I’ve been doing deals as a corporate lawyer for 17+ years, and there are certain fundamental mistakes that I’ve seen entrepreneurs make over and over again.  Accordingly, I thought it would be helpful to share three basic tips in connection with doing deals.  This is part three of a three-part series, which was originally posted on Forbes.

In part one, I discussed the importance of being careful with letters of intent, creating a competitive environment and using your lawyer as a “bad cop.”  In part two, I discussed the importance of checking your emotions and remaining disciplined, not blinking first and leaving some chips on the table.

Tips

Tip #1 – Diligence the Guys (or Gals) on the Other Side of the Table.  I’ll say it once and I’ll say it again: the most common mistake I’ve seen entrepreneurs make in any deal-making context is the failure to investigate the guys (or gals) on the other side of the table.  Indeed, whether you’re raising funds, entering into a partnering agreement or selling your company, you need to do your diligence and assess with whom you are dealing.

In practical terms, this means surfing the web and learning everything you can about both the particular firm/company and the particular individuals with whom you are dealing; it means having lunch, dinner and/or a couple of beers with those individuals so that you can size them up; and, of course, it means getting references and talking to other entrepreneurs and executives who have done deals with them.

In certain deals (like a venture capital financing) this is critical because you will, in effect, be married to the guys on the other side of the table for a number of years.  Accordingly, you will need to determine whether it’s a good match by addressing certain key questions, such as: Can this person be counted-on and trusted?  Will he add significant value (e.g., through his contacts, technical expertise, etc.)?  What is his motivation to do this deal?  Is he a good guy or a jerk?  Sadly, there are a lot of bad apples out there, and entrepreneurs need to be careful whom they are doing deals.

Tip #2 – Control the Drafting.  This is an important (but often over-looked) key to effective negotiation.  Not only should you be retaining a strong lawyer to watch your back (as discussed below), but also you should try to have your lawyer control the drafting.  All solid corporate lawyers understand this simple point.

For example, as a corporate associate at a large New York law firm, I was representing Sony in connection with its acquisition of CBS Records.  Cravath, the lawyers for CBS Records, actually negotiated in the letter of intent that they would control the drafting (i.e., draft all of the transaction documents).  Usually the acquiror’s counsel controls the drafting because the acquiror is paying the purchase price; however, Cravath was smart and got Sony to capitulate because they knew Sony was anxious to do the deal.

By controlling the drafting, you will force the other side to be on the defensive from day one and to react to your drafts of the agreements.  Words matter — and once your lawyer sets the words on paper, the other side will always be playing catch-up.

Tip #3 – Retain a Strong, Experienced Lawyer to Watch Your Back.  Finally (and this is obviously a bit self-serving), but every entrepreneur needs a strong, experienced lawyer to watch his or her back.  There is sometimes just too much at stake for entrepreneurs to be trying to play lawyer — whether it’s pulling forms off of the web or negotiating a term sheet when he has little deal experience); and, as noted above, there are unfortunately a lot of bad guys out there trying to take advantage of inexperienced entrepreneurs.

Yes, legal fees are often expensive. But any entrepreneur who has experienced litigation or a major dispute can attest to the importance of having strong corporate counsel.

The bottom line is that a strong, experienced corporate lawyer will sober you and lay-out all of the significant legal risks in a particular deal; he will then push hard to negotiate reasonable protections.  If the deal sours and lawsuits are filed, well-drafted documents with appropriate protections become like a kind of insurance policy.

Conclusion

I hope this series has been helpful.  If you have any questions, please feel free to call me directly at 310-288-6667 (Los Angeles) or 415-979-9998 (San Francisco).  Cheers, Scott

I’ve been doing deals as a corporate lawyer for 17+ years, and there are certain fundamental mistakes that I’ve seen entrepreneurs make over and over again.  Accordingly, I thought it would be helpful to share three basic tips in connection with doing deals.  This is part two of a three-part series; it was originally posted on Forbes.  In part one, I discussed the importance of (i) being careful with letters of intent, (ii) creating a competitive environment and (iii) using your lawyer as a “bad cop.”

Tips

Tip #1 – Check Your Emotions and Remain Disciplined. As I saw first-hand in New York City representing big, successful private equity firms, the best dealmakers have an extraordinary ability to take their emotions out of transactions and remain extremely disciplined.  Indeed, they will generally walk from a deal if they get out of their comfort zone (e.g., with respect to price, risks, etc.) — regardless of how much time and money they have expended.

Most entrepreneurs, on the other hand, become emotionally wedded to a particular deal (similar to a first-time homebuyer) and are unable to maintain their objectivity – particularly as they move further along in the process.  They understandably get excited as soon as some money is waved at them and often allow themselves to get drawn into the dealmaker’s web.  It is critical that entrepreneurs understand this dynamic.  Entrepreneurs are often negotiating with guys (or gals) on the other side of the table who are far more deal savvy and experienced than they – e.g., venture capitalists, private equity guys, corporate development guys – and are masters at playing on their emotions.

This is why it is so important for an entrepreneur to sit down with his transaction team and establish a game plan (i.e., a set of deal-breakers/parameters with respect to the key issues) before the negotiating process begins; he then must have the discipline to stick to the plan and be willing to walk, if necessary.  Once these deal-breakers/parameters are established, an entrepreneur will then find it easier to take his heart out of the equation and to think with his head.

Tip #2: Don’t Blink First.  Closely related to the first tip is tip #2: don’t blink first.  Indeed, there comes a point in time in just about every deal where both sides have dug into certain positions and the question becomes which side will blink first; for example, in a venture capital financing, perhaps the issue is the liquidation preference or the size of the option pool; or, in an acquisition, perhaps the issue is the cap on seller’s liability or the amount of the escrow.  Whatever the issue, the advice is simple (albeit difficult to execute): in order to maintain negotiating leverage and credibility, the entrepreneur should not capitulate first.

If an entrepreneur has flatly stated that “this issue is a dealbreaker,” but then blinks and nevertheless agrees to go forward with the transaction despite not getting what he asked for, he will have completely undermined his credibility and will have his clock cleaned with respect to other significant issues.  Like poker, if your bluff gets called, it will be difficult to bluff again.

That’s why it’s often helpful to run the negotiations through an experienced corporate lawyer who does this stuff for a living.

Tip #3 – Leave Some Chips on the Table.  Speaking of poker, the best dealmakers always leave a few chips on the table.  What do I mean by that?  I mean they don’t fight tooth and nail to win every last penny (every issue) – knowing that such a “scorched-earth” approach will create ill-will and may blow-up the negotiations.  You generally have to compromise and give a little so that the other party feels like he or she is getting a good deal (subject, of course, to the set of deal-breakers you have established prior to the negotiations).

This is particularly important where there will be an ongoing relationship post-closing, such as in a venture capital financing or private equity acquisition.  You will need to work with the guys on the other side of the table post-closing, perhaps for a number of years.  Accordingly, you want to have a hugfest at the closing, not a boxing match (as I sadly saw at one closing I had in New York).

Many lawyers do not understand this basic principle and are notorious for not being able to prioritize issues.  Accordingly, you need to make sure your lawyers are on the same page and understand the importance of throwing the other side a few bones.

Conclusion

I hope the foregoing was helpful.  In part 3 of this series, I will discuss the importance of (i) controlling the drafting, (ii) investigating the guys/gals on the other side of the table and (iii) retaining a strong corporate lawyer to watch your back.

I’ve been doing deals as a corporate lawyer for 17+ years, and there are certain fundamental mistakes that I’ve seen entrepreneurs make over and over again.  Accordingly, I thought it would be helpful to share three basic tips in connection with doing deals.  This is part one of a three-part series; it was originally posted on Forbes.

Tips

Tip #1: Be Careful with Letters of Intent.  A letter of intent (LOI) — sometimes referred to as a memorandum of understanding or term sheet — is often executed in connection with certain deals.  Entrepreneurs must, however, be careful executing an LOI because it may be deemed enforceable by a court of law (i.e., deemed to be a binding agreement), notwithstanding the intent of the parties.

The courts generally look at two key factors in determining whether a particular LOI is binding: the language used in the LOI and the actions of the parties.  If an entrepreneur doesn’t want an LOI to be binding, he must include very specific language to the effect that:

This letter is merely an expression of intent and is intended to serve as a basis for negotiating a definitive agreement and the related documents; it does not constitute, and will not give rise to, any legally binding obligation on the part of the parties hereto and is expressly subject to the execution of such agreement and documents.

The letter should also include words such as “would” (e.g., “the purchase price would be $_____”), as opposed to “shall” or “will”; and “this proposal” or “the possible transaction,” as opposed to “this agreement” or “the deal.”

Moreover, the actions of the parties post-signing must be consistent with such language.  Indeed, many entrepreneurs have gotten themselves into trouble when, despite the language in the LOI, they have acted as though an agreement has been reached.  For example, if the LOI expressly provides that it is “non-binding,” you should not be having drinks to “celebrate the deal” or you should not be sending “congratulatory” emails.  Nor should there be any partial performance by any party.

Tip #2: Create a Competitive Environment.  There is nothing that will give an entrepreneur more leverage in connection with any deal negotiation than a competitive environment (or the perception of one).  Every investment banker worth his salt understands this simple proposition.

Accordingly, whether an entrepreneur is raising capital from investors, negotiating a joint venture or partnership agreement, or selling his company, he should be reaching out and talking to several suitors and playing them off each other.  Not only does competition validate a firm’s thinking, but also it appeals to the human nature of the individuals involved; and as competitors are played off of each other, the entrepreneur will be able to negotiate the best possible price and terms.

This strategy, however, must be implemented carefully and is best-handled by someone with strong deal experience.  If the entrepreneur doesn’t have strong deal experience, he should retain an experienced advisor and/or corporate lawyer to help him and coach him.

Tip #3: Use Your Lawyer as the “Bad Cop”.  While working at two major law firms in New York City, I had the opportunity to represent a few large private equity firms, which employed all kinds of sophisticated negotiating games with target companies; one of their favorites was the “good-cop, bad-cop” routine.

This is how it worked: the private equity guy, of course, played the good cop and was smooth, friendly and agreeable and made the target CEO feel like all of his important issues were being taken care of.  But then the documents arrived — chock full of bells and whistles and boilerplate provisions designed to protect the private equity firm and often with significant gaps on the deal points.  When the CEO questioned as to what’s going on here, the answer, of course, was “it’s my lawyer’s fault” (i.e., the “bad cop”).

This game would continue throughout the negotiating process as the private equity guy charmed the CEO, while the lawyers pounded away on every significant issue.

Entrepreneurs not only must watch-out for this game, but also should learn to play it.  Indeed, entrepreneurs must learn to stay above the fray when negotiating and let the lawyers play the heavy.  This approach is particularly important where the entrepreneur will have an ongoing relationship with the other side post-closing; the goal is thus not to poison that relationship with testy, acrimonious negotiations — i.e., let the lawyers play the bad guy – the bad cop.

Conclusion

I hope the foregoing was helpful.  In part 2 of this series, I will discuss the importance of (i) checking your emotions and remaining disciplined; (ii) not blinking first; and (iii) leaving some chips on the table.  If you have any questions, please feel free to call me directly at 310-288-6667 (Los Angeles) or 415-979-9998 (San Francisco).  Many thanks, Scott

This post is a longer, more comprehensive version of the post I wrote a couple of weeks ago for VentureHacks, one of the best websites for startups, in which I recommended five New Year’s resolutions for entrepreneurs.  Indeed, as I noted in that post, during my 15+ years as a corporate lawyer (including nearly eight years at two major law firms New York City), I have seen entrepreneurs make certain fundamental mistakes over and over again in connection with doing deals.  So what better way to welcome in the new decade than to provide seven basic tips for entrepreneurs.

(Message to all of my female clients and readers: (i) the term “guys” includes “gals”; and (ii) in tip #6, you can decide what the term “balls” includes.)

Tip #1 – “Diligence the Guys on the Other Side of the Table”

Here’s the advice that I have written about often and give to all of my clients who are contemplating doing a financing: diligence the guys on the other side of the table.  Indeed, this is the number one mistake I have seen entrepreneurs make in any dealmaking context.  Remember, in financings and certain other deals (e.g., an acquisition by a private equity firm), you will, in effect, be married to those guys for a number of years.  Accordingly, entrepreneurs must do what any bride or groom does prior to tying the knot – date for a while and, of course, meet the family.

What does this mean in practical terms?  It means surfing the web and learning everything you can about the particular firm and, more importantly, the particular individuals with whom you are dealing; it means breaking bread and having a couple of beers with them; and it means getting references and talking to other entrepreneurs and founders who have done deals with them.  Issues to address include:  How have they treated their other portfolio companies?  Are they good guys or jerks?  Can they be counted-on and trusted?  Will they add significant value (e.g., through contacts, domain expertise, etc.)?

There is an outstanding video discussion on Mixergy.com between Brandon Watson, a smart entrepreneur (currently at Microsoft), and Andrew Warner, the founder of Mixergy, as to what could happen if you don’t adequately diligence your investors.  Brandon is extremely candid and discusses how he got “bullied” by his Board.  Moreover, he expressly notes in the comments section of the post that: “The diligence factor was that I knew them, but had never taken money from them.  It’s hard to know how people are going to react when they are at risk of losing money because of something you are directly responsible for until you are actually at that point.”

Tip #2 – “Check Your Emotions at the Door”

You have to think with your head, not with your heart – particularly when you’re doing deals.  The best deal guys are masters at taking their emotions out of transactions and being extremely disciplined.  They will just walk from a deal if they get out of their comfort zone (e.g., with respect to the price, risk profile, etc.) regardless of how much time and money they have expended.

Most entrepreneurs, on the other hand, become emotionally wedded to a particular transaction and are unable to maintain their objectivity the further along they get in the process.  They get all excited as soon as someone waves some money at them and allow themselves to get drawn into the money guy’s web.  It is critical that entrepreneurs understand this dynamic.  Entrepreneurs will generally be negotiating with guys on the other side of the table who are far more deal savvy than they – e.g., venture capitalists, private equity guys, etc. – guys who are masters at playing on their emotions.

This is why it is so important for entrepreneurs to establish a game plan (i.e., dealbreakers) before the negotiating process begins and to have the discipline to stick to the plan and be willing to walk, if necessary.  If an entrepreneur is seeking venture capital financing, for example, he should sit down with his transaction team before reaching out to the VC’s to establish his dealbreakers with respect to key terms, such as valuation, the liquidation preference, board composition, etc.  The same approach should be followed if he’s interested in selling his company:  What’s the lowest purchase price you’ll accept?  What’s the highest cap on liability you’ll agree to?  Will you agree to escrow part of the purchase price?  If so, how much and for how long?  Once you establish the dealbreakers early on, you can take your heart out of the equation and think with your head.

Tip #3 – “Create a Competitive Environment”

There is nothing that will give an entrepreneur more leverage in connection with any deal negotiation than a competitive environment (or the perception of same).  Indeed, every investment banker worth his salt understands this simple proposition.  Not only does competition validate a firm’s interest, but also it appeals to the human nature of the individuals involved.  Competitors can be played-off of each other and, as a result, the entrepreneur will be able to strike the best possible deal.

I learned this important lesson as a young corporate associate in New York City.  As I briefly discuss in my video post “Lesson Learned in the Trenches of Two Big NYC Law Firms,” I recall having two M&A transactions on my plate: one was a divestiture – i.e., the sale of a division of a multinational corporation being auctioned by an investment bank; and the other was the sale of a private company to a competitor (with no i-bankers involved).  In both deals, my firm was representing the sellers, but as we worked our way through the negotiation process of each deal, we ended-up with two completely different acquisition agreements with respect to the material terms.

In the auctioned deal, because the i-banker was able to play the prospective buyers off of each other and create a competitive environment, the final agreement was extremely seller friendly and included broad materiality qualifications, a huge basket/deductible and a cap on seller’s liability of 10% of the purchase price.  In the private-company transaction, however, there was only one prospective buyer — and the buyer’s principals knew that the seller was anxious to sell and thus were playing hardball.  Accordingly, in that deal, the deal terms ended-up being extremely buyer friendly and included a large portion of the purchase price being escrowed and a cap on the seller’s liability equal to 100% of the purchase price.

The lesson learned, of course, is that you must create a competitive environment (or the perception of same) in order to have strong negotiating leverage.  There is, however, one important caveat that entrepreneurs should keep in mind: this game must be played carefully and is better-handled by someone with experience.  The last thing an entrepreneur wants is to end-up with no deal at all.

Tip #4 – “Be Careful with LOI’s”

A letter of intent (an “LOI”) — sometimes referred to as a term sheet or memorandum of understanding — is often executed in connection with all types of deals.  The entrepreneur must understand that, depending on the deal and the context, there are different LOI strategies and considerations that must be addressed.  For example, in the acquisition context, a selling entrepreneur should try to negotiate all of the material terms of the deal in an LOI because it is at this point in time when his negotiating leverage is the strongest (see #5 of my post “Selling a Company: Ten Tips for Entrepreneurs”); on the other hand, a buying entrepreneur’s main goal with respect to an LOI is merely to lock-up the seller and prohibit it from shopping the deal for a reasonable period of time – his negotiating leverage is strongest after the LOI has been executed (see #1 and #2 of my post “Buying a Business: Ten Tips for Entrepreneurs“).

Another major concern with respect to LOI’s is that they may be deemed enforceable by a court of law (i.e., be deemed to be a binding agreement), despite language in the LOI to the contrary.  This issue often arises when entrepreneurs play lawyer — and draft and execute LOI’s without having them vetted by legal counsel.  Indeed, I represented an entrepreneur a few years ago who not only executed a LOI that he drafted in connection with an acquisition (he said it was “too small to run by me”), but also took the principal on the other side out to dinner and drinks to celebrate.  When my client refused to close the deal a couple of months later due to a significant diligence issue, the principal threatened to sue claiming they had agreed to a deal.  I was left in the awkward position of explaining to my client that as a result of the express language in the LOI and his actions subsequent to its execution, a Court was likely to agree with the principal’s position.  Accordingly, he ended-up settling the matter by agreeing to pay the target’s legal and other expenses.  Lesson hopefully learned.

Tip #5 – Watch-out for the “Good-Cop, Bad-Cop” Routine

Experienced deals guys (such as private equity guys and venture capitalists) employ all kinds of negotiating games.  One of their favorites is the “good-cop, bad-cop” routine.  Here’s how it works:  The deal guy plays the good cop and is smooth, friendly and agreeable; he makes the entrepreneur feel like all of his important issues are being taken care of.  But then the documents arrive — chock full of bells and whistles and boilerplate provisions designed to protect the deal guy’s firm/company and often with significant gaps on the deal points.  When the deal guy is questioned by the entrepreneur as to what’s going on here, the answer, of course, is “it’s my lawyer’s fault” (i.e., the “bad cop”).  This game will continue throughout the negotiating process as the deal guy charms the entrepreneur while his lawyers pound away on every significant issue.

How do I know this?  Because prior to launching my own firm specializing in the representation of entrepreneurs, I represented a number of private equity firms (both in New York City and Los Angeles) and have played this game many times.  One deal sticks-out in particular — and I remember it vividly because the private equity guy was a master.  He was a charming, good looking guy; and the target’s CEO was a woman, who appeared to become smitten with him.  Needless to say, this made my job as “bad cop” very easy.  When the target’s lawyer complained about all the draconian, pro-buyer provisions in the acquisition agreement, the private equity guy was able to convince the CEO that this is the form agreement he uses for all his deals and that he has certain fiduciary obligations to his investors.  As a result, we ended-up with extremely favorable pro-buyer terms, including a “diligence out” and no cap on the target’s or the shareholders’ liability.

Tip #6 – “Work Your Balls Off”

This is the advice a senior partner gave me when I was a young corporate associate at a major New York City law firm: “if you want to be a great lawyer, you have to work your balls off and make the practice the law the number one priority in your life.”  He explained that this means everything else in your life has to be pushed aside, and you need to “work, work, work.”  And when you’re not working, he added, you need to be reading treatises and articles discussing the deals you are working on to get a deeper understanding of the significant issues.  When I explained to him that, after three months, I had been working nearly every weekend and that my girlfriend was ready to leave me.  He told me that I need to get a new girlfriend.

I received similar advice from Harry Hopman, my old tennis coach (and the winningest coach in Davis Cup history), when I was playing tennis in the minor leagues after college.  He preached to me that: “It all comes down to one word — desire.  How badly do you want it?  How much are you willing to sacrifice?”  And he was right.  When I was traveling around and playing tournaments in Europe and South America, I noticed that the best tennis players were generally the hardest working; the qualifiers were the ones going out drinking every night, not the top seeds.  Sure there were exceptions – like John McEnroe – but the exceptions were rare.

I have seen this same pattern during my legal career: the most successful clients tend to be the hardest working.  Indeed, the private equity guys and hedge fund guys I represented in New York City were animals; working around the clock and cranking out deal after deal.  I attribute a lot of their success to just plain hard work.  In 2005, I moved out here to California to help entrepreneurs, and it’s been a mixed bag in terms of the work habits that I’ve seen.  Some of my clients are intense and put in the long hours; others, however, are just dreamers — and they are the ones who struggle.  In short, there are no shortcuts to success.

Tip #7 – “Retain a Strong, Experienced Lawyer to Watch Your Back”

This is obviously a bit self-serving, but every entrepreneur needs a strong, experienced lawyer to watch his back.  There is just too much at stake for entrepreneurs to be (i) utilizing sites like LegalZoom or (ii) pulling forms off of the web and trying to play lawyer or (iii) retaining the cheapest lawyer to save money.  Moreover, as the Madoff affair and other recent high-profile cases demonstrate, there are a lot of unscrupulous characters out there trying to take advantage of unsophisticated entrepreneurs.

There are also more subtle potential problems from which entrepreneurs need to be protected, including the inherent conflict of interest that certain service providers have.  For example, entrepreneurs need to be careful with investment bankers, who generally only get paid if a particular deal closes.  Indeed, a middle-market i-banker’s entire year can be made or broken based on whether or not he can close one or two deals.

Unfortunately, I experienced this issue first-hand shortly after moving to California when I got pulled onto an M&A deal in which an i-banker stuck his finger in my chest and warned:  “We’re going to get this deal done despite you f-ck’n lawyers.”  He then later complained to the managing partner (who had the client relationship) that I was blowing-up the deal because I had retained special environmental counsel from my old NYC law firm and we were pushing too hard on the environmental indemnity.  Good work by the i-banker (and cheers to my former managing partner) for getting the deal closed by watering down the environmental indemnity: less than six months later our client’s company was indicted for environmental problems that it inherited as part of the acquisition.

The bottom line is that a strong, experienced corporate lawyer will sober the entrepreneur and lay-out all of the significant legal risks in a particular transaction; he will then push hard to negotiate reasonable protections.  If the deal sours and lawsuits are filed, well-drafted documents with appropriate protections become a kind of insurance policy to the entrepreneur.

Conclusion

I hope the foregoing is helpful to entrepreneurs.  I have previously covered some of these tips in both video and written format, but I tried to spice them up a little with a few war stories and a little colorful language.  Cheers, Scott

1.  Execute an Exclusivity Agreement.  The entrepreneur’s  first step in connection with an acquisition should be to execute a tightly-drafted exclusivity (or “no-shop”) agreement, granting it the exclusive right for a period of time (e.g., 90 days) to negotiate with the seller/target and to complete its due-diligence investigation.  Such an agreement is often part of the letter of intent (the “LOI”); however, from the buyer’s perspective, it may be preferable, as discussed below, to execute a separate letter agreement and skip the LOI.  Indeed, if the buyer executes an exclusivity agreement with the target early on, it can avoid (i) getting into a bidding war with other prospective buyers and (ii) spending significant time, money and resources on due diligence without any assurance that the seller will not strike a deal with another party.

2.  Avoid Negotiating the Material Terms in an LOI.  Other than with respect to a no-shop provision (discussed above) and a Hart-Scott-Rodino filing (discussed below), there are generally no significant benefits to the buyer in executing an LOI.  Indeed, the seller’s negotiating leverage is strongest prior to the execution of an LOI — particularly if the target is represented by an investment banker who has effectively created a competitive selling environment (or the perception of same) — and thus it is in the seller’s interest (not the buyer’s) to negotiate the material terms of the deal in the LOI.  The buyer can avoid this trap in one of two ways: (i) by executing an exclusivity letter agreement and skipping the negotiation of an LOI — i.e., proceeding directly to the negotiation and execution of a definitive acquisition agreement; or (ii) by executing an LOI that includes a binding no-shop provision, but is otherwise non-binding (except perhaps with respect to expense reimbursement and/or other “special” provisions) and is as non-specific/general as possible (e.g., “this letter summarizes a proposal pursuant to which the Buyer would acquire the Target”).  Either approach gives the buyer not only strong negotiating leverage, but also the time and flexibility to complete its due-diligence investigation prior to agreeing to any material terms.  Moreover, it will minimize the risk that the LOI will be construed as a binding agreement between the parties — the major reason why a buyer should be circumspect with respect to the execution of an LOI — leading to potential damages if the transaction is not consummated.  (Note: an LOI does serve a useful purpose in deals greater than approximately $65 million — i.e., it enables the parties to make any required filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.)

3.  Do Your Diligence.  A comprehensive due-diligence investigation is critical to the success of any acquisition.  The fundamental purpose of due diligence is to validate assumptions with respect to valuation and to identify risks.  Accordingly, there are typically three separate investigations: operational/strategic, financial and legal.  Clearly, the scope of the investigations must be tailored to the particular transaction; however, it cannot be emphasized enough that most deals fail due to inadequate diligence — resulting in the buyer (i) overpaying for the target, (ii) assuming significant unknown liabilities  and/or (iii) experiencing major integration problems.  As I witnessed first-hand, the more-sophisticated acquirors (e.g., successful private equity firms) spend an extraordinary amount of time in the field (not in the data room) interviewing customers, suppliers, competitors, creditors and, of course, management in order to obtain a deep understanding of the target’s value drivers and business risks.  They also demonstrate extraordinary discipline and will walk away from a deal (regardless of the time and money spent) if they determine that they are overpaying and/or certain significant risks cannot be contained (see “Mistake #4” here).  In short, adequate diligence (coupled with rigorous analysis) is key.    

4.  Buy Assets, Not Stock (Equity).  It is generally advantageous for an acquiror of a private company to purchase assets, not equity, of the target for two principal reasons: (i) it will get a stepped-up tax basis in the acquired assets; and (ii) it will minimize the assumption of any unwanted liabilities.  Indeed, in a stock transaction or merger, the buyer assumes all of the target’s liabilities by operation of law; in an asset transaction, however, the buyer only assumes those liabilities that are expressly agreed to in the acquisition agreement.  There are nevertheless certain liabilities that, regardless of the asset-purchase structure, will be assumed by the buyer under the doctrine of “successor liability” as a matter of public policy, the most significant of which include (i) products liability, (ii) environmental liability, (iii) liability under “bulk sales” laws and (iv) certain employee benefits and labor issues.  Accordingly, the buyer must protect itself in the acquisition agreement against such liabilities with carefully-drafted indemnification provisions.  The buyer must also protect itself in an asset deal against a fraudulent conveyance claim by the target’s creditors by requiring that (i) the sale proceeds stay with (or be used for the benefit of) the target and not be distributed to the target’s stockholders and/or (ii) adequate arrangements are made to pay-off the target’s creditors.  Needless to say, every deal is different and must be structured and negotiated with the assistance of competent counsel, including tax counsel; however, the buyer entrepreneur should always be thinking about cherry-picking assets (with the caveats discussed above).   

5.  Tailor the Acquisition Agreement to the Particular Transaction.  The buyer’s initial draft of the acquisition agreement must be tailored to the particular transaction.  Indeed, this is not the time for the buyer’s counsel to use some off-the-shelf form (or “the agreement we used on that other deal”), with new names inserted.  Instead, the initial draft should reflect ongoing substantive discussions among members of the buyer’s transaction team regarding risk allocation, purchase price considerations, the diligence findings and the overall negotiating strategy.  The buyer’s counsel must, for example, specifically discuss with his client how aggressive the initial draft should be.  Perhaps from the buyer’s standpoint, the purchase price is so good and any significant risks deemed to be remote (or containable) that the buyer wants a “seller-friendly” (or “middle-of-the road”) draft to avoid losing the deal.  On the other hand, perhaps the target has so many potential problems, and the buyer perceives it is paying a full purchase price, that the agreement must be aggressively drafted, with broad representations and warranties and indemnification obligations of the seller to protect the buyer.  Needless to say, the role the buyer’s counsel plays is critical: he must understand the target’s business and the significant deal risks in order to protect the buyer and to ensure that the buyer is making an informed judgment with respect to price and terms.  Deals often take on a life of their own — with emotions and egos involved — and there is nothing more important on the buy-side than a lawyer who is watching his client’s back. 

6.  Escrow a Portion of the Purchase Price.  One step the buyer can take to protect itself is to escrow a portion of the purchase price (e.g., 15-20%) for a period of time post-closing (e.g., 18-24 months).  Indeed, escrows are relatively common (particularly where there are multiple sellers) because of the inherent unfairness of requiring the buyer to sue the seller(s) to try to get some of its money back for a problem or liability it never agreed to take on.  Alternatively, the buyer can push for a hold-back (i.e., a right to hold part of the purchase price) and/or a right of set-off in deals where part of the purchase price has been deferred (e.g., where the buyer has issued a promissory note to the seller as part of the purchase price); however, escrows are obviously more amenable to sellers (i.e., less controversial) because the money is held by an independent third party and the buyer does not have the unilateral right to withhold payment.  A few important points worth noting in connection with escrows: (1) the buyer should avoid limiting its recourse solely to the escrow without any carve-outs unless it is completely comfortable with the size of the escrow and has otherwise made an informed judgment with respect to the significant deal risks and terms; (2) the old pooling-accounting requirements of limiting escrows to 10% of the purchase price and one year in duration are no longer applicable; and (3) where there are multiple sellers, the buyer should require the sellers to appoint a representative who is authorized to make all decisions relative to the escrow (as well as other substantive issues).  This recent M&A Holdback Escrow Report  from J.P. Morgan underscores the importance of an acquiror utilizing an escrow to protect itself in the event of any indemnification claims against the seller (“[o]f the deals analyzed, 40% had claims filed against the escrow”). 

7.  Use Earn-Outs Only As a Last Resort.  Earn-outs (i.e., post-closing contingency payments) are often touted by unsophisticated investment bankers and counsel as an effective way to bridge the gap between what the buyer is willing to pay for a business and the seller’s asking price.  The reality, however, is that earn-outs often lead to major disputes and business problems post-closing and should, accordingly, be avoided if at all possible.  On the legal side, a number of critical issues must be negotiated, including the following: (i) the metric (e.g., revenue, EBITDA, profit, etc.) and milestones, (ii) measurement/accounting issues, (iii) exclusions/carve-outs (e.g., allocation of administrative or general overhead expenses, intercompany transactions and charges, etc.), (iv) the duration of the earn-out period, (v) the effect of acquisitions or dispositions relating to the acquired business and (vi) most significantly, post-closing operational control issues.  The amount of time and energy that is required to address adequately the foregoing issues can be extraordinary (often leading to pages and pages of provisions), and there will still be gaps because it is virtually impossible to anticipate every post-closing contingency.  On the business side, earnouts usually create significant impediments to the integration process and conflicting interests between the buyer and the target post-closing — e.g., if the metric is revenue growth, the target may sign-up a number of new customer contracts that may not be profitable or in the best long-term interest of the business; if the metric is profit or EBITDA, the target may cut back on capital expenditures or other expenses (such as marketing or advertising) — particularly as the end of the earn-out period approaches.  Moreover, target management may lose its motivation if it is unable to achieve its goals and thus is never entitled to an earn-out payment.  The bottom line is that earn-outs are very tricky from both a legal and business perspective and should only be used as a last resort. 

8.  Include a Carefully-Drafted “MAC”.  From the buy-side, one of the most important representation and warranty of the seller (and closing condition if there is a signing and a subsequent closing) is that the business has not suffered a material adverse change (“MAC”).  Lawyers have a field day wordsmithing the definition of MAC — arguing over such issues as (i) the applicable period, (ii) whether “prospects” should be included, (iii) whether the target and its subsidiaries should be “taken as a whole” and (iv) of course, the exceptions.  The bottom line, however, is that most MAC definitions are extremely ambiguous, and there is little case law to provide any guidance as to what constitutes a MAC.  Moreover, the leading Delaware case, IBP, Inc. v. Tyson Foods, Inc., suggests that the standard as to what constitutes a MAC is quite high — “measured in years, rather than months.”  Accordingly, the buyer must be careful about relying on a MAC to terminate an acquisition agreement (or otherwise to sue the seller for breach of the MAC rep) unless the definition includes specific objective criteria — e.g., a specific dollar decrease in EBITDA or sales, etc.  (Note: as a downsize protective measure, an expense reimbursement provision should be coupled with the MAC and other closing conditions.)      

9.  Don’t Give Away the “Basket”.  One of the provisions sellers generally insist on in the acquisition agreement is a “basket” to prevent the buyer from “nickel and diming” the seller for any claims post-closing.  The size of the basket varies from deal to deal, but based on a recent study of the Committee on Negotiated Acquisitions of the American Bar Association (of which I am a member), the norm is approximately .5% of the purchase price.  If the buyer agrees to a basket, there are a number of significant issues that it must address, including the following: (i) it should push for a “first-dollar” basket (sometimes referred to as a “threshold”) as opposed to a “deductible” so that if the seller’s damages exceed the basket, it would be responsible for all of the damages (i.e., beginning with the first dollar); (ii) the basket should only relate to breaches of representation and warranties and not to breaches of covenants or specific indemnity provisions (this is a common mistake); (iii) any materiality qualifiers in the representations and warranties should be disregarded for purposes of the basket — otherwise there would be a so-called “double-materiality” problem (another common mistake); and (iv) there should be appropriate carve-outs to the basket, the most common of which include capitalization, due organization, due authority and ownership of shares. 

10.  Watch Out for Caps.  One of the most important and hotly-negotiated issues in any private-company acquisition is the cap (or ceiling) on the seller’s damages.  Like other material terms in the acquisition agreement, there is no right or wrong answer (or “customary” or “market” amount): it all depends on the context of the transaction — i.e., the bargaining power of the parties, the risk profile of the target, the purchase price, etc.  For example, in an auction context with ten bidders expressing interest in a target, the cap may end-up being 10% or less of the purchase price due to the competition; on the other hand, if the target has a host of significant problems (and/or is financially troubled) and there is only one prospective buyer on the horizon, the cap may end-up being equal to the purchase price (or there may be no cap).  The lesson here (and the key takeaway of this post) is that the buyer must fully understand the target business and the significant deal risks in order to make an informed judgment with respect to price and terms, including the cap.  Indeed, as discussed in paragraph #6 above with respect to the escrow being the sole remedy, if the cap is less than 100% of the purchase price, the buyer should push hard to include certain carve-outs, including the seller’s breach of (i) any covenants, (ii) specific indemnity provisions (e.g., environmental, taxes, ongoing litigation, etc.) and/or (iii) certain representations and warranties (akin to the carve-outs to the basket).

www.youtube.com/watch?v=lHtZY6kPq-w

Mistake #1 – The Failure to Diligence the Guys on the Other Side of the Table 

Whether the entrepreneur is doing a venture capital financing, a partnering agreement with another company or is selling his company to a private equity firm – he must investigate the guys on the other side of the table.  This means determining the reputation of both the company/firm (if it’s not a marquee name) and the particular individuals with whom he is dealing.  Who are these guys?  Are they good guys or are they jerks?  Can they be trusted?  When they say they are going to do something, do they do it?  Do they add value?  Remember, in certain deals (such as a venture capital transaction), the entrepreneur will be, in effect, married to these guys for a number of years.  Accordingly, at a minimum, the entrepreneur should get references and speak with other entrepreneurs or CEO’s who have done deals with the guys on the other side of the table in order to make an informed judgment as to whether they are guys with whom the entrepreneur should be doing business. 

Mistake #2 – The Failure to Build a Strong Transaction Team

Every successful entrepreneur knows the importance of building a strong team, yet they often ignore this rule when putting together a transaction team.  Now is not the time for the entrepreneur to being using his buddy the divorce lawyer or the attorney who wrote his will to negotiate his financing or acquisition; nor is it the time to use his bookkeeper to handle tax and accounting issues; nor is it the time for the entrepreneur to play lawyer and start pulling forms off of the Web.  As I learned first-hand in New York, the quarterback of the transaction team should be a strong, experienced corporate lawyer – he’s the guy who is going to drive the deal, watch the entrepreneur’s back and help the entrepreneur build-out his team.     

Mistake #3 – The Failure to Run the Negotiations Through the Lawyers

The entrepreneur should do what he does best — i.e., build companies — and leave the deal negotiating to a strong corporate attorney (or an investment banker in the acquisition context).  Entrepreneurs are generally no match for sophisticated venture capitalists or private equity guys or corporate development guys who do deals for a living.  Accordingly, a smart entrepreneur will stay above the fray and let his corporate attorney run the deal – and business issues can easily be handled at an all-hands meeting (whether in-person or via conference call).  Experienced deal guys on the other side of the table may try to do an end-run around the entrepreneur’s lawyers, but the entrepreneur must remain disciplined and simply advise the guys that all negotiations are being run through his lawyers. 

Mistake #4 – The Failure to Check Their Emotions and to Remain Disciplined

Entrepreneurs (particularly those who haven’t had much deal experience) often become emotionally wedded to a particular transaction and are unable to maintain their objectivity the further along they get in the process.  Too often, an entrepreneur will fall in love with a particular deal — like the first-time home buyer — which will lead to poor decision-making and risky positions.  As I saw first-hand in New York City representing big, successful private equity firms, the best deal guys are masters at taking their emotions out of transactions and being extremely disciplined.  Indeed, they will generally walk from a deal if they get out of their comfort zone (e.g., with respect to the risk profile, price, etc.) — regardless of how much time and money they have expended.  It is critical that the entrepreneur understand this dynamic — and that’s why it is so important to develop a game plan early on — because once the emotions start playing havoc, you have to stay disciplined and stick to your plan (your dealbreakers, etc.) and be willing to walk, if necessary. 

Mistake #5 – Blinking First

There comes a point in time in just about every deal where both sides have dug into certain positions and the question becomes which side will blink first; e.g., in a venture capital financing, perhaps the issue is the liquidation preference or, in an acquisition, perhaps the issue is carve-outs to the cap on liability.  Whatever the issue, the lesson for the entrepreneur is clear (albeit difficult to execute): in order to maintain negotiating leverage and credibility, the entrepreneur should not blink first.  Indeed, if the entrepreneur has flatly stated that “this issue is a dealbreaker,” but then blinks and nevertheless agrees to go forward with the transaction despite not getting what he asked for, he will have completely undermined his credibility and will have his clock cleaned with respect to any other significant issues.  Like poker, if your bluff gets called, it will be difficult to bluff again.  Which brings us back to the important tip in #4 above: run the negotiations through an experienced corporate lawyer (or an investment banker) who does this stuff for a living.

1.  Be Careful with Private Equity Buyers.  Private equity firms are in the business of buying and selling companies.  Accordingly, they are extremely sophisticated and savvy and are often represented by large, aggressive law firms.  Deals with private equity buyers are generally more complex than those done with strategic buyers due to, among other things, the level(s) of debt added to the target and/or financial engineering.  Moreover, unlike most strategic buyers, private equity buyers (i) usually require the selling entrepreneur to rollover part of his/her equity into the acquirer (i.e., to maintain skin in the game) and (ii) may require a financing condition in the acquisition agreement – which obviously adds a level of uncertainty to closure. 

2.  Hire an Experienced M&A Lawyer Before You Hire an Investment Banker.  An experienced M&A lawyer will not only help protect the selling entrepreneur in the actual sale process, but also will help retain a strong investment banker and negotiate the banker’s engagement letter.  Indeed, investment bankers can (and should) be played off of each other to lower their respective fees — just like effective bankers play prospective buyers off of each other to get a higher sales price and better terms for the seller.  This approach can lead to substantial savings for the entrepreneur. 

3.  Get Your Papers in Order.  An easy way to instill confidence in prospective buyers is for the selling entrepreneur to deliver (or make available) a complete, well-organized set of diligence documents.  Accordingly, prior to initiating the sales process, the entrepreneur should ensure that the corporate books are cleaned-up, agreements are memorialized and/or updated to the extent necessary, public records do not reflect previously-released liens, etc.  Moreover, financial statements should be recast by experienced accountants to paint a more accurate financial picture of the business.

 4.  Develop a Game Plan.  Every deal is different — different players, different negotiating leverage, different risks, different timing — and it is thus imperative that the selling entrepreneur sit down with his/her transaction team and strategize to develop a game plan in connection with the sale.  The entrepreneur must communicate to the team, among other things, his or her deal-breakers, wish-list, problems and, of course, budget.  An experienced M&A lawyer will quarterback the transaction and ensure that the game plan is being executed. 

 5.  Negotiate the Material Terms in the Letter of Intent.  The entrepreneur’s strongest leverage as a seller is prior to the execution of the letter of intent (the “LOI”).  This is the time when a solid investment banker and/or M&A lawyer will create a competitive environment (or the perception of same), and prospective buyers will be required to compete on price and terms.  One buyer, for example, may offer a higher purchase price, but require a “cap” (as discussed below) equal to such price; another buyer may offer less, but only require a 10% cap.  Accordingly, prior to choosing a buyer, the selling entrepreneur should negotiate and weigh all of the material terms of the offer, and the LOI should reflect such terms. 

 6.  Sell Stock (Equity) Not Assets.  As a general rule, the entrepreneur should sell equity — not assets — for three significant reasons: (i) potential tax savings if the target is a “C” corporation; (ii) to pass the target’s liabilities (disclosed and undisclosed) onto the buyer; and (iii) because it generally requires less documentation and less time to closure (which means less legal fees).  Obviously, every deal must be structured with the assistance of competent counsel, including tax counsel; however, selling entrepreneurs should always be thinking about selling equity, not assets.

 7.  Insert a “Basket” in the Acquisition Agreement.  The buyer should not be permitted to “nickel and dime” the selling entrepreneur for immaterial breaches of the representations and warranties.  Accordingly, the seller should insert a basket (i.e., a deductible) into the indemnification section of the acquisition agreement (e.g., 1% of the purchase price).  The buyer thus would only be permitted to recover for its aggregate amount of damages in excess of the amount of the basket (though buyers will often insist that if its damages exceed the basket, the seller should be responsible for the first dollar).  Sellers should also push to include a mini-basket for individual claims — e.g., unless the buyer’s damages exceed $10,000 with respect to a particular claim, it does not get counted toward the basket. 

 8.  Cap Your Potential Liability.  The entrepreneur wants to sleep well after his or her business has been sold and enjoy the fruits of years of labor.  Accordingly, it is critical that certain key provisions be inserted into the acquisition agreement to protect the entrepreneur post-closing.  One such provision is a cap on liability, which, as noted above, should ideally be negotiated in the LOI.  Sellers should strive for a cap of 10% of the purchase price (or even less, with strong leverage) and should also try to minimize any buyer carve-outs.  The seller’s message to the buyer is reasonable: inherent in any business are certain ongoing risks, and thus once the business is sold, you (buyer) should only be able to recover a limited amount of the sale proceeds (absent fraud).   

 9.  Insert a Non-Reliance Provision in the Acquisition Agreement.  Another important seller protection that should be inserted into the acquisition agreement is a so-called “non-reliance” provision, which requires the buyer, in effect, to acknowledge that it is buying the business based solely on the seller’s representations and warranties in the acquisition agreement and its due diligence investigation.  Indeed, such a provision is intended to prevent the buyer from suing the seller based on any oral statements, writings, projections, etc. outside the four corners of the acquisition agreement.     

10.  Get the Buyer to Pay a Termination Fee.  The selling entrepreneur should require the buyer to pay a fee if the acquisition agreement is terminated through no fault of the seller (e.g., if the buyer is unable to satisfy a financing condition); this is sometimes referred to as a “reverse break-up” fee, which can be as high as 10% of the purchase price (e.g., in the sale of Neiman-Marcus) or as low as the amount of seller’s transaction expenses.  This is an issue that is often not addressed by middle-market sellers — but should be.

1.   Diligence the Guys on the Other Side of the Table.  Due diligence is often a critical component to any deal.  One form of diligence that is often overlooked, however, is an investigation of the guys on the other side of the table.  What’s the reputation of the Big Boy — e.g., is this a firm that squeezes the little guy or does it add value?  What about the particular individuals with whom you are dealing?  Are they good guys with whom to partner or are they jerks?  Can they be trusted?  When they say they are going to do something, do they do it?  Remember, in certain deals (such as venture capital transactions), the entrepreneur will be married, in effect, for a number of years to the guys on the other side of the table.  Accordingly, at a minimum, he should get references and speak with other entrepreneurs or CEO’s who have done deals with them in order to make an informed judgment as to whether they are guys with whom he should be doing business. 

2.  Retain a Strong Team.  In dealmaking as in business, you’re only as good as your team.  Accordingly, the first step for the entrepreneur is to retain a strong transaction team — and the quarterback of the team should be an experienced corporate lawyer.  Indeed, an experienced corporate lawyer will not only watch the entrepreneur’s back (as discussed in paragraph #10 below), but also will help the entrepreneur build-out his team and tailor it to the particular transaction — e.g., in an M&A transaction, (i) a strong tax lawyer is imperative to help structure the deal; and (ii) it may be prudent for the entrepreneur to retain an investment banker and/or a consultant to help on the business side.

3.  Create a Competitive Environment.  There is nothing that will give the entrepreneur more leverage in connection with any negotiation with a Big Boy than a competitive environment (or the perception of same).  Indeed, every investment banker worth his salt understands this simple proposition.  Accordingly, a start-up seeking a Series A financing from a venture capital firm, for example, will clearly have more leverage if such firm learns that other venture capital firms are interested in the start-up.  Not only does competition validate a firm’s interest, but also it appeals to the human nature of the individuals involved.  Competitors can be played-off of each other and, as a result, the entrepreneur will be able to strike the best possible deal.  One caveat: this strategy must be played very carefully and is better-handled by someone with strong deal experience.

4.  Run the Negotiations Through the Lawyers.  The entrepreneur should do what he does best — i.e., build companies — and leave the negotiating to an experienced corporate lawyer (or an investment banker, if applicable).  Entrepreneurs are generally no match for sophisticated venture capitalists or private equity or corporate development guys who do deals for a living.  The Big Boys may try to do an end-run around this process (and may even criticize the entrepreneur’s advisors and try to turn the entrepreneur against them), but the entrepreneur should remain disciplined and avoid “side-bar” negotiations with the principal(s) on the other side.  This approach is particularly important where the entrepreneur will have an ongoing relationship with the other side post-closing; the goal is thus not to poison that relationship with testy, acrimonious negotiations (i.e., let the lawyers fight it out).   

5.  Develop a Game Plan.  Every deal is different — different players, different negotiating leverage, different risks, different timing — and it is thus critical that the entrepreneur sit down with his transaction team and strategize; in short, he must develop a game plan and then attempt to execute the plan.  Indeed, doing deals is no different than any other project: the entrepreneur must (i) think through the issues with a smart, experienced team, (ii) set reasonable milestones and (iii) then monitor the progress.  Rigorous analysis throughout this process is paramount.

6.  Be Careful with LOI’s.  A letter of intent (an “LOI”) — sometimes referred to as a term sheet or memorandum of understanding — is often executed in connection with all types of deals.  The entrepreneur must understand that, depending on the deal and the context, there are different LOI strategies and considerations that must be addressed.  For example, in the acquisition context, a selling entrepreneur should try to negotiate all of the material terms of the deal in the LOI when the entrepreneur’s leverage is the strongest; on the other hand, a buying entrepreneur’s main goal with respect to the LOI is merely to lock-up the seller and prohibit it from shopping the deal for a reasonable period of time.  Another major concern with respect to LOI’s is that they may be deemed enforceable by a court of law (i.e., be deemed a binding agreement) — despite express language in the LOI to the contrary.              

7.  Check Your Emotions at the Door.  Big Boys are masters at taking their emotions out of transactions and being extremely disciplined.  Indeed, Big Boys will generally walk from a deal if they get out of their comfort zone (e.g., with respect to the risk profile, price, etc.) — regardless of how much time and money they have expended.  Entrepreneurs, on the other hand (particularly those who haven’t had much deal experience), often become emotionally wedded to a particular transaction and are unable to maintain their objectivity the further along they get in the process.  Too often, an entrepreneur will fall in love with a particular deal — like the first-time home buyer — which will lead to poor decision-making and risky positions.  It is critical that the entrepreneur understand this dynamic – and that’s why it is so important for him to develop a game plan early on and to stick to the plan (i.e., the dealbreakers, etc.) and be willing to walk, if necessary.

8.  Don’t Blink First.  There comes a point in time in just about every deal where both sides have dug into certain positions and the question becomes which side will blink first; e.g., in a venture capital financing, perhaps the issue is the liquidation preference or, in an acquisition, perhaps the issue is carve-outs to the cap on liability.  Whatever the issue, the lesson for the entrepreneur is clear (albeit difficult to execute): in order to maintain negotiating leverage and credibility, the entrepreneur should not blink first.  Indeed, if the entrepreneur has flatly stated that “this issue is a dealbreaker,” but then blinks and nevertheless agrees to go forward with the transaction despite not getting what he asked for, he will have completely undermined his credibility and will have his clock cleaned with respect to any other significant issues.  Like poker, if your bluff gets called, it will be difficult to bluff again.  Which brings us back to the important tip in paragraph #4 above: run the negotiations through an experienced corporate lawyer (or investment banker/consultant) who does this stuff for a living.      

9.    Watch-out for the “Good-Cop, Bad-Cop” Routine.  Big Boys employ all kinds of negotiating games, and one of their favorites is the “good-cop, bad-cop” routine.  The Big Boy, of course, plays the good cop and is smooth, friendly and agreeable and makes the entrepreneur feel like all of his important issues are being taken care of.  But then the documents arrive — chock full of bells and whistles and boilerplate provisions designed to protect the Big Boy and often with significant gaps on the deal points.  When the Big Boy is questioned as to what’s going on here, the answer, of course, is “it’s my lawyer’s fault” (i.e., the “bad cop”).  This game will continue throughout the negotiating process as the Big Boy charms the entrepreneur while his lawyers pound away on every significant issue.

10.    Hire an Experienced Corporate Lawyer to Watch Your Back.  This may sound a bit self-serving, but every entrepreneur doing a deal needs an experienced corporate lawyer to watch his back.  Indeed, I have worked on billion-dollar deals where, prior to signing, emotions run high (as discussed above), and a few of the significant risks are minimized or pushed-aside by investment bankers and/or business guys in order to get the deals done.  A strong corporate lawyer will sober the entrepreneur and lay-out all of the significant legal risks — and then push hard to negotiate reasonable protections.  If the deal sours and lawsuits are filed, well-drafted documents with appropriate protections become a kind of insurance policy to the entrepreneur.  This is not the time for a “yes man.”