Wednesday, February 25, 2009

Lawyers and Risk

For those running businesses, here’s a little secret about lawyers: Many of us aren’t very good when it comes to risk.

Sure, we can find risk – most lawyers can identify risks all day long. That’s what law school trains our already-skeptical minds to do. Spot the issues; identify any ways risk arises in a course of action. But balancing those risks against opportunity? Not so good.

Successful businesspeople know that you win by taking smart risks – risks that are outweighed by opportunities. These risks can be competitive, personal, financial, social or, yes, legal. The problem for most businesspeople is that the law is complex, and attorneys have done a good job making themselves its gatekeepers. How can the non-lawyer businessperson determine the size of the legal risk that lurks on the other side of an opportunity?

Your average business attorney will have little trouble assessing the potential for liability in almost any scenario. With some prodding, they will strive to give you the likelihood that liability will actually come into play. However, it can be like extracting teeth to get many attorneys to combine the element of likelihood of a risk with the likely consequences should that risk materialize.

Why is this important? Because – and I can’t emphasize this enough – legal risks are not created remotely equally. A legal risk may mean a vendor is likelier to send you a pissy letter. It may mean an increased likelihood of being sued. Or it may mean the feds raiding your office with a warrant for your arrest.

Obviously, you don’t want to take a major legal risk for a minor opportunity. Just as obviously, you shouldn’t let a little legal hand-wringing over minor risks slow down your plans. You also wouldn’t want to take those risks that are likely to result in criminal liability, bet-the-company litigation or other such unpleasantness under most any imaginable set of circumstances. Due to the gatekeeping function lawyers play, you must have input from your lawyers to tell which risk is which.

Are you getting this input? Just as potential risks are easy for attorneys to assess, the likely range of potential damages is difficult to come up with. Assessing this range requires not only understanding the worst-case outcome, but also discounting from this scenario to account for the uncertainty of the situation, the circumstances of your counterparties and the likelihood that liability will even emerge as an issue in the first place. All in all, a complex and messy process - and attorneys, being risk-adverse creatures, are often loath to wrong-set your expectations.

Much of this analysis is based on experience and judgment, not modeling or mathematical analysis (there are some exceptions I will write about down the road). If you’re lucky, you’ll work with attorneys who possess these qualities and are willing to fully deploy them for you. Ask yourself – are your attorneys walking you though this way of looking at your risks, or do you get the sense that they believe every risk needs to be eliminated? If the latter, and if getting new counsel isn’t an option, at least try the “worst case” test: Always ask your lawyer what the worst thing that could possibly happen is. You may be surprised by how often even the “worst case” is of little consequence next to the size of your opportunity.

Wednesday, February 18, 2009

Facebook - What Happened to the Adult Supervision?

Last year, in an attempt to address the burgeoning growth and complexity of its business, Facebook brought in some experienced senior management in the form of COO Sheryl Sandberg, VP, Communications Elliot Shrage (both Google alums) and General Counsel Ted Ullyot (Justice Dept.). Sadly, this leadership has abjectly failed Facebook in its Terms of Use imbroglio.

Last weekend, Facebook changed its TOU in certain ways that covered the more expansive ways it needs to license user content. Not to "own" user content, as many of the more hysterical voices in the blogoshere contended, but rather to reflect the many ways users distribute their content via applications and the profiles of others.

The issues raised by those objecting to the TOU changes were similarly overstated for several other reasons: First, only a vanishingly small fraction of a percent of the content on Facebook has any financial value whatsoever. Second, even with respect to that small fraction, Facebook would have no incentive for seeking to monetize it via their license. They don't have exclusive rights, it's not their core business, and they'd face a riot from users. Finally, it’s well-understood that website terms of use are only enforceable to the extent they are reasonable. It's silly for people to take strained and aggressive readings of TOUs and argue that the companies involved would evetake those positions. Their lawyers are smart enough to know that courts won't accept overly-broad or unreasonable interpretations of TOUs.

So, the TOU changes: The problem is that, for a complicated web service like Facebook, it’s really hard to draft website terms of use that are both clear and cover all of the situations the company needs to cover. It takes a lot more time, just as it’s harder to write a short, concise letter than a long one. Sure, Facebook could devote the time and legal resources to making their TOU both a model of lay-person clarity and legal coverage, but – this blogosphere dust-up notwithstanding – the ROI on doing that is very low. Even a well-funded startup like Facebook has bigger issues its counsel should be focused on.

I thought Facebook had this all figured out and had made their TOU changes understanding that they would meet with some complaints. After all, Google faced similar issues last year when it made TOU changes as part of the Chrome browser launch, and those quickly blew over.

But here's where the adult supervision broke down: Facebook has now apologized and backtracked to their old TOU. What's shocking about this is the tacit acknowledgement that the company hadn't considered the tradeoff inherent in expanding their TOU this way, hadn't considered how to communicate the changes and hadn't considered the possibility of blowback. It also shows a level of pliability to a vocal minority that in't going to serve the company well should it ever go public.

Monday, February 02, 2009

Corporate Tool Re-Tooling

I've worked with a lot of lawyers in my career, and have even done a fair impersonation of one myself (kidding, state bars - I'm actively licensed. Sheesh.) Given the moribund M&A market, the focus of my current job on the legal market - and the fact that I've exhausted most of what I could say about corporate development - I've decided to reorient "Corporate Tool" around how businesses should think about the law, and how lawyers who serve businesses should think about their clients. All the old CT archives on M&A will remain intact, but I'll add new categories for this new focus.

First post soon, on one of my favorites subjects - risk.