It happens every week. A client sends a short email describing a contract they want, or even a term to be added to an employment agreement for a new hire.
This post on issue spotting by Ken Adams shows you what a good lawyer thinks when she hears:
Oh, and Jane should work out of our Budapest office a couple of months a year.
That little line generates a healthy list of questions from Ken.
Questions like these seem silly at times to clients because you know what you’re thinking, even if it’s not expressed or actually thought of — sometimes you don’t know that you know what you want on a point until you’re asked, but then you know instantly what you envision.
From the outside, unless we’ve worked together enough to know how you want to handle these issues, a lawyer has three choices:
- Do nothing and ask all the conceivable questions.
- Draft an agreement that is completely one-sided in your favor, even unreasonably so.
- Draft an agreement with sensible, fair terms and discuss it with you as a starting point.
#1 gets you nowhere fast. No progress, even partial progress, until every question is answered. And here’s the rub. In some cases, you actually haven’t thought about an issue and now you have to take time and think about what’s reasonable and works for everyone. An experienced lawyer should be able to fill in those blanks for you to save you time.
#2 is the classic NYC lawyer model — everything 100% in the client’s favor and scorched earth on every point. While it may be sensible in some circumstances, those are tailored to size of the transaction — you can’t put the same level of transaction costs on a $15m merger as you can on a $1.05 billion investment. (At least you shouldn’t be paying for that, as the client, without signing up for that on purpose.)
#3 is the classic Silicon Valley model. Many contract terms for common agreements — venture capital investments, sale of a small or large company, employment agreements (remember Ken’s post?) — have both a set of truly standard terms (few people change the meaty parts of a registration rights agreement) as well as a fairly well-understood range of common and reasonable variations (definitions of “termination for good reason” or “constructive termination” in an employment agreement vary within a well-understood range). And, of course, there are combinations that are just as well-understood: types of anti-dilution protection for preferred stock investors fall into a very small set, and the agreed language on each is almost entirely standard among experienced firms.
Ed. note: I will have to do a post on anti-dilution and its sensible forms as well as the complicated ideas that some investors and founders come up with.