercially focused in-house lawyers that always kicked off a negotiation by strategising with me to determine the must-have points and then determining our walk-away – They worked with me to secure deals as an integral part of my team.
I have seen far too many negotiations start with the lawyers in the room – The commercial ‘Draft Terms Sheet’ should be done by the business people and then the lawyers engaged in my view.
In choosing counsel, it is wise to ask if the lawyer(s) under consideration have spent any time working in-house. As a former “in-house guy,” I know that you have to learn how to help the client, your employer, get to “yes” and not just kill teh deal. Or, the client goes out of business and you lose your job. Having skin in the game really helps a lawyer focus on getting the deal done.
Excellent advice! One bullet point I feel is missing a follow up sentence: “The web has great blogs by lawyers who get it. Read them.”
The comments already have some good references. I would also like to hear your (Steve’s) list of lawyer blogs worth following.
Thanks,
Tristan
Tristan,
Look at this page. Scroll to the bottom and you’ll see a list of sites I like.
steve
I think you might be painting with a little too-broad of brushstrokes here.
I am a lawyer. I also own more than one startup.
I don’t think the problem, here, is with lawyers as a category. I think your problems are that the lawyers you worked with didn’t have your business strategy as their objective (either because they were the wrong lawyers for you as a client, or their pricing model created a conflict of interest, or they didn’t understand your needs in this situation). That doesn’t equate with the conclusion that all lawyers fail to understand business strategy.
Hey!
I just read this post and felt good – because its exactly what we did with a major customer over the last two weeks. We discussed the business intent on the various clauses in the contract, found what made sense, and then passed it on to the lawyers to make sure the “legalese” as there. We, of course, need the lawyers to tighten the language and think about the various issues.
The contract appears after various business, strategy and technical discussions. I think its fair to say that both parties feel the partnership would benefit themselves and each other. Lawyers should not become a roadblock.
Very true, although as a couple of others have suggested the post could be entitled ‘why lawyer’s don’t run your company’. I witnessed (from a position where I was unable to make any changes unfortunately) the recent scenario of a very large enterprise software deal with a mining giant going south as the contracts had simply been ‘passed to the lawyers’. There were some sticky clauses in there, for sure, but a number that could have/should have been negotiated between the parties first before going back to legal – exactly as you suggest.
Often it’s far too easy, or seen as being compliant to simply flick every contract over to the legal dept the moment it lands on the desk, with big implications for costs, timing and sometimes the closeness of the business relationship.
[…] Why Lawyers Don’t Run Startups Startups need to have a great lawyer, accountant, patent attorney, etc. But founders need to know how to ask for their […] […]
Love your post. We all feel your pain. But, based purely on what you say, it sounds like all worked out well in the end and your lawyer made some good points and some poor points. It sounds like you did the right thing. You thought about the points, and you used good judgement to discard the poor points. Here is my question to you: Were the good points, which apparently led to actual changes in the deal docs, worth the dollars paid to your lawyer? Here is another question: Was it unambiguous from the start what were the good points and what were the poor points? (I agree that escrowing software in the event of bankruptcy is probably OK and should not lead to much comment. So,that by itself suggests some lack of business acumen.) And one final question: Did your lawyer offer solutions to the issues raised that had a chance of working for you and the counter-party (this is another way of asking if he or she understood the other side’s point of view)? If the answer is that he or she provided suggestions for solutions that worked for both parties, then he or she completed the Zen of legal advice. Although he or she did not cover himself or herself with glory, it sounds like your lawyer may have done an adequate job (probably not a great job).
my brother is a lawyer and he is planning to launch a startup..i have to show this post to him….
Reading this blog post I was actually pretty surprised that you did not immediately considered their boilerplate contract to be an off-the-shelve fabrication that no supplier actually signs. That was our natural first reaction with such contracts.
My personal experience was similar to worse with one of our first customers. The initial call we had was with the lawyer of that customer, who explicitly told us that we were not even worth his time, because the contract value was too small. We explained his attitude to our product champions, who set things straight. The positive effect was that the whole boilerplate contract went liquid.
We also had a lawyer with a ‘solutions’ attitude. Even better, he was very convinced that we could push some of the nonsense out of the contract, because he knew most of the legal stuff is indeed generated by people that want to have a say, while it does not make any sense under normal conditions.
Steve,
I’d suggest that a good way to determine whether a lawyer “gets it” is to ask him or her to describe what they do when the other side provides a contract draft that’s an extremely one-sided. To the extent their answer describes strategies and tactics similar to those in Fisher and Ury’s “Getting to Yes,” you’ve probably got a keeper.
John
As a lawyer and someone who runs a startup (www.ProfessionalsBidding.com) I can relate to both sides of this equation.
My favorite line of this article is “So we had to decide what deal points we could live with that wouldn’t kill our company.” I think this line is exactly what a lot of this boils down to and that is the balancing of risks and rewards.
With contracts you will be getting something of value to your company (otherwise you wouldn’t be signing it). This value needs to be weighed against what risks you are taking in signing the contract. Many lawyers (but not all) focus on the risk side of this equation. Being that risk is half of the equation, that is very valuable knowledge to have in making a good decision. After the lawyer makes you aware of the risks, it is the risk-taker’s/entrepreneur’s decision whether the perceived value outweighs this risk. The lawyer is not, nor should they be, the risk-taker in the situation.
You can try and try to negotiate the contract but at the end of the day, as an entrepreneur, you must decide what deal points you can live with that won’t ‘kill your company’. Then, and only then, will you receive the value of the contract without putting your company in jeopardy.
Steve, thanks for you blog and specially for your book. It was hard to get hands on it here in Russia. I’m a founder and CEO of a russian sartup and wonder how can I get in touch with you. I didn’t found your e-mail at your blog. Can you advise me how can I write you an e-mail? Thank you in advance. Alex Babin
Steve, I know this fellow, he is good.
I told my students only yesterday — “If a lawyer tells you “You cant’ do this” instead of “This is how you can do this” – fire him, he’s adding to problems rather than solving them.
Definitely something in the air these days.
I am attorney and this is a great article. Too many times when I tell people what I do, they think I tank deals. I try to explain to them, like what has mentioned above, its all about risk/reward, and ultimately is a business decision on what you can and what you can’t live with.
I generally agree with the thrust of your post. Lawyers have a very specific place in the start-up cycle that often times goes outside the bounds of helpful to the founding team.
If I may digress, I look at the types of skills that are required to build a start-up and grow it into a business. Two critical skills are usually lacking in most founder teams: financial acumen and risk management. While in the earliest stages these are not necessary, as the start-up begins to take on customers, partners, suppliers, etc., having these skills becomes essential. Unfortunately, these also tend to be expensive skills to acquire, particularly in the areas that attract the most start-ups.
Too many times, I have seen start-ups go sideways when there is a lack of fiscal discipline and a lack of proper legal vetting. Plus, it is important to have the “devil’s advocate” voice close to the team to temper the unbridled optimism that most founders exhibit. That does not mean that the optimism is bad, it simply means that have a “no” voice to consider can often be helpful when running at 1000 mph in getting the start-up launched.
So you are right, lawyers do not run start-ups generally. Having someone that can understand and elucidate risks is however an important voice in the start-up.
Great Post.
As one of those awful attorneys, I can attest to risk aversion. Something that is important for attorneys to understand is that deal makers, entrepreneurs or not, are verbose, to say the least. Our job as attorney is to analyze, decipher and assess risk. I try my best to be a solutions person, however, I will also present a “but.” If you hang on every word (which is our training), you will find your head spinning with liability questions.
Entrepreneurs. As the post says, use attorneys as tools in your tool box. It doesn’t demean our profession. You also need to know that attorneys, in their constant “what if the glass is half empty” mode also worry about there own liabilities. If, people are fickle, deal makers are down right schizophrenic. When I see a contract involving large sums of consideration and potential, I look around to see who is going to get the blame if things go south. We are providing a service, but we are also covering our asses.
I began my professional career as an attorney at Venture Law Group, and then became an in-house attorney at Yahoo!. After two years of practicing law I moved into business development and general management and never looked back.
While working as an attorney I had the privilege of working for Jon Sobel, then the AGC at Yahoo!, and early in my tenure at Yahoo! he told me, “There is no such thing as a legal issue. Every point in a contract–even things full of legalese such as indemnification, limitation of liability, venue and choice of law, etc.– are all business issues that must be decided by the business owners, not the attorneys.” He also gave me the most valuable advice of all, “Your job as an attorney is to give the business owners advice, not to make decisions for them.”
The real problem comes up when business owners do not understand the purpose of a written contract. In the typical US scenario a contract only serves two purposes: (1) to provide a road map for performance, and (2) to allocate risk between the parties. That’s it, and when business owners understand the implications of that fact, then the contract drafting process and subsequent negotiations becomes much easier.
In other words, when the business owners have fully thought out the details of who is going to do what and when, and what risks they are willing and unwilling to accept, then drafting and negotiating the contract is easy. The reason so many attorneys become decision makers is because the business owners throw a half-baked “deal” at them and say, “Paper it.” In those situations the real thinking is often being done by the attorney who may or may not understand the business or the needs of the parties, and that is when you end up with form agreements that do not reflect reality.
George,
Much better summary of the issue than my post.
thanks,
steve
Got this comment from a CEO of a large public company.
“Any General Counsel I interview and in every appraisal I do with the General Counsel I tell him there are two primary functions he has.
The first responsibility is as a risk manager for the company to make sure we protect ourselves. But I quickly say that if that was the only way he defined his job then we would fail.
He has a second responsibility and that is to find a way to get business done. It is only though his balancing those two objectives – risk management and supporting the growth of the business, that the right organization construct can be developed.”
My personal experience was similar to worse with one of our first customers. The initial call we had was with the lawyer of that customer, who explicitly told us that we were not even worth his time, because the contract value was too small. We explained his attitude to our product champions, who set things straight. The positive effect was that the whole boilerplate contract went liquid.