Reading Contracts: What am I Missing?

August 28th, 2009

One of the hardest things to do when reading a new contract is to figure out what is not covered.  It’s relatively easy to review an agreement and pick out things that are completely wrong or run contrary to one’s interests.  On the other hand, the sea of words can prevent readers from noticing, for example, that a license agreement provides a nonexclusive, worldwide, perpetual license, but doesn’t say clearly whether the license fee must be paid and once paid whether it must be periodically renewed.

The best way to be sure a contract contains all the terms one needs is to do the same type of transaction over and over until you know it cold.  Next best is to find someone else who has to rely on.  Those aren’t particularly helpful suggestions to someone in unfamiliar territory with a deal on the line, though, so here are some suggestions to help identify missing terms.

1) Make up a hit list.  Before you start reading, write down list of the important terms.  This step takes a surprising amount of mental discipline but it is incredibly important.  Avoid the temptation to dive straight in and “see what the contract says”.  Even if you think you know what terms you need, write them down before you start reading.

2)  Take the contract in sections.  This goes along with my piece on How to Read a License Agreement.  Instead of reading front-to-back, search the contract to find all the terms on your hit list.  Do they match your requirements?  Is anything from your list missing?  Bonus points for lining up your hit list in one column on a piece of paper and writing down the comparable terms in the contract in the next column.  I have only taken this extra step a handful of times, but found it very helpful when the deal was complex or I was having a hard time getting through the contract language.

3)  Put it Back Together.  Now that you have found the biggest points, you can read through and see how other terms flow around them.  Do all the defined terms match your understanding of what they should be?  Do any subparagraphs under one of the big points limit its applicability?

4)  Try to Break it.  It’s also easy to read a sentence, squint a bit and say “yeah, that basically covers it”.  Instead of trying to read the contract in a way that fits your needs, do the opposite.  How could a paragraph be read against you?  E.g. if you quit vs. being terminated by your employer, will you lose any vesting in your stock?

5)  Read with a Friend.  If the deal is important it merits more than one set of eyes.  I frequently find that useful points come out of discussion with a co-reader.

6)  Search for Exemplars.  I am putting this last because it’s really hard to find good examples of many types of agreements.  The SEC’s EDGAR database is a good source, but search is very limited unless you pay for advanced search capabilities.  Docstoc and Scribd have pretty good libraries but since there is no clear way to judge quality it is best to look for at least 3 samples of the type of agreement you need, then compare terms carefully before relying on any one contract.

I hope these ideas are helpful.  Reading carefully and catching everything is a genuinely hard task.  Practice very much makes perfect and these are some of my favorite practice tools.

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Slow Steps Into the Digital Age at the IRS

February 20th, 2008

For those who have never filed form 1099 before, one copy (red) goes to the IRS and another (black) goes to the independent contractor who provided services to a business. Apparently the reason for this is that the IRS’s computers scan the filings, and they can only read forms printed with red ink.

One can’t download the fileable form, because the shade of red must be very specific and a normal color printer can’t be trusted to get it right. One must have the forms mailed out or buy them from an office supply store.

About.com tells me that the Social Security Administration updated its systems to accept black copies of form W-2, but the IRS has changed its systems twice without adding this magical ability.

The IRS does allow 1099s to be filed electronically. This is a great step forward- it fairly leapfrogs the whole download/print/mail correct-color routine.

*However*, while thousands of businesses everywhere have figured out how to create online forms viewable and editable in any web browser, AND have worked out a way to let consumers create accounts online in minutes (if not seconds), the IRS is not quite there.

So in order to conveniently file my 1099s online, I must first mail in a form to the IRS, receive a Transmitter Control Code back by mail, and then download and install the IRS’s special form-creation software.

Identity theft and fraud are certainly big concerns so I can understand the need to verify identity before setting up accounts. Putting documents in the mail is not a remedy here though (the IRS should ask Network Solutions about Stephen Michael Cohen and Sex.com on this point).

The IRS has a huge job managing millions of accounts. They are certainly correct to be careful, and kudos to them for getting on the e-filing program. My wish, though, is that after Microsoft takes over Yahoo and drives away key employees, that the IRS will see an opportunity to pick up some Internet expertise. Yahoo has great e-commerce software. Get some of the engineers behind it working on IRS e-file programs for all kinds of filing.

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The Annual Corporate Minutes Scam

January 29th, 2008

At least once a year since I started practicing law I have gotten a question about and copy of an official-looking letter entitled “Annual Corporate Minutes Compliance” or something similar. It’s a total scam and it has been a pet peeve of mine for years.

There are a number of companies that bilk unsuspecting corporations in this way. These companies ask for $100-$200 and in most cases will send a rote form of “shareholder meeting minutes” that won’t be valid because they will refer to an annual meeting that likely never happened on a date arbitrarily picked by the scammer.

I was pleased to learn recently that the California Attorney General has sued some of the more egregious participants in this obnoxious practice.

For the sake of getting the facts out, here are the legal requirements in California:

1) California corporations are required to submit a list of officers and directors along with the address of the company and agent for service of process every year. The fee for this is $25, and the California Secretary of State sends a form that looks like this to do it:

Corporations can also e-file here: https://businessfilings.sos.ca.gov/. Bottom line- if it doesn’t say it is from the California Secretary of State, suspect a scam.

2) Corporations in California are required to maintain minutes of Board and shareholder actions. Corporations are also required to hold annual shareholder meetings, but no agency will suspend a corporation’s right to do business for failure to hold the meeting or adequately document it so don’t fall for that scare tactic (NB: shareholders and potentially even third parties might have claims against a corporation if it fails to keep good records and respect the rights of its constituents, but that is a completely different kettle of fish).

3) If a corporation fails to file the statement described in #1 its right to do business will be suspended. I strongly recommend staying current with filings, but if the corporation is suspended, it can be reinstated in almost all cases merely by filing the delinquent report and paying the $25 fee (for each overdue year).

This is the kind of thing no one should have to remember or think about, and it drives me crazy. So to all the business owners out there- next time you get a letter asking for money to prepare your annual minutes, check it carefully to be sure it comes from- and the check is payable to- the California Secretary of State, or ask your lawyer to take a quick look.

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How Greg Lemond Might Respond to Dick Costolo and Marc Andreesen

November 8th, 2007

In Founders at Work, Joshua Schachter advises new entrepreneurs to keep the product simple- do one thing and do it well, in essence. This strategy worked well for del.icio.us, which is a simple (in a good way) web tool. He built it largely on his own in his spare time while working for Morgan Stanley and that setup worked very well for him.

Mike Ramsay from Tivo, on the other hand, developed an extremely complex product (I found great humor in the section of the book where he describes the enormous back-end efforts to manage programming information for every TV service in the US, and then explains why he feels compelled to throttle anyone who describes Tivo as “like a digital VCR”) that required enormous engineering, marketing and other resources. Tivo raised significant money from VCs and went public to raise even more. Again, this has worked well for Tivo.

This pattern also reminds me of the Dick Costolo/Marc Andreesen online debate about raising outside capital that I continue to see discussed from time to time. Dick built Feedburner with a relatively small amount of outside cash, developed an excellent product with it and sold the company to Google for a solid return. Consequently, his advice to entrepreneurs is to raise enough capital to allow for a good return for founders and investors even if the business is not a home run.

Marc, on the other hand, has built two large businesses and sold each of them for over $1B- two grand slams. Both companies were heavily VC funded and Marc believes that the cash gave both businesses the wherewithal to survive difficult times, revise their business plans and ultimately become very successful. Based on his experience, then, the advice is to raise as much money as possible whenever it is available on acceptable terms.

All of these companies and people were successful, which means all of them are correct. Del.icio.us and Feedburner needed only modest capital to acheive their objectives. Tivo, Netscape and Opsware needed far more.

This brings me back to a piece of advice I picked up years ago in an entirely different context. Professional cyclist Greg Lemond wrote a book on cycling training in which he talked about one of the great fallacies of training- emulating someone else’s habits just because the person was famous or successful. As he put it “what works for ___ is good because it works for ____. That fact that it worked for ___ doesn’t mean it is right for anyone else.”

In other words, the paths to success of others are valuable for the ideas they can provide, but they are not the “right” path for everyone. Past experiences are data points to analyze, not prescriptions to swallow whole.

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The Art of the Introduction

October 16th, 2007

For a number of years, and especially since launching my own business a year and a half ago, I have made a study of how to introduce people in a way that is meaningful, appreciated and effective. It’s a challenging thing, to be sure, and subject to a number of variables. Still, I’ve been on all sides of the intro equation and I have drawn a few conclusions. Apologies they seem obvious- things often seem that way to me too once I’ve articulated them.

1 ) Both parties need to be receptive. This doesn’t mean that both people need to be actively looking for one another, but you need to be able to define a need that each introducee fills for the other. The risk here is that the intro may seem “spammy” to one side if the need hasn’t been defined.

2) Flowing directly from #1, define the value to each party. It may be specific and immediate (e.g. “here’s my friend. He is starting a company and needs a lawyer”) or it may be longer term (“so-and-so is an accountant and I think there may be a lot of overlap between your businesses”). Whatever it is, you need to be clear about that.

3) Once points 1 and 2 have been addressed the introducer needs to determine a proper form for the introduction. Quick email intros can be effective and quite valuable, but usually only where there is a short-term defined need. It takes a little more commitment to actually bring people together- to suggest that the three of you all grab coffee or lunch, for example- but lacking a short-term reason for the people to contact one another anything less may end in awkwardness.

Articulating these factors helps me think about how to make useful introductions among my contacts, and how to get the most out of introductions people make for me as well. I hope this provides some valuable to others as well.

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