Contract negotiations are a crucial aspect of revenue generation and fundraising for startups. Success or failure in this area can make or break a business.
However, startups must balance effective risk management with the need to avoid lengthy legal negotiations that could threaten a deal. Achieving this balance can be challenging, but with the right strategies and understanding, it is possible. This article provides practical insights and strategies for startups during contract negotiations.
Keep in mind that every attorney has their own perspective and style, and some may disagree with the strategies presented here. Nonetheless, we have found success using these methods over the past 15 years and hope they can be helpful to others as well.
Get Specific About Your Essential Deal Points
In his book Essentialism: The Disciplined Pursuit of Less, Greg McKeown advocates for a systematic approach to identifying what is truly essential in life and business, then eliminating the rest. Pursuing “less but better” allows us to regain control of our choices about where to spend our time and energy. By focusing on tasks that align with our most significant objectives, we can achieve more by doing less.
For startups, this concept is particularly relevant in contract negotiations. Focusing on the essential elements of a contract and maintaining flexibility on non-essential terms can streamline negotiations, foster better relationships, and ultimately support business growth and success.
The essential terms will vary based on the deal and the startup. It’s crucial to pick a few terms that are absolutely essential, typically no more than five. Some essential terms and conditions directly impact a startup’s success, while others are critical for mitigating potential risks. Getting clear with your team and counsel about the essential terms at the outset of the negotiation will save time and money, and allow your startup to close a beneficial deal.
Be Flexible on Non-Essential Contract Terms
Contract negotiations are rarely a straightforward, one-sided affair. They require a delicate balance of assertiveness and compromise, of standing firm on critical points and showing flexibility on less essential ones. Understanding the importance of this flexibility is key to successful negotiations and sustainable business relationships.
Not all points in a contract are deal-breakers. Some terms, while desirable, may not be crucial to the success of your startup or risk mitigation. Being flexible on these points can facilitate a smoother negotiation process and increase the likelihood of reaching an agreement.
Demonstrating a willingness to compromise on less essential points can build goodwill and foster a spirit of cooperation between parties. This can lead to more productive negotiations and a more positive ongoing business relationship. Flexibility is often reciprocal.
Negotiations can be time-consuming and costly, especially if they become protracted over minor points. By being flexible on non-essential terms, startups can help streamline the negotiation process, saving both time and resources.
Remember, flexibility does not mean giving in on every point or foregoing your startup’s interests. It’s about distinguishing between the essential and non-essential, prioritizing your efforts, and working constructively toward an agreement that benefits all parties involved.
Use Contract Playbooks
A contract playbook is an invaluable tool that provides guidance to your team and legal counsel for repeatedly negotiated contracts. It sets the preferred and acceptable positions for the terms in a given contract.
A contract playbook can significantly streamline the negotiation process. By setting out the startup’s stances on common contractual issues, it helps avoid reinventing the wheel with each new negotiation. This not only expedites the negotiation process but also ensures consistency and coherence across different contracts.
By providing an easily referenceable repository of the startup’s standard positions and acceptable compromises, a contract playbook helps to avoid overlooked terms and minimize legal risks. It also ensures alignment with the startup’s strategic goals and risk tolerance, even if different team members lead different negotiations.
However, creating a contract playbook requires an investment of time and resources upfront. It generally makes the most sense when a startup is at a stage where the same contracts are frequently negotiated. In these cases, the benefits — in terms of time saved in future negotiations, reduced risks and greater consistency — can far outweigh the initial investment.
Work With Counsel That Doesn’t Over-Lawyer
Over-lawyering is a term used to describe the scenario where legal counsel is overly involved or excessively nitpicky in contract negotiations, often to the detriment of the deal itself. While legal advice is crucial to ensure startups are legally protected, over-lawyering can have negative consequences and even hinder the startup’s progress in the following ways:
- Killing the Deal Over Non-Essential Issues. Over-lawyering can sometimes lead to the negotiation stalling or even breaking down over non-essential issues. Attorneys may insist on amending or adding terms that aren’t necessarily crucial to the contract’s success or risk mitigation. This can frustrate the other party and potentially derail the entire negotiation process.
- Slowing Down the Process. Contract negotiations often require a delicate balance of speed and thoroughness. Over-lawyering can lead to unnecessary delays as every term and clause is exhaustively analyzed and debated. In the dynamic world of startups where time is often of the essence, these delays can prove costly, resulting in missed opportunities.
- Racking Up Legal Fees. Legal advice doesn’t come cheap, and over-lawyering can quickly inflate legal costs. As every detail is meticulously examined and every clause potentially redrafted, legal fees can escalate, becoming disproportionate to the value of the contract. For startups working with limited budgets, these additional costs can strain resources and potentially outweigh the benefits of the contract itself.
While legal diligence is essential in contract negotiations, startups need to find the right balance. The focus should be on obtaining essential legal protection and negotiating successful contract terms, without allowing the process to become bogged down by over-lawyering. It’s crucial that founders manage legal involvement effectively, ensuring that it serves the startup’s best interests without hindering progress or straining resources.
Why Over-Lawyering Happens And How To Avoid It
The phenomenon of over-lawyering often stems from the background and training of many lawyers, who are accustomed to working with large, Fortune 500 companies. In this context, leaving no stone unturned to reduce risk to an infinitesimal amount makes sense. These corporations have the resources to pay large legal fees to ensure their extensive interests are comprehensively protected.
However, this approach doesn’t translate well to the world of startups for several reasons:
- Survival Is Paramount. For startups, the biggest risk is often not a legal misstep but the existential threat of company failure. In the early stages of a business, survival and growth are the primary objectives. Startups operate in a high-risk, high-reward environment. A certain level of risk is not only acceptable but often necessary to seize opportunities for rapid scaling.
- Different Risk Tolerance. Compared to established corporations, startups generally have a higher tolerance for risk. They are willing to accept moderate levels of risk in return for opportunities to grow and expand their business. Attempting to eliminate every conceivable risk isn’t just impractical, it can also squander promising opportunities.
- Cost Versus Benefit. The legal fees associated with nearly eliminating risk through exhaustive legal scrutiny is often ludicrous for a startup. Legal fees can quickly escalate, becoming disproportionate to the contract’s size or value. For startups working with limited budgets, these resources can be better allocated to other aspects of the business that directly contribute to growth, such as product development or marketing.
Therefore, while legal diligence is critical, the over-lawyering approach suited to large corporations is typically ill-fitted to startups. Legal advice should be strategic, practical and tailored to support the startup’s objectives, balancing adequate risk management without hindering the nimbleness and dynamism that characterizes the startup ecosystem. If you’re looking for counsel that doesn’t over-lawyer, feel free to reach out to us here.
In conclusion, effective contract negotiations are crucial for revenue generation and fundraising in startups. To achieve this, startups must balance risk management with the need to avoid lengthy legal negotiations. This balance can be challenging but achievable through the right strategies, such as focusing on essential elements, being flexible on non-essential terms and using contract playbooks. By implementing these strategies, startups can negotiate confidently and achieve favorable outcomes to support their goals and risk tolerance.