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You need to read before you sign Your agreements.
It sounds simple. And it should be.
But there are so many people out there who don’t take the time to read important agreements, or don’t make the effort to understand them, or rely too much on the wrong people for guidance. They later find out that they have really bad agreements in place and limited options to make things better.
In the world of startups and small business, there is a wide range of good and bad business deals. Along the way, there are many bad agreements that somehow get prepared and signed.
Whether you are an entrepreneur, startup founder or a seasoned business executive, you absolutely should read and understand your agreements before you sign them. I know that you may be busy and it’s a lot of work to read and understand a contract that is longer than a couple of pages. But remember – you are signing the agreement and you will have to live with it and its future consequences.
Below is a real world example of a section of signed contract that has gone sideways in a big way. We found this contractual provision in an LLC operating agreement that had been signed by some smart and accomplished people about ten years ago:
“PURPOSE OF THE AGREEMENT. The parties recognize that in all human endeavors disputes arise. It is important for maintaining long, mutually profitable and satisfying relationships to have these disputes settled with a minimum loss of time, money and aggravation. Moreover, the parties desire that the process for resolution of a dispute be one which is mutually educational, allows all parties to learn more about the thinking process of another and is settled in a friendly, cavalier manner in the same way that two young friends settle a dispute by flipping a coin. The parties desire to avoid costly, lengthy court proceedings which many times are as primitive and barbaric as throwing meat cleavers at one another and many times result in the parties being chasms apart and so alienated that further relationships with one another are impossible. Studies and experimentation in human relations and psychology have proven that better techniques are possible, as exemplified by this Agreement.”
Sure, there are some good concepts in the above paragraph, but the LLC members who signed the agreement were asleep at the wheel and since have confessed to me that they did not read the agreement and only relied on the guidance from their attorney (a commercial litigator who likely was not qualified to prepare this type of agreement).
To help you with your agreements, below are some key takeaways that you should keep in mind as you build your business and start to negotiate and sign contracts:
1. Trust Your Gut. You do not need to be a super lawyer to know that there is something wrong with the above provision and likely other parts of the agreement.
2. Tip of the Iceberg. The above provision has some unusual language, but it fortunately did not create any real legal obligations for the LLC members. However, when you see strange language like this in an agreement, you should start to question the entire agreement, especially those terms that really matter to you. In this case, the iceberg was loaded. There were other provisions in the agreement that had serious financial and liability consequences for the LLC members, and it now appears that the terms had not been customized or discussed properly with the parties who signed the LLC agreement.
3. Read, Understand and Then Sign Your Agreements. First, you need to read the agreement. And if you don’t understand it, then you need to get some help to know what you are getting into by signing the agreement. If the agreement seems crazy, then it probably is and you should not sign it. If, however, you read and understand the agreement and it is consistent with your understanding of the actual business deal, then pull out your pen if you do not need any additional legal advice or counsel.
4. Caution with the Internet. We found the related form agreement on the Internet and the signed version was almost identical to the form agreement, with no significant changes. It was a bad starting point for an agreement ten years ago and it now has become an even bigger problem, because the LLC members do not see eye to eye and likely will not cooperate to clean up their earlier mess.
5. Manage Your Advisors. In this case, a junior attorney in a litigation-focused firm prepared the LLC operating agreement, while making minimal changes to a bad form of agreement found on the Internet. Certainly, the law firm did not do a good job on the initial formation project, but some of the blame also has to fall on the LLC members who apparently signed the operating agreement without reading or fully understanding it.
We hate to see entrepreneurs and small business owners make bad decisions or take ill-advised actions that easily could have been avoided with a little guidance and effort. In this case, a little reading and a few questions would have made a big difference.
It’s your turn – let us know some of the crazy contracts that you have encountered on your business journey, so that we can help the new entrepreneurs avoid these business and legal land mines.
