Last Updated: January 2018
When entering into an important contract, take the time to discuss with your business partners, advisors and legal counsel, to make sure that you are clear about your opportunities and risks. In this article, we describe four simple steps to follow to make sure that your interests are protected when drafting a term sheet.
The best way to commence drafting a contract is similar to the best way to build a presentation slide deck or to design a website wire frame – start from scratch. This is to ensure that you are not constrained or swayed by the language of a prior contract. Start with a blank canvas, and start writing out the concepts that you want to include.
Step 1: The first element to think about is the opportunity i.e. what you stand to gain. Make sure that you clearly understand and have communicated what you desire.
This can be very simple (such as a cash payment), or can be more subtle (for example, receiving the rights to publish the logo of your counterparty on your website, access to an advisor’s business network, etc.). You may desire that the rewards be provided to you all at once, or that they are time-delayed. Once you have jotted down everything you stand to gain by entering into the opportunity, you can start determining the qualities of those rewards. This item can be as simple as “make money.”
Step 2: Make a list of your risks (or how could the deal go wrong), i.e. what could happen that could result in being sued, losing your cash compensation, or public embarrassment (not ideal for an individual or a company). Your legal counsel can assist you to determine what steps you need to mitigate these possibilities (e.g. requirement for insurance, cash up front, ease of termination of contract, and so on).
Step 3: Once you have completed your list of interests and risks, it is time to think about your counterparty’s interests and your counterparty’s risks. Making sure that your interests are protected and predicting the setbacks that might occur are two of the goals of a well drafted contract. A savvy (and speedy) negotiator will also try to anticipate the interests and risks to your counterparty, and to address those in the basic terms.
Step 4: After completing the prior steps, you will have the basic negotiating points of your agreement and can supplement with discussions with your business partners, advisors, colleagues in the same industry, and your legal counsel. The benefit of the additional experience and awareness of external factors (legal, operational, negotiating tactics or other issues) will add another layer of insight and protection.
To be diligent, I further recommend that you repeat steps 1 and 2, each time you commence contract negotiations and even at the time of renewal, to ensure that you have captured the elements of the contract that are important to you.
A contract negotiator should view these risks and interests as a touchstone. By referring frequently back to these items, counsel will be able to advise their client, or the parties and counterparties are able to think clearly about the essence of the deal, what deal items are ok to retain and what deal items are fine to drop.
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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.