I don’t write proposals, and teach my entrepreneur-clients and consultant-clients to avoid this as well.  Too often I have seen people act as “vendors” and provide a full outline of their strategies and tactics (as a proposal), only to have that valuable information ripped off and implemented without them.

Instead, I write a deal memo that outlines what will be offered, the value it will provide, the start date, the deliverables and their timeline, limitations on the scope of work, the cost and the payment schedule.  This deal memo is never longer than a single page, written in authoritative language in bullets.  It is polite but clear.  With this page in hand, any misunderstandings, confusions or objections can be discussed or re-negotiated before concluding the agreement.  And, if you build a template or two that will apply to most of your offerings, it is a quick way to sort out the tire-kickers from the prospects you can actually close, saving you lots of time in proposal-writing, contract-writing and re-negotiation (all these can work as a bottleneck in the operations of successful companies).

I write a contract (not a proposal) only after this discussion and the resolution of details is complete.  And I send an invoice for the first upfront payment with the contract.

Two of the elements are most important, the two that are most often left out of negotiations, proposals and contacts:

• The value that will be delivered.  Of course you understand the value of what you are offering.  You are very close to that information every day.  You know what happens if you don’t deliver that value.  Although your clients or customers may agree that your offer and deliverables are valuable, they may not be able to articulate them — to themselves or to their management which must approve the deal.  You need to do that, in writing, to support your value-based pricing.  Defining the value the clients or customers will receive from these deals will settle their minds, will give them ammunition for moving the deal through their bureaucracy, and will defend your price to all concerned.
• The limitations on the scope of work.  Specifying what is not included in this offer at this cost is critical to good relations with your clients or customers.  Addressing these limitations in your discussions, and writing them into the deal memo at the beginning saves misunderstandings later.  All clients or customers will push the limits as far as they can, to get what they want or what they believe they deserve.  For you to maintain your profit margins, this “scope creep” must be defined, addressed and controlled.  Of course you can provide more when asked, as long as there is additional payment for it.

Because you provide clarity early in your relations with prospects, you will save time by not pursuing non-clients or unlikely customers, and will save time and money writing long-form documents that get you nothing (and give away your expertise).  Mastering the use of the deal memo will add back time and profitability to your company.

Say you are proposing to deliver a creative work – perhaps a story bible for an online game, a webisode, a ghost-written book for a celebrity, or a graphic design for a website or marketing piece.

With this kind of work, you are risking many hours of rewrites for which you will not be paid, if your contract does not control the client’s expectations, sign offs and change orders.

There are two risks lurking in creative work, and they are two sides of a single issue: reading your client’s mind and limiting his change orders.

To deliver a creative work, you must pull from your client’s mind what he really wants to see when he cannot show it to you. These ideas are expressed as vague directives, goals, dreams and references to other work. Sometimes, in Hollywood, these references are to “high concept” ideas, like “Godzilla meets Bambi and Bambi wins!” Others are “make it sexy (when it is a software utility) or “we need a world created for these characters.”

The other side of this issue – the manifestation of your failing to read his mind — is the “change order.” A change order is request to fix what the client doesn’t like. It can be as simple as “make the villain more nasty” to “let’s change the gender of the main character.”

Controlling this two-sided threat starts in your contract:

• You specify each deliverable in phases.
• You do not begin the following phase until you have approval, in writing, signed by the client, that he has accepted what you have delivered in the previous phase, and authorizes you to begin the next phase.
• If he has made suggestions, your have documented his recommendations and he has signed off on that.
• You offer several steps of deliverables, each with its own authorization for sign-off. These steps will keep the creative vision and the project on track: an outline of the intentions and goals of the project; research as needed to validate these intentions; delivery of first draft; documentation of client changes and recommendations to the first draft; delivery of final (or next) draft. Each of these phases has the client’s sign off in writing.
• Then you control your client’s expectations: each phase has an estimated time period for your work and delivery. But each phase only begins when you have the sign off  and payment from the client. I have seen creatives miss their deadline by promising a final delivery within two months, only to find that the client takes 3 weeks of that time to send back change orders.
• So, for each phase of work, there is a deliverable, a fee (in advance), a request for approval and sign-off, then the beginning of the next phase. The time of delivery is expressed as “X days from sign-off and receipt of fees.”

This system of careful contracting shares the responsibility of the creative course of work, and the timing of the deliverables, between the creative and the client.

Beyond the system, of course, the creative must be strong enough to not begin the next phase of work until he has received authorization and payment for the next phase to begin, despite any pressure from the client to move forward.

Now, high energy is a great asset in a CEO. And excitement about emerging technology is a plus. Combine high energy and excitement with an over-hyped emerging market space, and one with an undefined or unresolved business model, and the thrill can lead to mistakes.

I’ve lived through this excitement several times. It is a high not to be denied.

The behavior that results from this excitement is a rush to the deal. The market pressures, (especially the first time they are experienced) combined with the energy of the times (and often the energy of youth), creates in a new CEO an eagerness to consummate deals and make new alliances fast. “We must keep pace with the industry” the CEO will say.

Of course, a fast alliance leaves the partners strangers to one another, even if they know each other through the community, common reputation, or industry events. None of this is “knowing.”

Slowing down a bit will help and not lose your edge in the marketplace. Trial periods that precede an actual formal deal will let you know more about your fit with a strategic ally, and if either of you can deliver on your promises to one another. It is a wise courtship period where you have a chance to experiment with your compatibility.

This advice came to me early in my career: “You don’t know anyone until you negotiate with them.” Turns out to be true.

Negotiations are the setting in which your partner’s real nature begins to reveal itself. Your own nature is revealed as well. The pressure of the negotiation and the hard questions that need to be addressed often reveal a side of your colleague that you never saw before… both positive and negative. Perhaps he is calm under pressure and sincerely seeks a win-win balance. Or she gets tense and shrieks when a control issue arises. Or she reveals a long-term vision that does not align with yours at all, when you assumed she wanted the same things you want.

A good negotiation is a peaceful conversation about what each of you wants from the alliance, and should include what each of you wants farther down the road for your own company – wealth creation, an exit, dominant market share, an ongoing family business without an exit, and so on. These long-term visions make a difference in understanding the value of the alliance to each party, and how to satisfy each partner during the alliance.

A good negotiation also reveals the true goals of each party, and can lead to deciding against the alliance. This is a positive outcome as well, as it saves the pain and cost of un-doing the deal or ownership in a commonly-held company later.

So, a bit of patience goes a long way. Many of us like all the details wrapped up in advance of moving forward with an ally or partner. Attorneys especially will advise this. Anything less seems sloppy and fraught with later danger.

I advise my clients to give all deals some time to reveal what is required. In one case, a couple of years ago, I advised that a start-up should be abandoned in favor of much more lucrative opportunities that were available to the CEO. I suggested that she be completely transparent about the market realities that pointed to this, and then let the team get used to letting go of the company, since the team members were minority owners. “Let the team feel the weight of the company over time, under the new market pressures. No need to shock them with any sudden decision. They will come to the same understanding if you are patient.” It turned out to be so.

Another time, I created a series of deal memos with 120 day trial periods. The outline of the ultimate deal was drafted in the deal memo, and signed, but actual ownership and ultimate compensation was deferred until we could all see if this configuration would work in the market, and among the team members. Everyone began on an even playing field, but not with equal ownership or compensation, and with each of their contributions recognized. The rest of the deal was decided upon the performance of each party in the first four months.

So, give some thought to the slow road, in the midst of the pressures of time to market and bad economic conditions. Test yourself and your potential partners, do a little courtship. Then, when you know your team, solidify your alliances.

Referrals: these partners create a “warm” introduction for your SaaS or DaaS offering and pass back the responsibility to your sales team to open, close and support the sales. Like an outside sales representative or a lead generation consultant, your referral partner is paid a commission (generally between 3% to 10%) for this referral, after the sale is closed, with a cap on the commission. The cap is either by duration (12 months of revenue, say) or by maximum dollar amount. Sometimes a small retainer is paid in addition to the back-end commission, structured as an advance against commissions, or not (as a non-recoupable advance or retainer fee).

Resellers and Value Added Resellers (VARs): these partners sell your product to their customer base, either on its own or in conjunction with their own products. Your product is not technically altered or integrated with the Reseller/VAR’s product, but may enhance the value of the Resellers’ solution to their customers. When your product is combined as a promotional value (special pricing when buying both products), the practice is called “bundling” and does not indicate any technology connection. VARs and Resellers provide the first line of support to their customers.

Payment happens in two ways. The Resellers/VARs buy your product at a 40-60% discount off your list price, and then price it to meet their market demands. Or, as there are no physical goods to keep in inventory with SaaS and DaaS products, you set a fixed price per installation, or a percentage split of revenue shared with the VARs (you would get between 40-60% of the revenue), and you would get paid at the time of installation (not when the VARs get paid).

White Label partners: These partners take your technology, eliminate your brand identity, label it with their own brand, and resell your product as their own, in conjunction with their other offerings, or on its own. Again, there is no technology alteration to your product. White Label partners pay more than VARs because they are removing your brand in these “white” or “private” label deals. This higher revenue to you is charged either in higher fixed price fees or higher revenue shares (when paid like VARs), or in an additional “labeling” flat fee set on top of the commission for each sale. All customer and technical support falls to these partners.

OEMs: These partners want to integrate your product with their product offerings to expand their solutions to their customers. (OEM stands for “Original Equipment Manufacturers” and goes back to hardware companies – -IBM and DEC — in the early 1960s). The integration requires some technology demand from your side. This technical integration may be as simple as providing “hooks” into the OEM partner’s offerings, or may require the building of new functionality of your product to work with the partners’ products. Customer and technical support is the OEM’s responsibility. You are responsible to the OEM (as your customer) to support the technology you have built for them.

Payments on OEM deals go beyond back-end commissions or revenue sharing. These deals include either consulting fees for the integration work if it is simple, or licensing fees if you have built a new functionality to make the products work together. The licensing to the new functionality may be exclusive to the OEM partner (for much higher fees), or exclusive in a single vertical market targeted by the OEM partner.

Or you may be paid consulting fees to create the new functionality as a “work for hire.” If the OEM wants exclusive rights to the new functionality, you will not be permitted to use it in your own company, as the OEM partner owns the intellectual property in a work-for-hire deal. In some cases, the OEM partner might agree to license the new functionality back to you for sale restricted to your own marketplace, if you sell into a non-competing market or vertical.

In any case, the OEM licensing fees to your core product are set and that license of your product to the OEM is non-exclusive. So the deal may include: your licensing fees of your core product, your licensing fees for the new functionality (or payment for developing it), plus whatever back end revenue share or fixed fee is placed on each combined product sold.

Of course you need a technology attorney well versed in these kinds of distribution contracts, often referred to as channel sales or indirect sales. But for your planning purposes and initial conversations with interested partners, this outline can guide you to a preliminary deal that can be finalized by your attorney.

Established consultants understand about getting paid (or not), but those new to the game, or employees currently being paid “off-payroll” may find their payments unexpectedly reduced or delayed, with little recourse.

Getting work the employee loses
The advantage of being “off-payroll” is that you may get work that would go to a full time employee, because the “professional services” or “contractors” budget has funds, but there is a freeze on hiring.

Employers carry the financial responsibility of their employees. In tight economic times, hiring freezes can result because employers pay up to a 25% “load” (extra costs) over and above your salary if you are an employee (this is an approximate figure). Also, employees have certain rights controlled by State laws, including receiving their benefits (such as health insurance) and timely reimbursement of out-of-pocket expenses. Laws also require that employers pay taxes on employee wages and salaries in a timely manner to the State and Federal governments. Defaulting on these taxes can result in employers being assessed significant penalties and interest.

Enter the consultant
So, there may be consulting funds for your role in the company, but not for your position as an employee. So you may be laid off and someone else hired in to fulfill your role. Or, that someone could be you, paid a fee and not a salary. Or, having been laid off, you may turn to being an “independent” to get paid for your skills anywhere you can.

Being paid a consulting fee (or contractor’s wages as a freelancer) leaves the responsibility for benefits (such a health insurance, travel/car expenses, and so on) and taxes on your shoulders. And as an “independent” you actually pay more tax than your employer!

These are rather obvious results of working “off-payroll” and you can plan for these by speaking with any established consultant or accountant. It is not easy to set aside 30% of your fee income to handle your self-employment taxes, and to pay your full health insurance on your own, but at least you know you have to do it.

Planning ahead
The more subtle effects of being off-payroll in a recession need to be anticipated as well. If there is a core group of employees still on board at your company or at your client-company, but you are off-payroll, the employees will be protected by the law, and paid regularly, usually through the accounting division or through a payroll service. There is not much room to change this compensation without some formal action on the part of the employer.

But as an independent, your fees are more vulnerable than your colleagues’ paychecks. When the cash squeeze comes (and you won’t know when it is on or off), your check will be delayed. Or paid on time but arbitrarily reduced. There may be some explanation (“keeping the company alive” or “catch you up next time”). Even if you have protected yourself in your written agreement, you have little recourse to demand timely payment, a catch up on arrears, or a check for out of pocket reimbursement. The best protection, of course, is to be paid up front for your entire scope of work, or to be paid monthly in advance of work to be done. These are good ideas at all times, if you can do it.

This position of advanced payment at least allows you the option of a “work stoppage” if the check does not arrive.

Choices to make
Of course, how you play your hand at these times will be a decision you will have to weigh carefully. It may be wise to wait out the arrears, if you believe you will be paid in full. This consideration involves how much you know about the company’s finances and how much you trust the integrity of the decision maker who writes the checks, who may not be your direct client. It might be wise to be clear with your client and the decision maker about your expectations for any deferred compensation, and what actions you might take in the face of deferrals in accomplishing your work.

Do not threaten to quit unless you mean to do it. In fact, never threaten to quit. If you are going to quit, tell your client quietly and respectfully that you will stop working now until payment is made, or that you will remain available for a few days while payment is arranged, and will be unavailable if it is not forthcoming.

In all cases, you must carefully consider how much effort (especially extra excellent effort) should be committed to a client which is falling into arrears on your fees. You must protect yourself. You must balance your work responsibility with how much energy you will commit to finding another consulting gig or a position in a more stable company. This is especially difficult for consultants whose identities are connected to excellence in their work and loyalty to their clients. I do not mean you should be less than excellent. I mean you should be loyal to your own (consulting) company and protect it, while you are continuing to support your client. If you are working for a client, give your best, but give that same best to your own company as well. Find the balance.

As I have said too many times to remember, you must be constantly marketing for more work, even if you are overbooked with current client work. You must keep your options for work and revenue constantly open and in play.

Especially in these uncertain times.

A New Orleans lawyer sought an FHA loan for a client who lost his
house in Hurricane Katrina and wanted to rebuild. He was told the loan
would be granted if he could prove satisfactory title to the parcel
of property being offered as collateral. The title to the property
dated back to 1803, which took the Lawyer three months to track down.
After sending the information to the FHA, he received the following
reply.

(Actual letter): “Upon review of your letter adjoining your client’s
loan application, we note that the request is supported by an Abstract
of Title. While we compliment the able manner in which you have
prepared and presented the application, we must point out that you
have only cleared title to the proposed collateral property back to
1803… Before final approval can be accorded, it will be necessary to
clear the title back to its origin.”

Annoyed, the lawyer responded as follows (actual letter):

“Your letter regarding title in Case No. 189156 has been received.
I note that you wish to have title extended further
than the 194 years covered by the present application. I was unaware
that any educated person in this country, particularly those working
in the property area, would not know that Louisiana was purchased, by
the U.S., from France in 1803, the year of origin identified in our
application. For the edification of uninformed FHA bureaucrats, the
title to the land prior to U.S. ownership was obtained from France,
which had acquired it by Right of Conquest from Spain. The land came
into the possession of Spain by Right of Discovery made in the year
1492 by a sea captain named Christopher Columbus, who had been granted
the privilege of seeking a new route to India by the Spanish monarch,
Isabella. The good queen, Isabella, being a pious woman and almost as
careful about titles as the FHA, took the precaution of securing the
blessing of the Pope before she sold her jewels to finance Columbus’
expedition. Now the Pope, as I’m sure you may know, is the emissary of
Jesus Christ, the Son of God, and God, it is commonly accepted,
created this world. Therefore, I believe it is safe to presume that
God also made that part of the world called Louisiana. God,
therefore, would be the owner of origin and His origins date back to
before the beginning of time, the world as we know it AND the FHA. I
hope you find God’s original claim to be satisfactory. Now, may we
have our damn loan?”

He got the loan.

The Details.
Two companies entered into an LOI under Delaware law and one of the two claimed that the other party did not act in good faith in accordance with the terms of the LOI and breached the exclusivity and confidentiality provisions. Please note that this was a decision only for a preliminary injunction.

In the second situation (this one an appeals court decision in Georgia), a company with a good idea (and some code) approached a couple of other companies about developing and selling a software product based on that idea and code. The first sale would be to a large insurance company known by all of the parties. So, the parties signed NDAs. Well, oops: Two parties decided to create their own product that was pretty similar to what was being developed and they went on to try to sell it as planned. But guess what? Both the trial court and the court of appeals held that there was no breach of the NDA (which was itself badly drafted, according to the court).

So What?

So, when it comes to an LOI, it is not an unenforceable “agreement to agree” but an actual agreement with specified rights and obligations. As the Delaware opinion stated, parties “[. . .] enter into [LOIs] for a reason. They don’t enter into them because they are gossamer and can be disregarded whenever situations change. They enter into them because they create rights.” What to do? Well, this court opinion says that parties can specify what is binding and what is not binding. Naturally, the opinion applies only to Delaware law but its principles extend to just about any LOI or term sheet. In particular, once a document is found to be an agreement, then covenants of “good faith” are incorporated into the deal. Pay attention.

As to NDAs, too little attention is paid to their precise terms—in other words, someone exhumes an earlier version and replaces the names of the parties. This is not smart. For example, specify—and we mean really specify—the purpose(s) to which the confidential information can be used. Define “confidential information” so that the person providing that material can control the information. This also means that one needs to make it clear whether or not copies of the confidential information can be provided and who has access to that information.

OK, OK, so we sound like a broken record: Pay attention to the agreements and, almost as obvious, make sure that the behavior of both (or all) parties comports not just with the agreements but also to expectations. Agreements are only a part of the relationship; behavior is another large part.

James C. Roberts III is my long-time colleague, a world-savvy attorney in new technology, new media, IP, entertainment, green and clean tech and mergers & acquisitions, as well as other transactions that matter. Check out his Global Capital Law Group at www.globalcaplaw.com

This is the second in a series of posts about the landmines startups face when they skip using lawyers.  You can indeed not use a lawyer, just pay attention to what has to be done.  And, as usual, this is not legal advice.

OK, so you have a few employees and some independent contractors–let’s say someone building your website and someone programming your nifty new mobile app.

So who owns what gets created?  The basic principle is that the person that creates something owns it, with some exceptions–among them employment or an agreement assigning rights.

You Make It, You Own it.

Generally, what employees create while employed is owned by the employer, without the need for a written agreement.  But to be safe, many companies have employees sign an assignment agreement, also known as a Proprietary Rights & Inventions Agreement.  This expressly specifies what is and is not owned by the employer.

Look at it this way.  It is rare that a company does not have employment agreements for key employees (say, the core management team).  If you are looking for venture capital, you can be certain that such agreements will be nothing short of mandatory.

For the independent contractors, the law is pretty explicit.  Typically, an agreement is necessary, one that either assigns the rights or makes it clear that the work being done is, by the nature of the engagement, owned by the party contracting the services of the independent contractor–i.e., the startup.  The latter sort of relationship and agreement is called “Work-for-hire” under federal law;  the former is usually called an “assignment agreement.”  Be careful:  usually, you cannot have a work-for-hire agreement that applies to work already started.

When it comes to the website itself and the programming, you’ll have to pay attention to just what is being owned.  Well, you say, it is the website.  Well, yes, but does the website include technology already created by the developer?  Similarly, does the programming include code written by the programmer that he or she used in a previous job?  Do you own it?