Your start-up is gaining traction, ready to scale. The LAST thing you want to deal with is a messy legal dispute halting your growth or even worse, destroying your company. A giant thank you to Catapult Founding Sponsor, Foley & Lardner LLP, for this guest post on the best way to avoid expensive litigation. A must-read for all growing companies!
You Do Not Want To Call Me
By Jeff Soble, Partner, Foley & Lardner LLC
I am a trial lawyer. I realize that some people just felt the urge to stop reading. Fear not! I am here offering nothing more than free advice designed to give you, the startup, a way to avoid me. Why should you avoid me? If you need to hire me, the following universal truths apply. First, something is wrong. Second, resolving the problem will be expensive. How expensive? Most lawyers I know cannot afford to hire themselves. Finally, resolving the issue will be invasive and time consuming. All of these issues negatively impact your growing startup.
So what do you do? You do the following:
1. Know with whom you do business. As one of my partners likes to say, “If you lay down with dogs, you get fleas.” If you are not conducting routine due diligence on people you want to do business with such as your investors, shareholders, potential partners, significant customers and key suppliers, you are putting yourself in danger. It may only be the danger of opening your company to a difficult, litigious relationship. However, for startups, that can be enough to endanger your existence.
Most due diligence can be done online, using resources which are comparatively inexpensive – the proverbial ounce of prevention being worth much more than a pound of cure. Conduct credit checks, check a company’s financials, research litigation histories, UCC filings, IP portfolios, etc. All that information is available from sources like Dunn & Bradstreet® Credibility Corp., Experian, S&P Capital IQ, LexisNexis® atVantage, LexisNexis® Courtlink and of course, Google, Bing, etc.
2. Use A Written Contract. Some people may think I just wrote “the sky is blue”. However, an inordinate number of cases that I handle in litigation have no written contract, or a contract that has only basic terms. One time, for a Fortune 500 client, the evidence of the “written contract” was a 2 x 1 Post-It® Note.
The best way to get a contract done is to ask a lawyer. But, most startups obviously do not have legal staff nor can they hire a lawyer to negotiate every contract. One solution is to identify the one or two key contracts that your company will use repeatedly and ask a lawyer to draft a form for a reasonable fixed fee. For one client, we drafted their form customer contract and identified their most important terms:
- Green coded terms the company could change with little risk;
- Yellow coded terms the company could change, but should understand the risk;
- Red coded terms were provisions that the company should consider deal-breakers and alter only in exceptional circumstances.
Thus, our client had a form contract and understood which provisions they were comfortable negotiating. The cost of having this contract drafted has been repaid to the company by limiting the number of disputes and the severity of any disputes.
3. Enforce Your Contract. It is easy to overlook contract terms and to consider as minor any errors, omissions or breaches. While devotion to every term is not required, nor practical, a company that neglects to enforce contractual requirements will regret doing so. From a legal standpoint, companies may find that they have waived the right to enforce terms of the contract. Practically, the people with whom you do business will learn that they can ignore terms of the contract. This will lead to disputes, and, the need for me, the expensive trial lawyer.
4. Resolve Problems Early. Somebody slow to pay you or payments coming up short? Is the delivered product poor quality? Are the people you do business with not profitable? Has that business partner who used to answer your email in minutes now taking days? These are warning signs! If you let them fester, they will change from warning signs to problems, to disputes. Know what you expect from the people with whom you do business. Make sure that they know what you expect from them. Proactively document when they fall short and head off trouble at the pass.
5. Get Divorced Properly. So, you no longer want to be in business with someone. Hopefully, that lawyer you hired to draft a form agreement included a solid termination provision and made sure to code it Yellow so that you only changed it knowing what your risk would be after the change. Follow the termination provision, precisely. Even after notice of terminating your business relationship, manage it to conclusion. Resolve invoices and payments, return physical and intellectual property (or get yours back), and plan a transition if necessary. Giving notice of termination is equivalent to filing for divorce. You then have to get through the divorce, and you want it to be as amicable as possible.
Every company has disputes. They are unavoidable, especially as you grow. No startup can waste their money on lawyers to avoid disputes. Even if they did, a lawyer may just get in the way of doing business – some risk is always necessary. But, knowing that disputes are inevitable and proactively protecting your company to put it in the best leveraged position when a dispute arises will lead to fewer disputes, more disputes resolved quickly for less, and a reduced need for me, the trial lawyer.
(Of course, feel free to ignore all of this so that I do not put myself out of business. Trial lawyers have to eat too.)
Thanks again to Founding Sponsor, Foley & Lardner LLC for this practical and compelling advice! For more information, check out Foley's website