MAKE SURE YOUR TEAM SEES THINGS THE SAME WAY
If you have investors, lenders or partners, your lawyer should give you pointers on what kinds of issues you need to think about before you start working with the other people on your team. Each person should agree on what their responsibilities are, how much time each person will devote to the project and how each person will be paid or repaid for loans. If one person is providing the financing, make sure that person is really on board and you understand what is expected in return. Is the money a loan or an investment in return for a percentage of the business? If you are all already in the beauty store business, can one partner import a competing product without involving the other partners? What happens if one of the partners dies? Can the other partners buy out that share and continue in business, or does the partner’s child inherit a share, which may give the child a right to force the business to dissolve? If one person goes to Cosmoprof North America, what expenses will the business cover, and can someone else go the next time? Once you have discussed these issues, make sure everyone really agrees by signing a contract.
It’s important to get a list of questions from your lawyer, and then think through and agree on all the answers before you ask your lawyer to draft up a contract. That way you won’t waste time and money on drafting a contract that the other people will reject out of hand. It can be very expensive to learn about a disagreement because the other person rejects a draft your lawyer spent a lot of time on.
SKIP THE TERM SHEET
Term sheets or letters of intent are usually just an extra step that you can safely skip, with some exceptions. Both term sheets and letters of intent are preliminary lists of the important terms of your deal. They can be binding or nonbinding. If they are going to be binding on you, you should really think through and reach agreement on all of the terms. If you don’t address an issue and there’s a dispute about it later, then a court might be able to impose a term that’s standard in the industry, but that you never would have agreed to if you had thought about it. Other times you may lose your bargaining position by agreeing to a concept in the term sheet that becomes unattractive once the other terms are negotiated later. Even something that seems straightforward, such as the percent ownership your investor will have, might turn out to be a problem once the investor tells you that he wants to transfer that ownership to a competitor of yours. So you may as well skip this less formal step because you will be better served by a formal contract with all the concepts fully thought out.
If the term sheet is not going to bind you to a deal, it can be useful to help everyone focus on the details and make sure you are on the same page, but it has to be written carefully and you should get legal advice on drafting it. It should say clearly that it is not binding and that you will have obligations only if both parties sign a formal written contract. Even so, it is often just as easy to go straight to a draft of the formal written contract.
BE PREPARED BUT DON’T OVER FUNCTION
Think about the issues that are important to you, and write out a bullet-point list for your lawyer. Your lawyer can take that list and help craft a plan that helps you achieve those goals.
But don’t bother writing out a fully developed contract. Then your lawyer will have to analyze the contract you wrote, distill out the important points, substitute contract provisions that are either generally accepted or have been interpreted by courts and, finally, check to make sure you didn’t miss anything. That takes a lot more billable time than starting with a well-thought-out list of important points and building a contract around them. Most lawyers have developed their own contracts that they know will hit all the important points already and will be generally accepted in your field.