Don’t make a bad deal

Here’s what entrepreneurs and bizdev folks ought to remember before they do a deal:

First, doing a deal is a good thing. Despite my warnings below, you don’t get anywhere if your idea is a secret. A leveraged idea is worth sharing.

That said, please remember that the idea isn’t what is worth anything. It’s the effort and the cash and persistence that pays off.

  1. Don’t do a deal where each side gets a fixed percentage. A 50/50 split of a company invented in a bar is always a bad idea. Even paying someone 5% for some sort of contribution can come back to haunt you. Instead, build the deal around a shifting percentage based on contributions over time.
  2. Don’t assume that the money you start with is going to be enough. Let’s say you and a buddy each put in $5k and each take half the business. Then what? What happens when the money runs out and only one of you is willing to put in the next block of capital?
  3. Think about taxes. If you build a Sub S company, and the company loses money, you both get a write off…
  4. Don’t forget the arbitration clause. Sure, your venture won’t go bad, but others do. A clause that guarantees informal binding arbitration not only saves you time and money when stuff goes wrong, but it helps keep stuff from going wrong because no one will blackmail the other with court.
  5. Do a deal with someone you trust, but don’t do a deal with a friend. You’ll likely end up with neither a partner nor a friend in the end.
  6. Don’t forget the shotgun clause. At some point, one of you is going to want to run with the project. So build in a clause that says, "At any time, one person can offer to buy the other out. The second person then has the chance to either buy the first person out at the same valuation, or sell." Money can solve a few problems, and this is one of them.
  7. In case you forgot, reread #1.
  8. Worry about control. A lot. Sooner or later, control matters. Do you have it? Really? If you don’t, are you okay with that?
  9. The myth of most legal documents is that the world is going to stay the way it is. Or that the world is going to change, but just the way you expect it will. It won’t, and it doesn’t.