Wednesday, June 21, 2006

First Draft Agreements

As a reformed lawyer, I may be more sensitive to how contracts are drafted than some other deal guys. However, a conversation with a former colleague reminded me of a particularly annoying tactic some folks use when sending the initial draft of a definitive agreement - the one-sided, overreaching first draft. It's not something you see every day, but still far too often.

I'm not talking about terms that need to be unilateral or lopsided because of the parties' differing roles, or even terms that are being aggressively negotiated. No, these agreements are laced with terms that favor the drafting party beyond any measure of reason.

Some claim that it makes sense to send over a lopsided contract because (a) the terms may stick and (b) it gives you terms to negotiate back from. I don't find the first point compelling, and the second represents a rather juvenile outlook on negotiating. Sure, lopsided contracts will occasionally work with unsophisticated parties or those you have loads of leverage over. However, in the vast majority of cases they will:

- Piss off your counterparty, harming any useful rapport you may have established
- Make your counterparty dig deeper into the agreement to look for all the other ways you're trying to screw them
- Waste a lot of time as the agreement gets negotiated back to where it should have been in the initial draft

End result: You're back in the same place you would have been had you sent a fairly-written contract, at substantial net expense in time, fees and credibility. You may even lose the deal because of the added delay or trust issues created by your draft.

Monday, June 12, 2006

Pissing Matches

I spent the first few years after law school as a litigation attorney in a small firm. I learned a lot, and worked with some great folks, several of whom are still good friends. Despite the long time (and career changes) since then, stories like this remind me of what I hated most about litigation - the petty bickering over meaningless crap.

In a negotiation, you can usually find ways to rise above this stuff. In a lawsuit, you may be trapped by the obstinacy of your opposing counsel. What's really amazing here is that both parties to the litigation are companies (OK, insurance companies, but still). You'd think the litigation managers would be wondering why they're getting billed for motions to be filed over such nonsense.

Monday, June 05, 2006

The NPV Trap

Sorry, no link, but the FT ran an article last week on "valuing innovation" that gets right to one fundamental problem with financial analysis - its usefulness varies greatly depending on the maturity of the project. The article focuses on investment decisions in projects and R&D, but the thesis works just as well with M&A.

Probably because I come from a non-financial background, I've always nursed a little rebellious streak when it comes to financial analysis and the pedestal upon which NPV calculations are placed in the corporate world. Sure, I'll use them as much as the next guy, and I am a firm believer that a discounted cash flow analysis is the single best way to assess the value of an operating business. The problem is that such analyses are only as good as the assumptions that go into them.

While future results for mature operations can be estimated with a fair bit of accuracy (or at least conformed to the acquirer's 10 year planning assumptions for modeling purposes), trying to produce a similar DCF model for a 6-person start-up with wonderful but untested technology is an exercise in fiction writing. Yet - who hasn't seen someone trot out an NPV analysis and hold it up as objective truth, despite the fact that the assumptions underlying the analysis might as well have been plucked from a hat?

There can be a powerful tendency to try and view all potential investment via the same lens, and NPV analysis often gets a halo of legitimancy because it is numbers-driven. Sadly, the numbers that come out are no better than the assumptions that go in. The FT article thesis is that companies should use multiple scoring factors in evaluating projects, with greater weight given to financial analysis as the project gets more mature (and hence more amenable to accurate forecasting). In the case of acquisitions, companies need to weigh factors other than just the NPV analysis - strategic fit, customer needs addressed, people issues, scope of potential benefit, etc. Equally important, the NPV analysis should be known for what it is - a very useful tool under the right conditions, but one of diminishing usefulness when it comes to the new and different.

Thursday, June 01, 2006

Trademarks and Cease-and-Desist Letters

Great, thoughtful post in Ventureblog regarding the dust-up over the "Web 2.0" trademark registration. As a reformed lawyer, I would take a point made at the end of the post even further - enterprises that allow their counsel to decide when to send cease-and-desist letters are almost always making a mistake.

Why? Even if the use is in the gray area, there's no downside (from a strictly legal perspective) to sending a letter, and such letters are great evidence (again, from a strictly legal perspective) to establishing that you have properly defended your marks. So, if you as the business person bring a question of possibly infringing use to your trademark counsel, the basic legal answer you get back will be to send a cease-and-desist letter. Of course, savvy trademark counsel will walk you through the pros and cons and potential PR and customer pitfalls of taking this approach. Unfortunately, many will simply apply a mechanistic legal test and advise sending the letter.

This can't be the end of your analysis. In all but the most cut-and-dried cases - say, a similarly-sized competitor making an infringing use, or outright stealing/counterfeiting - informal discussions and attempts to resolve amicably must be used prior to dropping the cease-and-desist letter. Such efforts often work, they are cheap, and they can keep your enterprise from encountering something that seems to be repeated as often as the seasons in the corporate world - big companies getting smacked back on the PR front for bullying behavior toward tiny enterprises.