Law and contracts

I consider myself a lucky person. I have found myself in situations with ethical grey areas, and I was fortunate that there was someone more experienced (or more conservative) to guide me to do the right thing and save me from potential hassle. I tend to trust my impulses and intuition as much as my purely rational judgement. I always want to start fast, too fast, and consider contracts and accounting a chore. I have stayed out of trouble despite my over excitement and impulsiveness. This has not always been the case and I have personally and financially suffered.

I learned my lessons though. Now, whenever I am making a big decision that has other important stakeholders, I always try to consider the angle of the Law, in its practical and purpose (ethical) sense. 

One episode from my past comes to mind. I started a venture, me and my angel partners signed an agreement. We were playing along very well, and I had every reason to trust them. I even considered the usual "what if this goes wrong" when reviewing contract drafts, but I kept lawyers out of it. The Angels were close people and again I had every reason to trust them - they were investing a relatively big sum on essentially a blank slate. Out of respect, friendship and perhaps some embarrassment, I didn't get it thoroughly reviewed by a lawyer of mine. My own father is a lawyer, but I just couldn't be bothered. I wanted to start. I asked all the questions I thought smart to their lawyer, sent it around to friends for quick comments, and we moved on.

Big mistake. Unfortunately, after just over 2 years in, we shareholders had diverged in what strategy to follow for the future, and I had resigned amicably, keeping my shares. Six months later we had a disagreement over how to raise money to keep the company going.  The company was operationally profitable, but had amassed significant debt with suppliers. We were an anonymous partnership, meaning partners are mostly only liable to the State and Employees. But some clauses could allow a different interpretation. On these grounds, others wanted a pro-rated infusion of capital and a personal financial backing of liabilities for not only the time I had been a CEO but after that as well. I didn't want that and proposed at most to back up the company's actions during the time of my CEOship. The biggest exposure was acquired stock which may go unsold, and paying those suppliers with whom we had a running account. Adding to that, my partners were also majority shareholders of our main supplier, and therefore the ones to benefit from such immediate payments and guarantees. As each side tried to explain their positions, it became very clear we weren't going to agree. Our ZOPA [1] hardly existed. A proposition to form an outsider committee to settle the issue was rejected. The tone soured and egos inflated, on both sides I must disclose. Discussion turned to grandstanding.

Now, from an intellectual perspective, I loved this situation. I had done nothing wrong, and I had always worked as hard and professionally as it is humanly possible for me. So I kept my admittedly naive engineer conclusion that nothing wrong could come of this. Plus, I was super curious! I was learning about people and studying contracts and all. The opinion of every one close to me (including lawyers now) was that I was extremely likely to not need to chip in personally, and could only be diluted. Some part of more heated debates were even borderline humorous, and that was fine. But time was going on, and a solution was needed. There were suppliers, and potentially customers and employees on the line. And that's serious enough.

I proposed covering my share of the maximum potential liability at the time of my exit - including all supplier stock unsold at the time and all supplier credit at the time. Despite extreme resistance my proposal was eventually accepted. And unfortunately accompanied by a resolute accusation of my moral inferiority, something which I did my best not to respond to. Worse still, even if we had ended up on my ground, I had a big financial loss, second only to my MBA. 

All of this would have been avoided if I had involved a lawyer in the beginning. It was imprudent. The resulting contract could have helped everyone manage this situation better, saving all the other shareholders and myself a lot of headaches and money. 

A clearer, simpler contract would have limited the pressure on both sides of the argument and reduced complexity. Starting a legal discussion is the same as starting a real war: It's better if everyone's holding sticks, not sophisticated and lethal ammunition. The contract was not 100% clear on a startup character, rather it resembled a "marriage until last consequences", and it was my fault for signing without checking it through.

As a result, whenever I am about to enter in a contract, I hire a lawyer. I ask all the questions, both stupid and smart. He'll be forecasting the better and the worse, and even more important, the way laws can be used in different scenarios. 

Trust and optimism is fundamental, but it's smart to exercise your right for protection. When you're at the negotiation table, save a seat for the Law.

1. ZOPA is the Zone Of Possible Agreement, that is, where opposing interests overlap.