How Should you Prepare for and Negotiate Company Relationship Agreements?
“Would you tell me, please, which way I ought to go from here?” “That depends a good deal on where you want to get to.” “I don’t much care where –” “Then it doesn’t matter which way you go.” ― Lewis Carroll, Alice in Wonderland
“The only thing worse than no-deal is a bad deal.” A close friend and client shared this homily with me. It struck a cord, maybe “B Sharp” (get it?). I share B Sharp or as I now call it, “Shaffer Rule # 1” with “start-up clients, when it appears that they may be allowing “do the deal” anxiety to overwhelm strategic thinking and good judgment.
I come to contract and transaction work from a litigation background, assisting clients to unwind or remedy bad deals, partnerships and LLC formations, mergers and acquisitions; buy-sell, teaming, investor funding, licensing, sales, requirements, agency, product exploitation, value-added reseller, and similar agreements. In other words, I am a student of things that go wrong and how they could have been avoided. This sounds depressing, but is actually a source of strength.
Most litigants, regardless of who they hire, learn Shaffer Rule # 2, without much preaching. “Hiring a lawyer to win a lawsuit and remedy a bad deal is many times more expensive than hiring the same lawyer to properly negotiate, structure and “paper” the deal” with the goal of mitigating the risk of a weak posture in the event of a dispute.
Shaffer Rule #3 offers a good lens for evaluating how to prepare for a negotiation and set your posture. “Dreaming is not preparation.”
I offer four suggestions for contract negotiations. They are common sense. They also are too rarely evaluated in depth and diligently applied.
Shaffer Rule #4. “Success is based upon care and execution.”
To prepare for a negotiation you must study,
(a) the market, economic sector, and competitive advantage your project presents; (b) your enterprise short and long term economics and resource requirements; (c) required management skills; (d) the development, marketing, and distribution challenges, which must be overcome should you actually reach agreement; (e) each element of the transaction, your assets and risks, the other side’s assets and risks, and price/value them; and, (f) safety-valves, control, and cushions for mitigation of the impact of mistakes. Understanding the essentials enhances both the likelihood of success and the quality of negotiation presentations.
Shaffer Rule # 5. “Your lawyer can’t address something that you haven’t told him.” Integrate your lawyer into your preparation, negotiation plan, and a red team review challenging all of your assumptions. I win trials because I out-prepare and out-work the other side. I deliver good agreements because I study the client and the transaction and try to understand what the client needs for success as well as or better than he/she knows itself.
Shaffer Rule # 6. “Be patient.” Impatience results mistakes and increases risk of failure. A good negotiation allows the discussions to evolve organically. You and the other party often have much to learn about each other besides the terms of the contract, for example, personalities, methods, business philosophy, temperaments, values, integrity, humor, and goals and objectives.
Shaffer Rule # 7. “Do it right the first time.” There are several ways to structure deal making. A formal structure generally employs the exchange of a proposed letter of intent (“LOI”), which addresses key issues in a definitive manner that is short of a detailed contract. A more informal process first frames the discussions with a list of “points for agreement.” The list identifies the key topics that each side believes must be addressed for the deal to work. During the discussions, the parties record their position, agreements, disagreements, concerns, and reasoning. Each side can then review the list and decide whether and how to proceed, including offering acceptable proposals for addressing the other party’s concerns. When the LOI is ratified or the points of agreement are satisfactorily resolved, the transaction is turned over to the lawyers for formal documentation.