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 Is a good example of what not to do.

  • when I started this venture, me and my angel partners signed an agreement. I had every reason to trust them. They were close and were investing a relatively big sum on essentially a blank slate. Out of respect, friendship and perhaps some embarrassment, I didn't get contracts thoroughly reviewed by a lawyer of mine. I asked all the questions to their own lawyer, sent the contract around to friends for quick comments, and we moved on.
  • after 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 with enough comfort. The company was operationally profitable in the month I left, and was growing rapidly. But the company had also amassed some debt with suppliers, before and since my departure.
  • As an anonymous partnership, we were liable (mostly) only to the State and Employees. But some clauses could allow a different interpretation. The angels wanted me to contribute capital and also sign a personal guarantee for liabilities covering the time I had been a CEO but also later times. I didn't want that. I suggested they put in more capital and dilute me, they didn't want that. To make matters more complex, my partners were also majority shareholders of our main supplier, and therefore the ones to benefit from any immediate payments and guarantees.
  • As each side tried to explain their positions, it became very clear we weren't going to agree. Our Z.O.P.A. hardly existed. I proposed that we elect an outsider committee to settle the issue, but that was rejected. The tone soured and egos inflated on both sides. Discussion turned to grandstanding.
  • 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. I thought nothing wrong could come to me. Plus, I was super curious! But time was going on, and a solution was needed.
  • I proposed covering my share of the maximum potential liability at the time of my exit - including all unsold inventory at the time of my departure and all supplier credit at the time too me, which is a stretch. This was small money but personally at the time it was a lot for me.

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 pen and paper, not sophisticated and lethal ammunition such has money. 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.