Legal Strategy Roadmap Part 3: Protecting Revenue & Profit

This is Part 3 in the Strategic Legal Roadmap series. In this note, we look at how you can use the law to protect your company’s revenue and profit.

Revenue is income from customers. Profit is revenue less the cost of producing that revenue. Both are governed by contracts – the contracts you have with your customers and suppliers. Your customer contracts can be thought of as “downstream” — the direction in which the value you produce flows. Supplier, subcontractor, and vendor contracts are “upstream” of the customer, in the acquisition of raw materials, supplies, and services.

Downstream Contracts

Whether written or oral, the customer contract contains all the essential terms of the deal: what, how much, when and how, and who. A customer contract may be a relatively simple consumer retail sales agreement – “buy one, get one free.” But if your customer is another business, or if the product or service is intricate, the deal can become quite complex, and the way that you have structured it can have profound consequences for revenue.

  • Services and Deliverables. Though often completed in a hurry, as a statement of work to a boilerplate agreement, the description of the services and deliverables will profoundly affect revenue and expense. Ambiguity in the statement of the activities, services, goods, outcomes, timelines, specifications, performance, and service levels, or a failure to delineate what is and is not being delivered can give rise to disputes or trap the seller or buyer in a deal they did not fully intend. In addition, it is essential that the statement of work speak to how out-of-scope work will be compensated.
  • Compensation. “How much” is just the starting point. You will want to consider the payment terms (can you wait 60 days?), the conditions for withholding payments, offsets to payments, payments for things that are out of scope, contingencies, or events to which the payment may be tied, etc.
  • Termination. How and when can you and the customer exit? If the deal becomes unprofitable, can you exit in a timely way?
  • Competition. Are you an exclusive vendor or can the buyer substitute you? Can you sell the same services to other buyers in the same industry?

Upstream Contracts

On the expense side of the profitability equation are upstream supplier, vendor and subcontractor agreements. If your agreement with your customer depends on third-party goods or services, you must ensure that – to the degree possible – your supplier agreements are a mirror image of your customer agreements.

  • Delivery Parameters. Commitments to the customer concerning the quality, number, timeliness, return and refund of products or services must be accounted for in the supplier contract, so you are not left holding the bag if the supplier fails to deliver to you. You must have ways of adapting and responding to customer demand – both as a legal matter and as a matter of sound business practice.
  • Confidentiality Obligations. If you have confidentiality obligations to your customer and share confidential information with your supplier or subcontractor, you must make sure that those obligations intended to raise money are part of your agreement with the supplier.
  • Intellectual Property. As with confidentiality obligations, it may be necessary for you to pass on any intellectual property licensing, assignment or work for higher provisions that govern your relationship with your customer.
  • Indemnities and Warranties. here too, your warranties to your customers any any indemnities that they have you agree to maybe transitive in nature and passed along in your relationship with your suppliers and subcontractors. Again, it is a matter of not being left holding the bag.
  • Remedies and Cover. If your supplier breaches the agreement, will you be able to fulfill your obligations to your customer? Are there ways of ensuring against problems, for example, by using liquidated damages clauses?
  • Term and Termination. If your supplier exits early, do you have alternatives? Perhaps you should make the supply contract more difficult to exit or have a definite minimum term and notice periods that allow you to adjust should the supplier decide to exit.

A big company might employ a “General Counsel” for strategic guidance, negotiation, and authorship of critical contracts. But if you don’t have such a General Counsel, this email series should provide a strategic roadmap for you to consider in your decision-making.

Legal Strategy Roadmap Part 2: Setting the Direction

This is Part 2 in the Strategic Legal Roadmap series. In this note, we look at the legal roadmap as the business is setting out, at or near inception.

Certain formative business and legal decisions set the overall direction for the business and affect downstream decisions for years to come. How the business is conducted when times get tough may determine whether it ultimately succeeds or fails. Essential power dynamics are written into certain key documents. And, would-be investors doing due diligence want to see ownership and management clearly and have a clean, up-to-date repository of company documents and filings.

Your General Counsel would advise you to carefully consider decisions related to…

  • Formation & Governance. What is the mission of the business? What does it do? This may have implications for its form (partnership, non-profit, corporation, limited liability company). As the company grows, it is essential to have a plan for how owners enter and exit and how profit and loss are shared. Voting rights will determine who maintains control over the company and the power of investors to affect the leadership and direction of the company. How is the operating agreement or bylaws amended?
  • Capitalization & Shareholders. For corporations, what types of security will there be – common, preferred, options? How are they converted? How many securities? What percentage of ownership? What valuation? What liquidation, and anti-dilution provisions? Preemptive rights? How does voting work? What about dividends?
  • Founders, Officers, Employees. What are the founders’ relationships to the company as concerns equity ownership, vesting rights, insurance, indemnities, benefits and the like? What incentives are offered to employees? Options? Warrants? Stock? What vesting periods and other conditions?
  • Filings. Have you filed your annual report(s)? Have you recorded votes and member actions? Have you paid taxes in the states you do business? Are there licenses, permits and other forms of government approval or validation necessary?

These “platform” issues for the business are usually addressed as it formally starts up, but they may occur later, as the business merges with another business or converts itself from LLC to Corporation (or vice versa).

To many entrepreneurs, these can be dull and difficult issues. Who wants to worry about voting rights when we are trying to get the product into the marketplace? They are nevertheless the most important issues you will ever deal with if indeed “Success” is your objective.

A big company might employ a “General Counsel” for strategic guidance in these platform issues. But if you don’t have such a General Counsel, this email series should at least provide you a strategic roadmap for you to consider in your own decision-making. Look forward to our next installment, Protecting Revenue & Profit, in our next email.

Sincerely,

Robert Kost

Principal Attorney

General Counsel Online

The Challenge of Everyday Law for Small and Mid-sized Businesses

Main street

A small business will retain an accountant, a banker, an insurer, a janitor and maybe an HR consultant or web marketer, yet it seeks out a attorney only when there’s trouble.  As the saying goes: that’s closing the barn door after the horse has fled. 

Just as you see a doctor before you’re sick to avoid getting sick, it’s worth having an attorney on-call if you should need an extra set of (trained) eyes on your contracts, your intellectual property and other day-to-day  business decisions.

Yet, we’re stuck with this conundrum: your business can’t afford a lawyer and can’t afford not to have a lawyer.

Find out how GCO addresses this conundrum — view Robert Kost’s live interview on LinkedIn, hosted by Josué Batista.