Is Your Lawyer Disruptive? Shouldn’t He/She Be?

When people think of the qualities they want in a lawyer, disruptive doesn’t always come to mind – in fact, it rarely does. However, this is one of the most important qualities in growth stage and entrepreneurial/start-up companies wanting to revolutionize their market segment and change the world. So why don’t clients (especially the kind mentioned in the preceding sentence) insist that their lawyers – in addition to being outstanding technical lawyers – be disruptive? After all, doesn’t it make sense that the most innovative and forward-thinking lawyers would relate best to the most progressive companies and clients? Sadly, I think the reason people don’t generally seek out these qualities in their lawyers is because they don’t know they exist. And, why is that? Because lawyers and the legal community have set the bar so low when it comes to innovation, creativity and client-centric business practices – choosing to require clients to conform to the traditional attorney-client model, rather than the attorneys focusing on what the clients want and need. In my opinion, clients should insist on more – and lawyers should deliver more.

So, I ask, is your lawyer disruptive, and if not, why not? The answer, of course, depends on what it means to be disruptive as a lawyer and whether/how that disruptiveness can benefit you and your company as a client and consumer of legal services. When I think of disruption in the legal world, I don’t mean reckless, hasty, rude or destructive. Rather, what I mean is not just the ability, but the desire, and in fact the affirmative goal, to think outside the box and provide creative client-driven solutions to your business and legal challenges – not canned or pre-scripted “one size fits all” responses from a dusty legal treatise.

With the foregoing definition in mind, you may say, “thank you but no, I don’t want my lawyers to be disruptive – I want them to provide the same “buttoned-down” black letter responses that their forefathers provided to my predecessors and leave creativity to me. If so, then this article probably hasn’t resonated with you. If, however, you like the idea of a creative, disruptive thinking lawyer and law firm, find one – they’re out there!

Understand What No Lawyer or Document Can Do For You

I was recently helping a client with a stock purchase in a deal that just felt wrong to me. Each time we asked a question or reviewed a document, it seemed additional issues, questions and concerns arose. Notwithstanding this fact, the investment bankers, company officers and selling stockholders assured us in each instance that there was no problem – usually with the excuse that it was simply bad record-keeping, a lack of attention to detail or a favorable related party transaction that would not adversely affect the company or my client going forward. In fact, they said, it was precisely because of these circumstances that my client had been presented with this amazing investment opportunity. I did not find these explanations to be persuasive or reassuring, even when the sellers agreed to provide a litany of warranties and representations, broad indemnification rights, and other contractual protections.

In this circumstance, I was compelled to explain to my client a very simple fact – while a lawyer can draft an all-encompassing contract in which virtually every possible risk is anticipated and addressed with detailed indemnifications, aggressive remedial provisions, escrows, etc., that does not turn a bad deal into a good one or provide the same level of protection as walking away from a bad deal.

The simple truth is, if your due diligence yields more questions than answers more uncertainty than certainty, and more risks than opportunities – and if you find yourself spending an inordinate amount of time and effort trying to protect yourself from known and unknown legal risks and possible bad behavior or misrepresentations by the other party (versus ordinary course business risks) – no amount of lawyering and no legal document can adequately protect you. In that case, you really only have 2 choices – (1) walk away from the deal, or (2) draft that over-the-top contract with all of the bells, whistles and protections and “hang on for the ride.” And if you opt for alternative 2, understand that a good lawyer and a good contract do not make a good deal.

Negotiating With Investors – Focus on What Really Matters

Negotiations with investors are tough – especially when you’re not accustomed to these kinds of discussions and the party across the table engages in them on a regular basis.  What’s the most important advice (right after hiring a good/experienced lawyer who understands your business) – focus on what’s important – economics and control.

Having stated that you must understand and try to aggressively protect, retain and preserve economic/financial upside and control, it’s also essential to understand that the investor has something you need – money – and it’s inherently reasonable for that investor to expect in return for providing you with that money that he or she will receive both (a) substantial economic upside in the event the company is successful and downside protection if it’s not, and (b) a degree of control in order to protect that investment.

Unfortunately, I can’t provide a detailed explanation in a blog post of all of the terms and variables that arise in negotiating economics and control, but here are a few you must understand (Note – if you don’t know what these terms mean, find out before negotiating):

• Valuation – what ownership share will the investor get for invested dollars?

• Dividends – if the investor is to receive dividends, how much, when, who decides, and are they cumulative?

• Preference – assuming the investor gets paid first upon a liquidity event and that payment is more than the initial investment (i.e., a preference), how much more?

• Participation – after receiving the preference, does the investor get to “participate” in the remaining proceeds, and if so, to what extent?

• Dilution – how can various parties be diluted (including by an employee incentive pool), and what impact will this have on distribution of proceeds?

• Board Seats – who fills the Board seats, and what is the “balance of power”?

• Voting Rights and Protective Provisions – what issues does the investor get to vote on and/or veto?

• Conversion Rights – assuming investors receive preferred stock, when can they convert to common, and what impact might that have?

• Tag-Along and Drag-Along – under what circumstances can parties force others to participate in a sale or allow them to participate in a sale?

The above list is, admittedly, abbreviated, but it should give you an idea of the most important issues in negotiating with investors – everything else pales in comparison.

The Pros and Cons of the “Just Do It” Mentality

I’m showing my age with this one, but hopefully most reading this will at least vaguely remember the old Nike ads urging you to, “Just Do It.” They were filled with pictures of great athletes “giving 110%,” “going the extra mile,” and otherwise living the “no pain, no gain” mantra. I’m a big believer in that portion of the message and note that it would seem to have equal applicability and validity in the business world as well as the sports world. After all, it’s not easy to excel or reach the top (or even your own best) in any activity – without extremely hard work and complete focus and dedication, you’re not likely to get there in sports, business or life.

However, the other message that some people got from the “Just Do It” slogan is extreme urgency – the need to move immediately, take unreasonable chances and bet it all to succeed – throwing caution to the wind in exchange for moving quickly. While that may (or in fact may not) be a reasonable thing to do in your sports and fitness training, I believe this approach is both imprudent and generally unnecessary in your business matters, and sometimes leads to disaster.

The bottom line is, I think “Just Do It” is a great mantra for buying shoes – and even for bringing out the inner athlete, inner entrepreneur, or inner risk-taker of virtually any kind in all of us. After all, great ideas, great people and great companies usually start with someone discarding the status quo and opting instead to take a risk by introducing some sort of “disruptive” idea or concept. However, I don’t think it is a great strategy for running your business. In that regard, I prefer one of the famous quotes by the late John Wooden – “Be quick, but don’t hurry.”

Know Where You Want to Go Before You Start

You’d never leave on a family vacation without knowing where you’re going and what you’ll do when you get there. So, why would you begin a business negotiation without knowing what your objectives and acceptable outcomes are? My answer – you shouldn’t.

So, am I saying you need to know exactly where your negotiations must conclude before you even begin discussions? Of course not – negotiations necessarily involve multiple parties, all of whom have their own goals and expectations. It would be foolish to think you can predict and control all possible outcomes, and short-sighted and unrealistic to believe the only successful outcome will be exactly the one most beneficial to you. After all, successful negotiations almost always require give and take from all parties to ultimately arrive at a win-win arrangement. Without this, at least one party will, presumably, have no incentive (or not enough incentive) to do the deal.

What is critical, however, is that you not enter into negotiations without giving careful thought to what your objectives are, the ways that you might be able to achieve them, and the outcomes that would be acceptable. Note that I’ve said objectives, ways and outcomes – plural. Just like the old saying, “there’s more than one way to skin a cat” – there’s almost always more than one way to structure a business deal.

I recommend you follow these basic suggestions before entering into business negotiations:

• Identify your ultimate objectives – the primary reasons you’re considering this deal.

• Consider the various ways that you might be able to achieve those objectives.

• Identify your secondary objectives – things that would be nice to get, but are not essential.

• Consider the various ways that you might be able to achieve those without compromising on the primary objectives. Also consider things that you would view as deal-killers.

• To the extent you’re able, go through the same analysis from the other party or parties’ perspective – see the deal through their eyes.

• Now, once again, consider how you can achieve your primary (and hopefully secondary) objectives AND how the other parties might also achieve theirs. Hopefully there are several ways to get there – some of which may be more or less desirable to you, but all of which would be acceptable.

• Having gone through this exercise, it’s now time to negotiate.

Remember, your best way to achieve a successful outcome is to consider what that might look like before entering into negotiations, rather than looking back and wondering what went wrong.

The Importance of Follow-Through and Tying Up Loose Ends

Averting a crisis is exciting! Negotiating a deal is exciting! Closing a deal is exciting! Moving on to the next deal is exciting! Making a follow-up “To-Do List” and completing the tasks on that list is not. However, I see time and again situations where important post-closing items fall through the cracks and ultimately end up costing parties time and money – often resulting in lost opportunities, disappointed expectations and a failure to obtain the full benefit of the bargain that was struck.

So what are some of the most common examples of poor follow-through? You might be surprised – they include failure to:
• actually sign the transaction documents, or to obtain all necessary signatures from parties such as, e.g., guarantors;
• obtain final executed documents and keep them where you can locate them in the future;
• attach critical exhibits – like legal descriptions, product schedules, minimum purchase quotas, etc.;
• obtain bonds, proof of insurance or important loss payee designations;
• docket important future dates, like delivery of tax returns, financial statements, renewal/termination dates, etc.;
• properly file (or to promptly file) documents such as mortgages, UCC financing statements, patent applications, etc.;
• follow the terms of the transaction documents, or to execute an amendment when the deal changes;
• require the return of confidential information and business assets such as copies of agreements, customer lists, product specifications, laptops, cell phones, etc. upon the termination of a business relationship; and
• obtain required approvals from lenders, shareholders, directors, etc.

The above items are merely examples of failures to follow through that can have a devastating impact on a deal or company. My advice – don’t be the company that fails to follow through by tying up the loose ends of your deals. Make post-closing checklists; prepare executive summaries of important agreements; docket dates; keep originals (or at least copies) of important agreements where you can locate them; and most importantly, take the necessary steps to realize and protect the value of your deals!

Negotiating a Deal? Be a Mediator, Not a Gladiator

What’s the primary goal of most business negotiations? I don’t mean negotiations in the context of a dispute – I mean in the context of a prospective business deal or relationship. In that setting, the primary goal is to reach agreement. And that generally means emphasizing mutual benefit and necessary compromise to reach the desired outcome for both parties, not just one – after all, if your negotiations are so “successful” that the other party has lost everything, there’s really no reason for that party to proceed at all. In other words, you may “win” the negotiation battle but “lose” the deal.

So, how should a business person (and that business person’s lawyer) approach negotiations? Simply put, I think it’s better to assume the role of mediator than that of gladiator; be a problem-solver not a competitor. That doesn’t mean that you must avoid confrontation and disagreement in all cases. What it does mean is you should pick and choose your “battles” carefully; and where possible, avoid them entirely by finding creative solutions.

Negotiation is not generally possible without some level of disagreement. If that weren’t the case, we’d never need to exchange multiple drafts of an agreement, since all parties would simply agree to the first draft. Disagreement is not the problem. Confrontation, however, often times can be – particularly if it’s not handled with professionalism and diplomacy. If disagreement is necessary, try and explain to the other party why your position is reasonable, and why the issue is important. If it’s a potential “deal-breaker,” explain that too. In the end, I believe it’s most productive to avoid confrontation when you can. Disagree when it’s important, but even then seek compromise where it’s possible and makes business sense. Be creative and seek to find win-win solutions. Remember, the goal is to get the deal done on terms that benefit everyone – not walk away after “fighting a good fight.”