Month: July 2009

You have a hot shot attorney. The kind that can get the major players in your industry on the phone. He/she knows the basic terms of the most recent industry deals, and is a fearless negotiator. Folks aren’t happy to get letters from them on the fancy letterhead with all the partner names. So when the time comes for you to make a deal, you should let sick your big gun on it, right?

Not for my money.

Don’t get me wrong, this article is not about lawyer bashing.

But there’s a time and place for lawyering, and negotiating ain’t it. Lawyers, as smart as they usually are, aren’t business people. That’s what negotiations are about. Business.

You should determine the terms you want / will accept, as well as the tone that should be used throughout the negotiations. It’s fine to hand things over to your attorney once you’ve decided what needs to be done, but letting them run that show usually isn’t a good idea.

Lawyers are trained to have a very different mentality. They anticipate problems, consider contingencies, etc. All too often, they feel like they’re earning their keep by being the tough cop who tells the other party no. On the other hand, since they’re paid by the hour, some lawyers have been known to manufacture problems to actually draw out negotiations because that’s where they earn their money.

The best course is for you to decide what you want from an ongoing relationship and current negotiation. What I like to do is take the initiative and make a bullet point term sheet, as it helps steer the negotiations. Then have the other party draft the first pass at a contract, and save on your legal fees. Then have your lawyer review it.

I always have attorneys review contracts, but I don’t let them drive the bus.

If you do it this way, you’ll likely not only save the money, but often enough, the deal itself.

How many times have you seen (or written!) something like the following:

“Based on our revolutionary technology that offers five times the current industry standard performance at one tenth the average price, we predict that by Year 3, we will capture 20% of the $2 billion worldwide market.”

This is what I call the “If we only get 2% of China” fallacy. And it’s an obvious “tell” that your business plan assumptions are either naive or glossing over exactly how you’re going to get your customers.

Yes, if you have better technology at a better price – and have the ready access to distribution, you may well capture 20% or more of a given market. The point, though, is that this magic 20% is not just going to fall into your lap. You have to fight for each and every sale, and what’s more, the more of the market you capture, the harder your existing, and future competition, will fight to regain it. This is “top down” forecasting.

Far more effective are “bottom up” projections.

Describe how you’re going to get each sale, what your revenue is, and what your costs associated with each sale are. Then address issues of scaling – meaning as you ramp up to greater and greater volumes, will you have capacity issues of personnel, equipment, bandwidth, etc. That’s what a business model is.

Use overall market size to show how attractive your industry is, and what the potential ceiling for your revenues might be, then a granular business model analysis to show how you’ll get your customers.

Nobody really cares what percentage of the market you have, just how many profitable customers. So instead of focusing on a percentage of the market, focus instead on a percentage increases you’ll have in terms of sales, then convince investors that you’ll hit your targets. Start from the bottom and go up, and you’ll have a better chance of making your bottom line.

I’ve seen umpteen business plans / prospectuses / PPMS and the like where the Use of Proceeds earmarks a full competitive salary for the entrepreneur(s) and also repays them what they’ve put into the business so far. Ask the entrepreneur about this, and they’ll usually say something along the lines of “I’m taking so much risk already not working for a large company, I can’t afford to take a hair cut on my salary when I have a mortgage and kids.”

The world doesn’t care about your expenses – but investors do.

Unless you’ve already been so successful in the past that investors are beating a path to your door, you’re not doing investors a “favor” by “allowing” them to participate in your business. And if you do have investors clamoring to get in on your new opportunity, chances are that you’ve already made so much money that you don’t need investors, and choose to not have them to begin with.

Your new company is not you, and it doesn’t owe you more than the lesser of:

1. What you’re worth
2. What the company can afford

You don’t start a new company for security, you start it because you’re confident that before long your hunch will be proved right in the form of a rapidly growing list of happy customers.

If you don’t have your own skin in the game – what’s to stop you from stopping when the going gets tough? You can simply walk away at any time, no worse for the wear. And where’s your commitment? If you don’t believe so much in what you’re doing to go without salary, bloat up your credit cards, take out a second mortgage, drive a beater car, etc. etc. then why should anyone else?

The best signal you can send to investors, employees, and partners, is that you yourself are personally financially committed to your new business. You tell people that you’re committed, but they hear that all the time and tune it out. Show people that you’re truly committed – that you’ve burned your ship after landing on the island, that you’re the pig whose bacon shows commitment in the breakfast as opposed to the chicken whose eggs shows involvement – choose your metaphor, and you’re halfway home.