The Real Reasons You Should Create Business Contracts

The Real Reasons You Should Create Business Contracts
August 29, 2016 Brett A. Cenkus
business relationships

Transactional Relational Attorneys

Attorneys who do the type of work I do – forming companies, helping them raise capital, mergers & acquisitions, etc. – are sometimes called “transactional” lawyers. The idea is that we work on specific transactions, ones that have a beginning and an ending. This is as opposed to, for example, compliance lawyers who often provide ongoing advice and services to heavily-regulated business clients. However, this term fails to capture the fact that transactions are often the staring gate for long-term business relationships.

Transactions, such as mergers or acquisitions, may be one-time events for the attorneys and other advisors involved. Our clients, on the other hand, are just beginning a long-term business relationship. While some mergers or acquisitions involve layoffs and severe cost-cutting, others are more strategic and growth-oriented, and in those cases the outcome of the deal is often a much larger company, with all the employees now rowing in the same direction toward a new, shared goal. This is always the case with joint ventures. “Joint venture” is a term used to describe a type of partnership between two or more companies who come together for a specific purpose – to enter into a new market or launch a new product, generally using some people or resources from each participating company.

The Closing Isn’t the End of the Business Relationship, it is the Start

While my work may be complete when the acquisition agreement or joint venture documents are signed, my client is just getting the party started. In this context, just about the worst thing I can do is come through like the proverbial bull in a china shop, applying an “us vs. them” approach that polarizes the parties, rather than brings them together. Yes, I have my client’s back, I want them to get the best deal they can and I absolutely want to be sure they don’t wind up in a bad contractual situation. However, when my client wants to get a deal done, I should want to get that deal done. That doesn’t mean I don’t talk about possible risks, because I do. It means, though, that I am there to facilitate, not impede, the deal. And, I want to get deals done on favorable terms at the closing table, while also ensuring my client and the company on the other side of the table feel good about moving forward together in their business relationship. After closing, they need to start actually working and playing well together.

 

Great Communication in Business Relationships

With startups I spend a decent chunk of time talking about their goals and expectations and what they all want out of the venture. When partnerships go south, the vast majority of the time it is because the parties have not been communicating well, or at all. Great business communication starts right out of the gate, at the time the founders are launching the business and forming the business relationship. How many hours do we each expect to work? What will we each do? How will we make decisions? How will we resolve disagreements? Why are we even doing this?

That last question is an interesting one. A founder who wants to change the world is very differently-motivated than a founder who wants to change their world by making a heap of money. Having those open, candid conversations is invaluable. Even if the founders aren’t perfectly aligned, understanding and appreciating where they are each coming from makes a world of difference. Perfect alignment may be impossible, but perfect understanding is not.

Most of my clients start out believing that the number one reason to create a contract, such as a founders’ agreement (this agreement trades under different names), is to have a strong contract in place for enforcement purposes in case they later wind up in a dispute. And, while that is one reason to hire a lawyer to create a contract, in my opinion it’s the third most important reason in almost every business context, including with startup founder agreements.

The Most Important Reason to Create a Business Contract

The most important reason to create a founders’ agreement is to be absolutely certain the founders talk through all the important considerations about how their partnership is to operate. As with a marriage, everything may be rosy now and the participants may be constitutionally incapable of even envisioning a world where they disagree. However, it is almost inevitable that there will be some rocky patches  in the business relationship. Talking through important issues and considering various situations that may later arise might lead founders to decide working together is not the right thing to do. More commonly (because they are usually dead set on moving forward together), it helps them forge common ground, shared understanding about how things should work. It gets them in sync. The second most important reason to create the contract is to document that shared understanding. We all have selective memory. Yes, you, too.

Back to the third reason – having a strong contract to enforce. If you wind up needing the contract for that purpose, you have lost big-time. Litigation is, at best, a zero sum game. Often time, it’s a negative sum game. Yes, there are legitimate differences of opinion, legitimate misunderstandings, legitimate different takes on interpreting an agreement and making decisions about the “right” thing to do in a company. But, 90% of disputes I see suffer from a lack of communication. The business relationship has broken down. The dispute kicks in, the parties cling to the contract, they hire expensive litigators and they fight. What they ought to do is get in a room together, have a beer and figure out where things went wrong.

Business is about business relationships. Business contracts are the cornerstone of business relationships, but not in case the business relationship breaks down. They are there to ensure that business relationships DON’t break down. Instead of “transactional” attorney, maybe we should start using the term, “relational” attorney.

Brett is The Startup Shepherd™. He has 20+ years of experience in business law, entrepreneurship and finance. He spends most of his time on startups, joint ventures and mergers & acquisitions. Brett believes there are a lot of dumb questions, but we should ask them anyway, along with the challenging ones (and sometimes it's hard to know the difference). The real travesty is silence when you have something to say.

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