Contracts: When the Other Party Provides the First Draft

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The suggestions in my last post assumed that you were providing the first draft of a contract.  What if the other party provides the first draft?  And what if, as may often be the case, the other party has more bargaining power than you do?

Here’s a suggested approach:

1.  Read the contract.  Or, if you’re pressed for time and/or “legalese” puts you to sleep, ask your attorney to identify the sections containing the key business terms.  Read those sections carefully, as you’ll understand your business goals better than your attorney does.

2.  Discuss with your attorney any concerns he or she has with the contract.  For each concern, ask: under what circumstances would this language come back to bite us?  What’s the probability of that occurring?  What would be the dollar downside to us?  Of course, these numbers will be purely speculative, but this exercise should enable you to identify those risks that have a high probability of occurring and/or a high dollar amount.  At the end of this process, your list of concerns will most likely be a lot shorter than the list your attorney brought to you.

3.  Negotiate key business terms directly with your counterpart at the other company.  Once the principals have agreed on the key business terms, the lawyers can negotiate the legal terms (e.g. indemnity, limitation of liability, reps and warranties, etc.) and less important business terms.  As a result of the risk analysis you did in Step #2, your attorney will enter that negotiation with a clear sense of what’s important to you and what’s not.

For how these negotiations should be conducted, see my post on “Negotiating a Transaction” or, better yet, read Fisher and Ury’s “Getting to Yes (http://en NULL.wikipedia NULL.org/wiki/Getting_to_YES).”

Thanks to Steve Blank (http://steveblank NULL.com/) for a recent post (http://steveblank NULL.com/2010/05/27/why-lawyers-don’t-run-startups/) that stimulated and clarified my thinking on this topic.

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