Several days ago, a Quora question and answer caught may attention. The question asked about things some lawyers do that break, rather than make, deals. I was intrigued by the response “[s]ending over very aggressive opening terms as a negotiating ploy”.

That is a situation I have faced only rarely – most of the time, my clients’ counterparties are pretty reasonable. When excessively unreasonable terms do appear, however, there is a simple response: I refuse to negotiate. Instead, I reply along the line of the following:

Unfortunately, the proposed terms are so one-sided and unreasonable that they are not a suitable starting point for negotiations. If you would like to provide an agreement that is more appropriately balanced, my client will be pleased to consider it.

So far, this approach has had the desired effect every time: The other side provided a more reasonable starting point, and the parties ultimately reached agreement.

Looking back, I see that this post’s message is a corollary of the post I wrote two days ago (Negotiating Successfully: The #1 Thing You Need to Know): If you want to negotiate successfully, you have to be willing to walk away.

Photo credit: Philip Niewold via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Several years ago, a friend lamented that he was not very good at negotiating on behalf of his professional-services business. He felt that clients were better at “bluffing” and other negotiating techniques than he was, so he often was paid less than he should have been. I told him the single most important thing he needed to know if he wanted to negotiate successfully:

You have to be willing to walk away.

If you determine your minimum requirements (pay, performance requirements, schedule, etc.), then the only way you will feel that a deal is fair is if the minimum requirements are met. If the other party won’t meet your minimum requirements, then you need to say “no, thank you” and “good-bye”. If, instead, you grovel or beg, the other party will tighten the screws and make you whimper even more.

My friend understood right away. Bluffing is irrelevant; making sure your own needs are met is what matters.

This principle recently came up in a conversation with the CEO of a client, which provides security-related open-source software and had received an acquisition offer from a huge Internet company. When the CEO told the co-founder CTO the minimum bid the CEO would accept, the CTO said, incredulously, “You would walk away from __________?!”

The CEO said “yes”. He understood that there is no need to sell a valuable asset for less than it really is worth. (Since then, the client also has turned down term sheets from two VCs because the terms were inadequate. The longer the company waits, the greater its value and the value of the founders’ investment.)

Of course, there is much more to negotiating successfully: One should always aim for more than the bare minimum. But the willingness to walk away is the foundation on which successful negotiations are built.

Check out all posts about negotiation.

Photo credit: Ella Devil via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

I think the economy – and business confidence – are improving. The reason: During the past week, two of my clients received unsolicited acquisition overtures from well-known Bay Area companies.

I’ll readily admit that this  does not represent a statistically valid sampling of local businesses. Nevertheless, I find this development meaningful because the last time a client was acquired was years ago.

At the moment, I’m coaching these clients on negotiation tactics. Then, because I started working with each company after it was formed, we’ll make sure that corporate records are complete and up-to-date. (See What Must We Do if We’re Going to Be Acquired?)

I’m sad that I will lost valued clients, but I’m pleased that I will have a role in their successful exits – and that these transactions appear to be a sign that the business climate is improving.

Photo credit: Paula Navarro via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

If your small technology company provides products or processes that might interest the U.S. government, you should know about the Small Business Innovation Research (SBIR) program.

The objective of SBIR is to provide qualified small businesses with opportunities to propose innovative ideas that meet the specific research and development needs of the federal government.

Eleven federal departments participate. These include, for example, the Departments of Defense (including the various armed forces), Education and Transportation.

While there is some variation among departments, SBIR generally is a three-phase process:

• Phase I – Technology feasibility is determined and contracts are valued up to $100,000, lasting from six to nine months.
• Phase II (awarded to successful Phase I contract winners) – The necessary R&D is accomplished to produce a well-defined product/process. These awards typically span 2 years to accomplish the primary research effort and are valued up to $750,000.
• Phase III – Commercialization of a Phase II project result using private sector or federal agency (non-SBIR) funding.

Here are a few tips based on my experience helping clients with SBIR projects:

1. While the government retains broad rights to use the technology, the small business concern retains rights to sell the technology commercially.
2. Successful small businesses often work with large companies as subcontractors to add heft to the project team and increase the likelihood that a proposal will be accepted.
3. The fact that a small business has worked with a large company in Phase I does not necessarily mean that the same large company must be used in subsequent phases.
4. Because the small business is the prime contractor, it has substantial leverage in negotiating terms with the large company that it might not have in other circumstances. So, for example, if the large company makes demands about co-ownership of or other rights to Phase III intellectual property during Phase I, the small business can respond, “There is no guarantee that the project will get to Phase III or that we will even be working together, so let’s just focus on Phase I right now.” The implicit threat: If you are too difficult, we will work with someone else.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

A start-up entrepreneur recently told me about the agreement he signed with the developer of his website. The agreement has what I consider, from the entrepreneur’s perspective, a most pernicious provision: Ownership of the website, and its intellectual property rights, does not pass from the developer to his client until the fee is paid in full.

I understand why developers like this type of provision: It gives them extra leverage to ensure that they are paid.

In my opinion, however, this type of provision is inappropriate, from the perspective of the developer’s client, for several reasons:

• If development extends over a long time, the client is deprived of ownership rights throughout that entire period.
• Sometimes a client has a legitimate dispute that justifies a reduction in payment – but the provision in question does not allow for this possibility.
• There are other, less-disruptive means that can protect the developer, such as the granting of a security interest.

So here is my advice to anyone who receives a website development, or other professional services, agreement with a “you don’t own it until you pay” provision:

• Negotiate that provision away, making sure that you own the deliverables, and all intellectual property rights in those deliverables, as soon as they are created.
• If the service provider will not agree to this change, find another provider.

Photo credit: Sufi Nawaz via stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

My client owns several patents covering ways to improve the efficiency of certain types of lasers. We had succeeded in licensing a large company for one field of use. We were trying to sign up another company for a second field of use.

All business and legal issues had been resolved when, at the last minute, the licensee’s General Counsel demanded that my client convey, in addition to the patent license, certain broadly-defined rights to my client’s know-how. We refused, explaining that know-how never was part of the discussion, and if my client ever was interested in conveying know-how, it would come at a price. The parties then reached final agreement without the know-how provision.

Trying to Change the Deal

We expected to receive a signed agreement from the licensee shortly thereafter. When it did not arrive, we contacted the licensee. The GC said that he still wanted the know-how, so he would give us a choice: Either the licensee would wait to sign the agreement until it obtained the know-how elsewhere, or my client would have to accept a provision allowing the licensee to terminate the agreement at any time if the licensee could not obtain the know-how.

I advised my client to reject the licensee’s conditions. In response, I sent the GC a short e-mail: “[My client's] offer to proceed on the agreed-upon terms will expire this Friday, May 18, at 5:00 pm Pacific Time.” The GC was not happy. On May 17, he replied “Now…you have issued an ultimatum requiring us to bear the risk that…we must still pay the fees under the License Agreement (for a license we would be unable to use). I hope you can understand…we do not feel this is a reasonable request, and it is a difficult one for us to accept.”

Calling His Bluff

At the same time, the licensee’s business executive asked whether we could have an all-hands telephone conference the next day (May 18) before 5:00 p.m. I said no. I realized that the deadline was working in our favor: The licensee was in no position to back out of this deal, having already committed significant resources to a project that would require the license.

On May 18, at 4:52 p.m. – eight minutes before the deadline - the G.C. sent the following e-mail: “Attached is an executed copy of the License Agreement in the PDF form provided by Dana….Once we have received the countersigned Agreement, we will process the Initial Payment….”

My client was as delighted as I was. I was pleased to offer the right counsel, but to me the correct response was obvious. An in-depth understanding of the transaction told me that our position was reasonable from the business and legal perspectives, while the licensee’s position was overblown from the legal perspective and untenable from the business perspective.

Here are some thoughts that you might find helpful in any negotiations, especially if the stakes are high:

• Make sure that your legal and business strategies are consistent with one another.
• Know which points are so important that without them you will walk away from the deal.
• Know when the other party is so committed from the business perspective that you can bring the transaction to a close by saying “take it or leave it.”

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Every state has a searchable database of the businesses that have registered with that state, either because the business was formed there or because it was formed elsewhere and registered to do business in the state. Each state includes in its database, at a minimum, information about the corporations and limited liability companies. Most states include information about other types of business entities, too.

Finding the search page for a given state is pretty straightforward. A Google search for

[NameOfState] search corporation

usually leads to the right page within two or three clicks. If that approach does not work, the fallback is to go to the state’s homepage, click on “Business”, then look for the business search function.

Sometimes it takes a bit of effort to determine the state where the company is registered. The state where its principal office is located is a logical first guess. If that does not work, I try Delaware. If that does not work and there are no other clues, I fall back on asking the other party’s attorney.

Once the applicable state’s website is found, the record for the company can be pulled up by searching for all or part of the company’s name. Although records vary from state to state, they often contain information such as:

• When the legal entity was formed (provides a clue as to how established the company is)
• Company officers and/or the agent for service of process (may identify and provide the addresses of individuals who control, or otherwise have important roles in, the company)
• The company’s filing number with the state (may be necessary if more-detailed information is sought)
• The company’s status with the state (active, inactive, dissolved, etc.)

I find status information particularly helpful. If it shows that the company is anything other than active and in good standing, I immediately am concerned as to whether my client should be doing business with that company. This situation typically reflects either, or both, of the following problems: The company may have neglected to provide its annual information filing with the state (a simple, inexpensive process, suggesting that the company lacks effective business procedures), or it may have failed to pay its taxes or other state fees (suggesting that the company may be in financial trouble). Either way, I let my client know about the problem so we can build extra protections into the agreement and the business relationship.

I consider this type of research a significant component of properly representing my clients. As the adage says, forewarned is forearmed.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.