My client’s startup was experiencing fast growth. During the course of business, the CEO negotiated and signed what looked to be a straightforward deal on his own. Unfortunately, an unclear provision was not effectively negotiated. The contract also lacked a termination clause, which meant there was no way out of it.
As my client’s firm developed and became prosperous, the counterparty took advantage of the circumstances and claimed that the condition was an exclusivity restriction and that my client was in violation. The provision drew my client into an expensive litigation that threatened his company’s survival.
What is the moral of my client’s storey? A pound of cure is worth an ounce of prevention.
Here are four tactics you may use to dramatically enhance the result of your contract negotiation.
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1. Determine your bottom line and choose your battles
First, collaborate with your attorney to select the terms that are most important to the success of your company. Yes, you must defend your firm and acquire the finest terms for your business, but it is also critical to your business that you negotiate the contract promptly so that you can move on. The cornerstone of contract management is balancing operational and financial performance while limiting risk.
Determining which terms and conditions are worth fighting for upfront can save you from wasting time and money waging frivolous disputes, producing work for both parties and prolonging the contract turnaround process.
If there are any possible concerns with these crucial phrases, your lawyer will notify you, and you and your lawyer will determine how far your lawyer should go to get them.
2. Establish the Appropriate Negotiation Tone
Contract negotiations aren’t about “winning” or “losing” – they’re about agreeing on the best terms achievable given the specific business environment at hand. The nature of your attitude and tone should be influenced by your company’s connection with the counterparty.
Your temptation may be to take a hard line and fight for the “best” terms imaginable, but this is seldom the wisest strategy. By insulting the counterparty and putting them on the defensive, an aggressive tone may stymie the process. I’ve seen cases where tough-talking techniques led a simple NDA to take three weeks to close when it should and should have taken two days. You may be characterised as difficult, and the counterparty may be less willing to do business with you in the future. They may even back out of the arrangement. There is a time and a place for a firm stance.
If you have or want to have an ongoing commercial connection, such as a sales, joint venture, or partnership agreement, it is critical to set the setting for a healthy relationship, with compromise as the aim.
A more aggressive strategy, on the other hand, may fit the bill if the contract negotiation is a one-time encounter, there is no need to have the contract signed, and your firm will continue to flourish without it
Finally, analyse the character and reputation of the counterparty. Are they reliable? Have you ever done business with them? And what is the likelihood of a breach? If you are doubtful, it is always preferable to err on the side of caution and take a tougher stance — no matter how eager you are to close.
3. Determine your bargaining power and use it to your advantage.
You should consult with an attorney to assess your situation in relation to the counterparty. Consider who you will be negotiating with and if they will be open to lengthy remarks or several redlines.
For example, if you’re a tiny business negotiating with a well-known VC investor, you’ll have limited negotiation strength. This procedure will go much more easily if you consult with a lawyer as soon as you decide to get financing.
You should keep your remarks to a minimum in talks with venture capitalists and only highlight catastrophic defects and red flags — problematic or off-market conditions that would expose your firm to an intolerable level of risk. Broad sweeping indemnification requirements, indefinite periods, draconian noncompetes, and exclusivity restrictions are all warning flags.
Similarly, if you buy software licences from a major firm, you have little power since you need their programme and they just want your money. In this instance, you’ll certainly have limited leeway and may have to accept the deal as is.
On the other hand, if you’re selling free marketing space on an app you’ve created, you have a lot of clout, so you should take a tougher stance. For example, you may compel the other party to agree to protect you against third-party claims stemming from its exploitation of the app.
If the contract is urgent, you may opt to pursue a more commercial strategy with the assistance of your lawyer. This entails just checking for severe red flags and deadly defects. If there aren’t any, then finish it straight away.
4. Find a lawyer you can rely on and start working with him or her right once.
If you employ a lawyer from the beginning, they can assist make your company significantly more safe and lucrative.
A few hundred bucks to have a lawyer draught a 10- to 12-page contract is a modest thing to pay to prevent a harsh noncompete or unjust exclusive condition that might jeopardise your business in the future.