Famous Last Words: “The Shorter the Better”

Over the years, I’ve lost track of the number of times I’ve sat with or been on the phone with a client and we went over the deal they were trying to close (or more often some part of the overall deal), where they said “We just need something short to memorialize this, preferably a one page agreement.”

I’m somewhat baffled as to how someone can put considerable time or money into a venture, but then not want to adequately protect themselves.  Granted, there are situations where a one page document would work fine for the situation (these are normally the sorts of things that can be drawn up on a cocktail napkin at the local brewpub).   However, I’ve had this request for somewhat complex transactions where plenty of money was involved.

I tend to think I’m reasonable, and I understand and see that:

  • It is definitely easier to get someone to sign something if it is straightforward, easy to read and usually short.
    • My counterpoint to this is that in the long run its better to have the person that is countersigning actually have read the document and if necessary have their lawyer look at it.
  • There are certain instances where a short to the point agreement is all that is needed.
    • Again, these instances are pretty rare.  Usually a major point is agreed upon but there are a lot of open issues that weren’t discussed and any of the minor issues have the ability to swallow the major point.
  • Lawyers are taught to plan for the worst, so our though process is different (for better or worse).  But even if your attorney thinks through the usual scenarios that may arise, there is bound to be something that can happen in the future that the agreement may not directly address.  However, this doesn’t mean you should throw caution to the wind.  The things that can be foreseen as possibilities should be addressed.
  • Some attorneys go to the opposite extreme, dropping 100 page documents on mundane type deals. I usually think this is done because the attorney has a form they used for a more complicated transaction that they’ve closed in the past and they feel comfortable with the form. And some attorneys are more paranoid than others as well.  I tend to give the attorney’s the benefit of the doubt that they are not just bolstering their fees.

I’ve had a number of times  where a new client will come in and show me what they have as far as documentation for a deal they closed themselves, with Legalzoom or with another lawyer.  I have, at times, been shocked.  The worst are when the client purchased a business via an asset purchase and the agreement they used to do so either does not address the bulk sale requirements or fails to indemnify the buyer for the previous taxes owed by the seller.  In New York, like a lot of other states, if a seller has outstanding sales tax owed to the State for previous sales and a buyer buys the assets of the business without paying the seller’s outstanding sales tax, the buyer becomes liable for the full amount due.  Its been pretty hard to tell the person that they now are liable for this amount, but they undoubtedly are (its sometimes been a higher amount that what they paid for the business), and usually the seller is hard to find after that.  When I ask why they didn’t use a more standard agreement or a lawyer to do it (preferably one that specializes in transactional law), they say they “wanted to keep it simple” or that it was “just a small deal” and they and the seller wanted to really just do it on a handshake.

There have been other situations where a group of startup founders come to me and have either (1) been working together with no entity/agreement or a basic handshake agreement or (2) where the entity has been formed but not all the equity issuance and intellectual property assignments signed.  When one of the founders leaves, and there is nothing allowing the company to repurchase their unvested equity, or worse  they don’t have the intellectual property assignments signed (so the startup doesn’t actually own the IP it purports to use in its business), problems have arisen. Some of the worst include where investors, who would have presumably otherwise invested, passing when they find out about the discrepancy, or other instances where a startup has succeeded despite the co-founder leaving earlier. But when the co-founder hears about the success he or she comes back and files a lawsuit saying they were entitled, as per a handshake arrangement, to X% of the startup’s equity.

In closing I will say that when possible I prefer and do use “plain English” agreements.  However, its not always possible.  It is beneficial to use documents that you know courts have passed judgments on before.  So when they see yours you can be relatively sure what will happen. Precedential value of various types of agreements outweighs readability and considerations regarding length.  If you or the individual you are doing a deal with do not understand the agreement you are using, then you need to sit down with your attorney.