Doing Deals – 3 Tips for Entrepreneurs (Part 3)

by Scott Edward Walker on August 25th, 2011

Introduction

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, domain 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 with 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 for $2 billion.  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, using LegalZoom 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

 

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