Risk Management: Seeing the Forest Through the Trees
I have the privilege of spending a few hours every Wednesday morning with an incredible group of women business owners. I have learned so much from them, including how to dashboard, measure, market/brand, face challenges and “wrastle” demons. At least once a year I share 20 minutes of legal “stuff” that I think will help them. Coming up with a topic isn’t always easy because their businesses are all wildly different. However, risk is a common denominator in business so I recently decided to address it.
I don’t know about you but I like my business risk on the calculated side. It’s why I’m a better lawyer than a black jack player. It’s also why my material rewards are likely to be more measured than some of my more entrepreneurial clients.
Big Risk = Big Reward
The “nothing to worry about” folks are the same ones who claim their lawyers stay up at night dreaming of scenarios that won’t possibly happen. Sorry but that is only partially true.
The sad fact is that those lawyer “dreams” are usually very real scenarios that have actually happened to some poor business or individual. When I’m helping a client assess risk it really doesn’t matter if we are talking about taking on investment, starting a business with a partner, buying or selling their business, a joint venture or entering into an exclusive manufacturing relationship.
If there is some kind of interdependence, keep a keen eye on the following:
Corporation or individual, we just don’t like to talk about it. It’s unseemly. It’s also really risky. If we don’t carefully walk through scenarios and spell out contingencies the wheels come off when the reality is different than the expectation. What if there isn’t enough revenue. What happens if there is too much? You simply can’t be squeamish about discussing money.
You know what we like talking about even less than money? Big mistake. Taxes drive deals and distributions. Don’t make assumptions. Spell. It. Out.
Roles, Responsibilities, Decisions
Who does what is a common source of misunderstandings in interdependent relationships. If you don’t take the time to really carefully think it through and get it on paper prepare for unfulfilled expectations, simmering hostility, brown stuff hitting the fan. Not worth it. Even with a good paper trail this may happen but it is less likely.
IP (Intellectual Property)/Proprietary and Confidential Information
If I had a dollar for every time I asked a business (doesn’t matter what the context) if they have IP and they say no and then they tell me about the neat proprietary software they use to run their business. I hate to shout but …EVERY BUSINESS HAS IP!! IP is not just a patent. Trademarks (common law or registered), your packaging (tradedress), customer lists, operations manuals, methods, processes, trade secrets, your marketing brochure (copyright) —they are all IP and even if they don’t rise to that distinction, they are proprietary and confidential and need to be protected. If you are lending any IP to another business or they are borrowing yours and paying you money (royalty), you need licensing language. And, if you are creating a product with someone else who owns it or has the rights to it, what happens if you split up? What about work you or your employees did on that product? Don’t leave that swinging in the breeze.
Death, Disability, Divorce. Life happens. Particularly in contracts or relationships where you are banking on an individual for his or her performance, you have to discuss “what ifs”. I admit this may be even less pleasant then talking about taxes but if you don’t, you may wake up one day with the nasty ex of your biggest shareholder sitting across the table from you instead of the shareholder. This is preventable pain.
I am a fan of putting a mechanism in agreements that roadblocks anyone from “going nuclear” right off the bat. It can be an advisory board member, business folks or an outside mediator. It really doesn’t matter who it is but that mediator can inject a little sense into the process. A lawsuit should not be the first stop when something goes sideways. Make a commitment to at least try another option. I guarantee that if you do, you will have a better result than firing another shot over the bow. There are exceptions to this of course and protecting your intellectual property is one of them.
The part of the risk ledger that your lawyer doesn’t know unless you tell her or him are:
The business drivers that are propelling you to make a decision.
The outcome you are trying to achieve.
What keeps you up at night?
These aren’t filler questions. They are critical pieces of information. The failure to vet these fully could cost you a ton in the long run.