Three Contract “Watch Outs” When Negotiating Deals as a Startup (Part 2 of 2)

Disclaimer: I am not a lawyer (still) and this article should not be considered legal advice. Always consult with your legal counsel when negotiating a contract.

As a startup CEO or sales leader, I recommend setting some ground rules with your legal counsel before you begin negotiating contracts at any volume. That way, when you encounter the three “watch outs” I discussed in my previous article, you already have an idea of your guard rails for negotiating. You should have an understanding of:

  • What deal terms are critical to your acceptance of a deal — are there certain contractual terms that are 100% non-negotiable? 
  • How much liability is your company willing to accept?
  • For what situations are you willing (and unwilling) to indemnify your clients?
  • What is your minimum deal size for which you are willing to spend effort reviewing the other party’s contract template — it’s probably not worth it for small deals. 
    • If you do review the other sides’ template, what percentage of the terms need to match before it’s worth entering into a negotiation? 
  • What deal size thresholds are you willing to break some of your ground rules? If your average deal size is $25K, maybe at $250K you are more lenient.

By setting some ground rules, you can create a simple decision-making framework when reviewing deals to help you to remain objective. Here’s an example flowchart of a hypothetical decision-making framework (you don’t need to actually make one of these, but you should document your contract ground rules):

The point of this framework is to help a startup’s leadership remain objective when evaluating a deal. It’s easy to get caught up in the mystic of working with a particular large brand and to let your emotions take over, causing you to make bad decisions. For example, I once signed a contract with a Fortune 500 company that included a legal clause (that I overlooked) that required us to notify their company and obtain permission in the event of a change of control (we couldn’t sell the company without their permission!) — oops! The good news is that it all worked out. Here are some additional tips:

Situation One – The other side insists on using their contract template for a deal: As a general ground rule, I recommend declining right off the bat if the deal is small. If the deal is of adequate size, send the template to your legal counsel for a read-through and ask their opinion. If the contract is reasonable, let’s say within 75% of your existing template, then I recommend going ahead with the review process. If the template is way off base, I recommend sending an email to the other side to the effect of “We believe our business is particularly unique and nuanced, and your template is not capturing the needs of our business arrangement. We have spent (months/years) developing a contract that works well for our clients and we believe we can make it work for you. Would you mind passing this to your legal team? We are also happy to set up a legal-to-legal call to help expedite.” — Give that a try and see how they respond. If they insist, I recommend walking away. 

Situation Two – Uncapped or excessive liability exposure: I always recommend connecting your attorney with the other side’s legal counsel to hash it out over the phone. If the other side insists on no cap, I recommend walking away from the deal. Alternatively, If the buyer’s company is asking for a $300K cap on a $50K deal, and the maximum exposure you want is 3x of the deal size ($150k), you can try to increase the deal size to $100K to provide a $300k cap. You shouldn’t exceed your threshold without a concession from the other side.

Situation Three – Broad, or unacceptable indemnities: Indemnity language is particularly subtle and nuanced, and you will need to rely on your attorney to decode it. For example “negligence” and “gross negligence” mean different things in legal language. If you complete the pre-work I described above with your legal, you’ll have a good idea of your business’s unique guard rails. If a deal falls outside of your guard rails I always recommend setting up a legal-to-legal call to try to resolve the differences. If you are unable to resolve the differences, you need to walk from the deal.

For all points above — anytime I was stuck on a deal with a client that I really wanted to close, I would try one last “hail mary” to get the deal over the line. I would set up a call with the other side’s business contact and have a heart to heart. I would tell the story of our startup journey and our struggle to build a big, sustainable business. I would mention our investors/board of directors/grandparents/anyone and bring up how they wanted us to make smart business decisions, and that the deal we were negotiating fell outside of our comfort zone. The goal of the call was to appeal to the buyer’s humanity by helping them to understand our situation, and convince them to talk to their legal on our behalf. About 50% of the time this would work and we’d have a breakthrough in the deal, the remaining 50% of the time we would need to walk away.

Being a little fish startup swimming in the open sea is a dangerous business (no pun intended), and if you’re not careful you will end up being eaten alive by a bigger fish. If you set comprehensive contract ground rules from the beginning, you’ll feel a lot more confident negotiating, and you’ll be able to identify and walk away from bad deals. Always remind yourself that the feeling of losing a deal because you are not able to come to terms will pass, but the bad deals you sign will last forever! Good luck out there!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

You May Also Like