It’s one thing to have professional advisors – lawyers, accountants, etc. – to point you in the right direction. It’s a whole other thing to know how to use them properly. I’ve found it’s a pretty steep learning curve for most entrepreneurs to figure out how to receive advice from, and give instructions to their lawyer. So, this is the first in a new feature I’m calling “Lawyer Stuff 101” – what a lawyer can do for you in different situations, and how the process should work.
I’ve been harping a lot on contracts lately – generally, and for record labels – since it’s a big part of my practice, so the process of birthing a contract seems a logical place to start. Signing a contract without a lawyer is like doing your taxes without a calculator – just because you can do it doesn’t mean that you should. Get your lawyer involved early in the process, as our kind know more about the points that should be covered in different kinds of deals. It’s easier to ask for something from the start than to go back to the drawing board when you realize that your deal has gaping holes in it.
Lawyers do three main things with contracts – writing them (drafting), reviewing them, and help in negotiating them. I’ll touch on each in turn.
Usually the party that’s offering the goods or services is the one who draws up the contract. The way your company does business will dictate a lot of the terms of the contract – how goods are ordered, packaged, shipped, and paid for, for instance – so it makes sense that you’d spell that out for the other party first.
It may seem odd, but it’s usually cheaper to get your lawyer to write a whole contract for you than to go through and tweak something you’ve written yourself. In order to “tweak” your contract, the lawyer’s got to review it first (see reviewing, below), and then rework it to say what you want it to say.
I usually send my clients a list of the things that they should consider for the type of contract they’re writing up, and ask them for a list of the things that they want in it. This often involves talking to the other party and figuring out the who, what, when, why, where, and how of the deal. Once that’s done, I’ll put together a first draft of the contract and send it to the client to review it.
Once you’ve read the draft, there’s usually a phone call or an in-person meeting to go through it, clause-by-clause, to make sure it says what you want it to say. Sometimes just talking through an issue raises other points that need to be added or changed in the contract. I make the changes and send an updated draft. It may take some back & forth to get it just right.
Once you’ve got a contract, it goes to the other side. Depending on what the contract’s about, there may be some negotiation involved before you can put pen to paper. The end goal is for you to have a contract that everyone understands, and says what it’s supposed to.
Any time you’re presented with a contract, it’s important that you understand what it says before you sign it. Contracts are binding legal agreements, and there can be major consequences – like lawsuits – for breaking them.
It’s up to you, the client, how thorough of a review you want. The thoroughness of review depends on a bunch of things – your budget, and the size of the deal tend to be the biggest factors. A review and legal opinion will be more expensive and more thorough than a general overview and flagging of key issues. The bigger the commitments being made, the more important the deal, or the more money involved, the more important it is to get it right.
When my clients send me a contract for review, I’ll ask them to tell me in their own words the deal that they think they’ve made – so I know whether or not the contract actually says that. For a thorough review, my work starts with a quick read-through, to get familiar with the structure of the contract, and its general terms. I may ask a few follow-up questions at this point, or for copies of other agreements or documents that are referred to in the contract.
The next step is a thorough read-through – word by word, clause by clause – to understand the finer points of the deal. I’m looking to make sure that the contract doesn’t contradict itself (consistency), that it ties in with other documents or agreements, that it’s fair and matches the deal you think you’ve made, that there’s nothing illegal, and that there are no significant or unusual risks (liability) that you’re taking on.
The last step is to give a written legal opinion on the contract. In the opinion I’ll explain how the deal works as written, and point out differences from the deal you thought you’ve made. I’ll flag unusual or particularly risky clauses, inconsistencies, and illegal clauses. The amount of detail in the opinion depends on the thoroughness of review you’ve asked for. Once I’ve sent you the opinion, and you’ve had a chance to read it through (a couple of times, at least), we’ll set up a call or a meeting to discuss it, which often leads to….
Most business contracts have room for negotiation, as both sides want a fair deal that will grow their business. The negotiation process is where you try to add as many of the things that you want to make the deal better for you, and to get rid of the things that expose you to unnecessary risk. That said, risk is inherent in business, and usually each side will take a share of it. How much risk you’re willing to accept is up to you. My job is to let you know that it’s there, and recommend a course of action – but it’s up to you to make the decision. Once you know the risk’s there, you can take steps to minimize its potential impact.
The first step of contract negotiation, which is usually tied in with the discussion of my legal opinion, is figuring out what you want. What are your must-haves, nice-to-haves, and things you don’t care about one way or the other? Then we try to figure out what the other side wants and why they want it, and brainstorm ways to work through potentially sticky negotiating points.
I usually recommend that the business people talk directly, before getting the lawyers involved in negotiations. It could be a quick phone call or email to discuss the main points, and get an agreement in principle on the proposed changes. This “meeting of the minds” between the business decision makers helps to keep the lawyers on track when sussing out the details.
Whoever is proposing changes will then have their lawyer make the changes they want to the contract, and send you back a clean copy and a “black line” version with the changes highlighted. The other lawyer will review those, advise on any variation from the agreement you made with the other party, and any new risks. The contract may get bounced back and forth like this a few times to hammer out the finer points, and the lawyers may need a phone call or two to finish it off. Any changes from the deal you’ve instructed me to get will have to be approved by you.
Putting together contracts can be a drawn out process, especially for complicated business deals. Most lawyers will use some variation of the above process. Start planning well in advance, and get your lawyer involved at an early stage. When it’s all said and done, you’ve got a contract that you can live with, and rely on in case it goes south.