Strategic Alignment Goes Beyond Your Workforce

Business consultants frequently discuss the importance of having an aligned workforce – one with an identified and accepted culture, common values, a shared vision for the future, and a uniformly adopted strategic plan for getting there.  I would suggest for businesses of all shapes and sizes the need for alignment extends beyond your workforce to include, at a minimum, your legal counsel and other important advisers.

Why, you might ask, is it important that your outside advisers be “aligned” with you and your business?  In the simplest terms, having aligned advisers results in: (i) less wasted time; (ii) less wasted money in both consulting fees and lost opportunities; (iii) less frustration and misunderstandings; (iv) more productive negotiations and transactions; and (v) more meaningful and direct accomplishment of your business goals.

So, what does it mean to have aligned advisers, and how do you get them?  Here are a few thoughts:

•         First, choosing the “right” advisers is critical – different advisers have different personalities, approaches and philosophies – choose those that share yours from a big picture perspective.  But understand that this alone is not enough.

•         Remember, you set the course – not them.  Aligned advisers adopt your approach, not theirs – so they need to know what your approach is and what your objectives are.

•         In addition, your advisers must know what tactics and methods you want to use to achieve your objectives – overall and in each transaction or circumstance.  Make sure your directions are clear in this regard.  Think joint venture versus distributor, or even 50-page agreement versus handshake deal.

•         Make sure your advisers are informed as to changes in culture, philosophy, tactics, objectives, budget, etc.  They can’t execute what they don’t know.

•         Finally, periodically evaluate your advisers and their alignment.  If they don’t get passing marks, make a change.

The value of alignment cannot be overstated.  Make it part of your consulting and advisory relationships.

Joint Ventures Present Potential Rewards AND Risks

What are the most basic qualities characterizing a good joint venture?  I would argue that the most important keys are business synergies and a shared vision of what the companies want to achieve and how they can achieve more working together than working alone.  Equally important – and sometimes lost in the early optimism and desire to move quickly – is understanding and agreement as to:  (i) what each company is and is NOT bringing to the JV and what its responsibilities will and will NOT be; and (ii) what each company can do outside the JV – both during and after the JV’s existence.

Why is it so important to decide and define these things?  Because, chances are, if this is a truly strategic joint venture, these are the things that each party may want to pursue on its own (outside the JV), and they may very likely be directly related to, and often competitive with, the purposes and products of the JV.  This means that several key provisions of your JV documents must be carefully considered and drafted.  Some of those are as follows:

• Ownership of (and Rights to) Pre-Existing Intellectual Property – who owns the IP that each party brings to the table, and separate from ownership, does the JV (or even the other party) have any license or use rights to that IP during or after the JV’s existence?

• Ownership of Jointly-Developed IP – similarly, who owns the jointly developed IP, and what use rights do the parties have during and after the JV’s existence?

• Confidentiality and Use of Information and IP – what can the parties do with the confidential information and IP of each other and the JV?

• Assignment of Inventions – Are each of the parties (and their employees?) required to assign all inventions and IP resulting from their joint efforts to the JV?  Only those relating to the business activities of the JV?  What about after the JV’s existence?

• Non-Compete – what exactly can the parties do and not do during and after the JV’s existence?  Compete with JV?  Compete with each other?  And what does compete mean?

• Non-Solicitation – who can the parties do business with during and after the JV’s existence and what kind of business?  Pre-existing customers?  Non-competitive products?  Anyone and anything?  Etc.

Joint ventures present exciting opportunities. Just remember to carefully define the parties’ rights and responsibilities to avoid disagreements in the future.

Subtlety Has Its Place

As the title to this post indicates, subtlety has its place – just not in business negotiations or contracts.  This is not to say that people shouldn’t be tactful, courteous and professional in these contexts – of course, they should be.  I’m not talking about manners; I’m talking about clarity, precision, directness and transparency – i.e., the things that avoid uncertainty and minimize the risk of disagreement (and litigation).

Occasionally, clients will ask me to word a provision in a contract so that it isn’t as clear or explicit as it might be, so that it’s “less conspicuous,” or in a way so that “later, we can take the position that it meant X. . . .”  This is almost always a bad idea.  After all, a contract is meant to be a clear and complete expression of the parties’ mutual intent and agreement – trying to “finalize” the deal while simultaneously avoiding clarity and completeness in order to avoid points of disagreement is NOT a recipe for success; to the contrary, it is a recipe for future disputes.

So, what does this mean for your negotiations and contracts?  Quite simply, items of potential disagreement should be identified and discussed (and hopefully resolved) early on, just as items on which the parties agree should be discussed.  Dispute resolution at the point of negotiation/deal-making and as part of the contractual process is healthy and productive.  It generally leads to one of 2 outcomes – either the parties ultimately reach agreement through compromise, concessions, etc., and they move ahead with the deal; or they don’t, and the deal doesn’t get done.  Either result is far better than signing a contract or entering into a relationship only to end up in the other kind of dispute resolution – the kind that comes after the contract is signed and involves 2 teams of lawyers, a judge, jury or arbitrator, and words like injunction, breach of contract, damages, and legal fees.  Don’t be subtle . . .

Nice to Meet You – Let’s Get Married

Only fools rush in.  We’ve all heard that expression many times and probably think we’re far too wise and experienced to be such a fool.  However, you’d be amazed at how often businesses and individuals rush headlong into business relationships or contracts only to find out they should have used more discretion, patience and judgment.  Remember, before you date someone, you usually want to know at least a little bit about them; before you go steady, you want to know a little more; and before you get married, you really want to know them well.

Consider applying some of these dating lessons and clichés to your business and legal relationships and contracts, and you may find you have fewer emotional breakups or (more importantly) fewer bad marriages that end in messy divorces:

  • Ask around (a/k/a, do your due diligence) – learn all you can about a person or company before you engage them, become partners or enter into a long term binding contract.
  • Trust your instincts (a/k/a, if it doesn’t feel right, don’t do it) – unless there’s some compelling reason you have to work with a specific person or company or you have to jump into a deal with both feet, if you’re getting a bad vibe, don’t proceed.
  • Go slowly (a/k/a, – start small) – whenever possible, start with a smaller project or a short term relationship and see how it goes. There’s usually time and there will almost always be more opportunities to work together if the first one goes      well.
  • Build in an escape hatch (a/k/a, don’t put all of your eggs in one basket) – even if you’re ready to hire someone or enter into a contract, make sure you have the ability to terminate or get out of the relationship.
  • See other people (a/k/a, avoid exclusivity) – exclusive relationships are serious commitments and have high risk (and potentially, high reward); take your time.
  • There are more fish in the sea (a/k/a, know when to say when) – ending a bad relationship is always hard – whether personal or business – but when your gut tells you it’s not right, then it probably isn’t. Cut your losses and end the relationship (in the right way, of course).

The bottom line is, business and legal relationships resemble personal relationships – with the same types of risks and rewards.  Look before you leap.

You’re an Owner – Act Like One

Owners of businesses – particularly closely held businesses – often divide responsibilities for company matters based on their individual strengths, interests, likes/dislikes, etc.  Those that are good at sales handle sales; those that are good at production manage production; etc.  This makes perfect sense, and I get it.  In fact, these types of preferences, skill sets and synergies are often the reason that certain people make good business partners.  However, this does NOT mean that they should not monitor each other’s performance and the performance of all material aspects of the company’s critical business operations, processes and finances.  Failure to do so often leads to misunderstandings, and in extreme cases can lead to business breakups or even outright failure.

Frequently I encounter businesses whose owners are not particularly strong in financial matters or simply don’t enjoy monitoring the company’s finances.  Without sounding too harsh or patronizing – complete delegation of your company’s finances to another party (even your trusted business partner) without regular reports, monitoring, etc. is NOT acceptable or prudent.  After all, as an owner, that’s your money they’re dealing with.

We all know the old saying – “The buck stops here.”  Well, part of being a responsible owner is understanding that the buck stops with you.  Too often I’ve seen owners who discover too late that someone was doing something wrong, something was not getting done at all, or the business simply wasn’t healthy or performing properly – and the explanation frequently is that it was someone else’s fault.  I hate to be so blunt, but it’s always the owner’s fault – and it’s always the owner’s money that’s lost.

The bottom line is ownership comes with benefits, burdens, responsibilities and obligations.  Monitoring all aspects of your company’s performance and finances is one of the burdens – or at least one of the responsibilities.  Take it seriously for your own benefit and protection.

Understanding Burn Rate and Runway and Their Impact on Alternatives

There’s a lot of jargon in the title of this post, so let me get to my point quickly.  Burn rate typically refers to the monthly outflow of cash necessary (or at least customary) for your business to operate.  Runway is simply the amount of time or the distance that your current cash and projected revenues can take you before your business “crashes and burns.”

Every business has a burn rate and a runway, although healthy businesses – particularly those not looking for an exit transaction – don’t generally spend a lot of time looking at these rather crude measurements of performance/viability.  For them, analyzing burn rate really only means carefully reviewing the company’s business plan/budget, projections and pipeline of new business, tracking the company’s income statement, controlling expenses, etc.  Businesses looking for an exit (or even those just looking for additional investors), however, CANNOT afford to lose track of these factors, because doing so can dramatically impact valuation, limit alternatives, and ultimately determine the viability of the company as a going concern.

So, why is this rather simple subject worthy of a blog post?  Because again and again, I see businesses with valuable assets, technology, etc. that simply “speed down the road toward the exit ramp” (i.e., a sale, merger, IPO or other transaction) only to find that there’s not enough “fuel in the tank” (i.e., operating cash) to get there.  And what does that mean?  If you’ll pardon my taking the road-trip analogy even further – that means you may be the company with the $300,000 Lamborghini that’s out of gas by the side of the road in the middle of the desert where the sale price for gas is $100/gallon; or worse yet, where there’s no one who will sell you gas at any price, but someone who will buy your car (i.e., business) for 1/10th its actual value; or in the very worst situation, where no one will even buy your car, but instead, they’ll scavenge and loot it once you’re gone.

Don’t be the company that loses track of burn rate or runway!

Raising Outside Capital? Know the Basics – Part 1

So your company is doing well and has great growth potential, but the banks won’t loan you money to grow, you’ve exhausted your personal resources, and you’ve run out of friends and family willing and able to write checks to your company – what does that mean?  It probably means it’s time to raise outside capital – perhaps angel or venture capital.  Here are some considerations before raising outside capital and some of the key points you’ll likely be negotiating:

Dilution/Loss of Control:
First, consider whether you’re prepared to own less than 100% of your company, and if so, whether you’re also prepared to have less than 100% control over business decisions.  If the answer to either of these questions is no, you should not raise outside capital.

Capital Need – Sources and Uses:
Second, carefully consider how much money you need and what exactly you’re going to do with it.  The reason is twofold – first, no experienced investor will take you seriously unless you have a detailed and well thought out strategy; and second, the more you raise, the more ownership and upside you give up.  Raise just what you need to execute your business plan (with the caveat that everything generally takes longer and costs more than planned).

Strategic Investors:
Third, consider what qualities, skills, connections, experiences, etc. you would like your ideal investor to bring to the table.  After all, a dollar is a dollar, but these other strategic offerings are what differentiate one investors’ dollars from another’s – and make them more valuable to you.

Valuation:
Valuation will be key.  At the risk of stating the obvious, the higher the valuation you can justify, the lower the interest the outside investors receive for each dollar invested.  And be prepared to justify your valuation – this company is your baby, not theirs.  What you see as a cute dimple, they may see as an ugly scar.  In the end, the value of the company becomes what you and your investor(s) agree it is.  Make sure you’re prepared to make the strongest case for your valuation – and understand that to the investor, it’s just business.

Stay tuned for “Know the Basics – Part 2.”

Shared Values Matter in Attorney-Client Relationships

Everyone knows that shared values matter greatly in interpersonal relationships – in fact, they may be one of the few absolute requirements for a successful and rewarding long term personal relationship.  Most would also agree they matter within an organization, where individual values ultimately dictate company culture.  I’d like to make the case for the importance of shared values in attorney-client relationships.

Both attorneys and clients come in many “shapes and sizes” when it comes to personalities, preferences, communication styles, etc.  I’m not suggesting that these qualities need to be the same or even similar.  In fact, one can argue that it’s healthy to the overall team to have varying skills, experiences and styles.  However, I don’t believe that’s true when it comes to values.  I believe shared values and value systems are essential to a long term successful relationship.

When speaking of values in the attorney-client context, I’m talking about those principles – business, ethical, etc. – that dictate both what we’re willing to do and not willing to do and how we’re willing to do it.  For example, I’m not willing to lie or mislead, abuse or mistreat, or place unfair demands or blame on the other side to a negotiation.  My value system inherently tells me that these are the wrong actions and behaviors to bring about a positive outcome for my clients.  I am, however, willing to push myself and my team to the limits to zealously and aggressively represent my client’s interests.  When clients share these values with me, we make a great team and can accomplish great things.  If we don’t, it will ultimately lead to frustration and disappointment.

If you haven’t taken the time to explore whether you and your attorney (or you and your client) share the same essential values, you should.  It can go a long way toward establishing the right relationship and building it so that you – as an attorney-client team – reach your maximum potential for the benefit of your business.

Changing Relationships Call for New Agreements

Have you ever had wills drafted or met with your financial advisor or insurance agent, and at the end of the meeting, he or she said, “Now we need to revisit this every couple of year to make sure things haven’t changed.”?  That same approach should be followed in your other legal and business relationships.

Relationships and circumstances can change for a variety of reasons.  The law changes.  One party is faced with financial or other business hardships.  One party transforms from a start-up business that is just happy to have a contract to an industry powerhouse.  An employee right out of school becomes a partner in the business.  Territorial capabilities or needs change.  Etc.  When these changes happen, it is critically important that the parties’ contract(s) be reviewed, and where appropriate, revised.  Otherwise, that ever-important “meeting of the minds” that we attorneys talk about may no longer exist – and that’s a recipe for trouble.

As I’ve said before, in negotiating and drafting agreements, we should attempt to anticipate the various ways that the parties’ relationship may change over time, and where possible, include provisions that allow the contract to evolve as well.  However, it’s rarely possible to anticipate all of the changes that may occur.  For that reason, I recommend a periodic revisit of your contracts.  The old saying, “If it’s not broken, don’t fix it,” is absolutely true; but your contracts may be broken now simply because they don’t fit your evolving business relationship.  Don’t let that be the case – remember the other saying, “An ounce of prevention is worth a pound of cure.”  Review your contracts and relationships periodically as part of your preventive maintenance.

How to Begin a Project With Your Lawyer

I was working on an international dealership project with a long time client this week, and something caused me to ask – why is there mention in this email string of a third party that isn’t part of our deal?  Oh, my client responded, you remember that we work with them and they get a piece of each deal “like this” – meaning not like their standard deal.  In fact, it’s been 4 years since we worked on the contract with the third party, and we haven’t worked on a deal “like this” since then (although we’ve worked on many that were not like this) – so, no, I didn’t remember.  Thank goodness I asked about the third party’s involvement, because it was not evident from any other information my client had provided so far, and without knowing this, I could have missed some key issues.

What does this scenario tell me?  It tells me that even in longstanding attorney-client relationships (and maybe especially in those relationships – since sometimes clients forget that the lawyer has many other clients and is not immersed in the client’s business 24/7), we need to always focus on the basics of the deal.  This starts with a detailed description from the client of all relevant facts, circumstances, concerns, interests, etc., and a specific identification of the ultimate business objective.  Next, the attorney should restate his or her understanding of the deal, and ask any specific questions and gather any specific information necessary to fully understand the project and properly advise the client.  This exchange between client and lawyer may be verbal or in writing, but the point is, when it’s complete, the attorney should be clear on what’s happening and what’s most important to the client.

The above process may seem obvious or even tedious, but I can assure you that it will better protect the client’s interests than the “ready, fire, aim” approach that is often the case.  An added benefit is that it will reduce legal fees and the time it takes to consummate your deal – it’s a real win-win.