What are some good tips for contract negotiation?

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2. When I say “LIKE A BOSS” I’m not talking about this boss on the left, clearly. I’m also not
talking about this boss on the right, because what little I know about Steve Jobs is that he
was apparently not an unemotional, calm, rational negotiator, interested in finding out the
other party’s needs. He’s probably not the personality type you want negotiating contracts,
because you don’t want ego, ambition, or creative expression to be the driving factors in
negotiating and drafting a contract. Rather, it is a bit like doing your taxes: you want
something that will please an auditor when they read it.
If we do want an example of who to emulate in negotiating contracts, it’s probably Warren
Buffett. He says some very boring, and very sensible, things about the electrical utility
businesses that Berkshire Hathaway owns, and how they need to invest for the long term,
and to stay on the good side of regulators and the public purse (their customers). He’s
arguing for long-term contracts that are sensible, good business, and that stand the test of
time.
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3. First, let me tell you a little bit about myself: I’m not a lawyer. I am however an amateur
student of Spanish. But seriously, it’s relevant that I am not a lawyer because I can offer
advice that’s 98% good for certain situations, but there are many things that still benefit
from a real card-carrying lawyer giving approval or disapproval on.
So this talk is NOT subtitled “how to save a bunch of money by avoiding using lawyers and
negotiating your all of contracts all by yourself”. But neither should we take the opposite
extreme position: that you must never get involved in any aspect of negotiating or even
drafting your contract, and a lawyer must dot every I and cross every T. If you’re
comfortable with it you can responsibly do some of the work yourself, or at least I make a
living by doing so! [I call myself sometimes a “pretend lawyer”, which for some reason my
lawyer friends get really nervous about]
Or, at minimum, if after this talk, some of the legalese is less of a mystery and you feel less
completely locked out of the whole experience of reviewing and negotiating a contract,
then I will not have completely wasted your time.
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4. Here are some good ingredients for negotiation – not just contract negotiation. And by the
way, I firmly believe negotiation is not sales. There are some folks down the street for
whom I think negotiation is more equated with sales, but the more complex a service or a
deal is, the less appropriate I think it is to use old-school-sales-type thinking like closing.
Anybody seen the Glengarry Glen Ross scene where Alec Baldwin yells at his staff about
sales? “ABC.” “A – always. B – be. C- closing. Always Be Closing.” It’s a caricature of high-
pressure tactics.
What IS the point of a contract? Do think about the future readers and users of your
contract. This could be auditors, making sure you have compliant contracts with vendors
and suppliers (e.g. privacy); or it could be your future employees or operational staff,
having to manage the contract; or it could be a judge or mediator hearing your dispute over
the contract.
Put another way, a contract is a way of trying to avoid litigation or ease disputes by clearly
setting out what’s agreed in a variety of scenarios. I often use it as a test of whether to
bother negotiating something in a contract to think “would anybody bother to litigate over
this”?
Lack of emotion and transparency. A lot of people think that doing business means playing
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5. hardball, concealing things, hiding your bottom line, etc. Again going back to Warren Buffett,
it’s actually surprising how often you can gain in a negotiation by being unusually
transparent. That doesn’t mean 100% transparency of course! But try erring on the side of
disclosing more than usual and being more transparent than usual in your next negotiation
and see how it works. Of course, if it backfires – I’m not a lawyer! Don’t sue me!
Individual people: One of the big productivity killers in my view is the teleconference. To
smaller companies I would say don’t try to emulate big corporations by holding more
teleconferences as you grow. Good deals get done between individuals.
This “joint statement” should stand the test of time. And how will things like contract
currency stand the test of time? A USD contract could cost far more in CAD – developing-
world currencies are even more dramatic. How about term of the agreement – if there are
milestones far in the future, have you set company reminders for those events or expirations,
in a calendar which will still be accessed and used e.g. 5 or 10 years out? Assume that
everybody will forget, and don’t build in actions required by your side many years hence (it’s
OK to have provisions for the other party they’re likely to forget – it puts them on the back
foot!).
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6. I’m going to talk a lot about business-to-business contracts for goods and services, such as
you might sign with a supplier or vendor, or subcontractor, not only because this is the bulk
of my experience – Ha ha – but because it’s likely to be the majority of yours as well and of
the money you spend. But of course many of you are interested in agreements that are
investor agreements, say with an angel investor in your start-up; or licensing or sale
agreements whereby you’re selling a portion of your company or intellectual property. So
I’ll also try to talk about those company-transformation agreements as well as those for
goods and services.
The issues are still frequently the same however for all of these: clarity is needed, as well as
plenty of discussion before and during (in person and by phone, ideally only by email to
confirm what was said).
One particularly contentious area is angel investors who are subsequently diluted or
crammed down by later rounds of VC financing. But that type of scenario is a bit beyond
the scope of this talk because that issue involves a totally new contract which may
effectively abrogate the rights early investors thought they had. Those interested in
addressing such scenarios should look at the SAFE (Simple Agreement for Future Equity)
agreements developed by Y Combinator (SAFEs are an alternative to convertible notes):
https://www.ycombinator.com/documents/
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7. http://shockwaveinnovations.com/2013/12/21/reviewing-the-new-safe-investment-
instrument/
http://abovethelaw.com/2015/01/innovation-more-than-another-app-how-wilson-lawyer-
turned-yc-partner-carolynn-levy-is-revolutionizing-startup-investing/
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8. That said, let’s talk a bit more about investor agreements of the type entrepreneurs are
likely to negotiate with angel investors, because otherwise, you’ll all be complaining that
my talk wasn’t relevant. And I’d rather you came away with a more legitimate criticism of
the talk, like that it was really boring.
Normally one shouldn’t make analogies like inflexible rights breaking under the pressure of
future agreements, because rights aren’t sticks, and there’s that whole sensible Richard
Feynman argument he makes that you shouldn’t use analogies or models from physics for
abstract systems. He talks about how inappropriate it is to use the hydraulic analogy in
psychology, such as “pressure building up in your head”. But anyway – any more on that
topic and the boredom level in this room will be over 111%!
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9. Where/when/why do you need a lawyer? The short answer, which will please my lawyer
friends here, is that indeed you do need a lawyer. But you may be able to get away with
using a lawyer just in the initial and final stages, or in certain elements, just as you would
use a structural engineer to confirm a design of a load-bearing wall as well as inspect your
final work.
Here I’ve just listed some of the more troublesome elements in contracts that demand
attention.
International contracts need to take heed of applicable law and jurisdiction but also the
currencies involves, how to address inflation, and the basic practicalities of who has to
travel where in the event of a dispute. Imagine the litigation or mediation actually taking
place physically, and put practical language in accordingly.
Indemnification and limitations of liability need special attention because they determine
your exposure to risk. Third-party rights infringements, which you can easily be exposed to
in software development for example, require indemnification from the other party if
you’re to avoid getting dragged into them.
Similarly many vendors will try to cap their liability at the value of payments made for work
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10. performed, but if they are insistent on this, I like to make sure that elsewhere they warrant,
for example, adequate insurance in types and amounts appropriate to the work they do. And
one needs to have a serious think about the individual situation and where indemnification is
likely to be desired. I had a case just yesterday where a vendor wanted to cap all liability
including indemnification at 1× fees paid, and when I protested a bit they proposed 3× fees.
Better than nothing, was my thought but this really does get quite arbitrary at times and
sometimes you will be trapped by what I consider to be the lowest form of negotiation,
which is “meeting in the middle”. You see that on Pawn Stars all the time and it’s really
tiresome. And, the title of this talk is not How To Negotiate Your Contract Like a Pawn Star –
maybe if I was scheduled 6 hours later today that would be appropriate but not at 9AM,
please.
And last and certainly least, pseudo-contracts. I REALLY REALLY dislike these; in fact I have a
borderline hatred of them, but if that sounds a bit irrational I am sure my lawyer friends will
back me up that they’re just a mess.
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11. Let’s talk for two slides about Balance of Power because in many cases entrepreneurs are
going to be negotiating contracts with much larger companies; even your suppliers are
likely to have you out-lawyered, and worse: possibly even out-business-card-thicknessed.
Again, this talk isn’t about me making a self-serving argument that you don’t need lawyers.
The principle quoted here will generally apply and you [probably?] can’t rely on the defence
that you couldn’t afford a lawyer, or were railroaded by the other party. Don’t view this as
one step up from mobile-phone agreements, where some judges have been sympathetic to
consumers – many have not. And this is a business-to-business contract, we assume, not a
business to consumer.
Confidentiality and secrecy: usually overblown and overkill. Don’t be intimidated by large
companies throwing their weight around with secrecy requirements: the British Medical
Journal was not when they asked my former employer Roche about Tamiflu evidence. And I
was surprised to even read in that correspondence that Roche offended other parties with
insisting on secrecy, because I didn’t use those clauses in my own agreements I negotiated
for Roche!
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12. Applicable law and jurisdiction. I love this one because contracts are so boring but with this
one you get to armchair travel the world! Ooh – New York, New York, how exotic! Or I’m
seeing a lot lately, Québec. That one scares the hell out of me and basically ask the lawyers
here what to do about that.
The second point is easier said than done, but it is an approach that can work well if the
other side have separate legal and commercial/business teams. If the legal part of the
assembly line won’t budge on their endless terms and conditions, try appealing to the
business contact for a common-sense way to get the deal done “without all these pesky
lawyers ruining the mood”
If there is one person on the other side who seems friendlier, make one-on-one phone calls
to that individual to try to build the relationship with them and they may act as
ambassador for you. Warning: they may also view it as inappropriate.
The last point is easier said than done as well. But this is one of the things about
negotiation – you try stuff all the time, and they won’t work a lot of the time no matter
how good you are. You should be good at this if you’re an entrepreneur – failing and trying
again!
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13. The quotes above is from Focus magazine, and perhaps the details here are contentious,
but if even some of them are true, it’s a cautionary tale about contracts. Where to begin:
it’s too long, at 394 pages. At $93M some might argue that requires a longer contract, but
this is nonsense: I’ve negotiated shorter contracts for larger amounts of money for clinical
trials, and clinical trials are arguably far more complex and intangible than bridges.
Another theme that arises here is that of secrecy. Now, secrecy as noted before in private
business dealings is one thing, and usually silly and counterproductive there, but of course
it’s far more offensive when it comes to spending public money.
Another lesson from Helps and Isitt here is don’t be afraid to delay things. Large contracts
acquire a sort of totemic significance among many people involved, with lots of huffing and
puffing about deadlines. My experience is that rushing to meet deadlines on contract
signature rarely improves the quality of the contract or the deliverables once work starts.
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14. It was naïve for anyone to think this contract would not have scope creep and cost
overruns.
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15. Now one should never read one’s slides, but this is where you make a dramatic exception
and read your last slide verbatim to make it sink in, or just because you’re tired and want to
get it over with.
…
Every situation is different; but most every contract looks the same: figure
that one out!
Nobody really understands indemnification – or, I guess that’s why there’s
law school
…
Thank you very much!
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