By Hunter Farrell
When technology companies are ready to form a legal entity, raise funds from angel investors or private equity, or sell themselves to an acquirer, they typically find an experienced corporate attorney to handle the matter. However, when they are contemplating entering into transactions to buy, sell, license or develop the technology-based products or services necessary to operate their day-to-day business – transactions that, in the aggregate, are crucial to the ongoing survival of the company – they often decide that they can handle the deals through the use of non-specialist attorneys or, worse, standard forms downloaded from the Internet.
I think there are some critical, significant benefits to using a technology transactions (“TT”) attorney, however.
Non-TT Attorneys May Be Less Familiar with Industry-Specific Issues and Risks
Technology companies that already have corporate counsel handling corporate formation, governance or financing matters sometimes decide that it would be more efficient and cost-effective simply to have the corporate counsel manage licensing and other technology transactions. Alternatively, some companies decide that it would be cheaper to farm the project out to generalist attorneys available through legal temporary placement agencies or through foreign legal outsourcing arrangements.
But different industries in the technology space have very different business models. Accordingly, in each industry sector there are different standard legal and business issues and risks that are critically important. A TT attorney who has had extensive, repeated exposure to transactions in a specific industry will generally be more familiar with, and have a more nuanced understanding of, business practices and contractual issues and risks for that industry. This allows the TT specialist to advise clients on industry norms and establish the most favorable business terms. Corporate attorneys, generalist “temp” attorneys and outsourced foreign attorneys don’t normally have the same regular exposure to transactions in an industry and may have little or no awareness of certain key issues and risks.
Downloaded Form Agreements Must Be Appropriately Adapted and Negotiated
Early-stage companies sometimes see the wealth of contract forms available on the Internet and conclude that it would be quicker, cheaper and nearly as effective to download a form and paper a transaction without the assistance of an attorney. While it is true that a wide range of high-quality, industry-specific form agreements are available on the Internet, these forms cannot often be used properly as an “off-the-rack” solution.
First, except in the most basic transactions (e.g., a simple assignment of a domain-name registration), technology deals generally have numerous unique deal terms. A downloaded form is very rarely going to match all of these terms perfectly. Thus the form is typically going to require significant adjustment of numerous interrelated provisions. It may also be the case that the selected form is not entirely appropriate for the client’s deal. A TT attorney who regularly drafts and edits transactional agreements is likely to do a significantly better job of ensuring that the selected form is appropriate for the deal and client, and that any adjustments are made with clear, industry appropriate language that minimizes legal risk and results in a consistent overall agreement.
Second, when a non-lawyer sends out a downloaded form for a deal, an attorney representing the other side may decide to make significant modifications to the form. The non-lawyer is then faced with the challenge of analyzing the risks and issues created by the changes and negotiating appropriate compromises. A TT attorney who routinely negotiates agreements in the industry will be more effective at spotting and negotiating any issues and proposing substitute language. This levels the playing field when negotiating with much larger companies that are represented by sophisticated counsel.
Avoiding Critical Mistakes
At this point, you might be thinking, “Does it really matter if the contract is not perfect? If it covers all of my key business terms, is it really important to obsess about obscure risks and minor inconsistencies? Life has some risks, and I know a lot of companies that get by fine without paying a specialized attorney to review this stuff.” My response is: while it is likely that nothing bad will happen, do you really want to roll the dice with your core IP assets or the critical vendor products and services you need to operate your business efficiently?
As the saying goes, it’s not a problem until it becomes a problem. If the business relationship unfolds as planned, you might never find out if your agreement is full of holes. When a relationship sours or a third-party lawsuit comes out of left field, however, one of the first things the parties will do is reach for the contract. If that document doesn’t correctly specify the appropriate transfer of rights, performance obligations of the parties, or limitations of liability, for example, it is too late to fix those problems after a dispute has started. And those gaps in the contract can have major consequences for the ongoing survival of the business. In future blog posts, I plan to delve into some specific types of contracts and highlight some areas in which inadequate language can cause real problems.
Lawyers That Actually Help Drive Revenue!
One final point I want to make is that a well-crafted contract, or contracting strategy, can help a business work more efficiently, earn more revenue and/or reduce costs. A TT attorney who is more familiar with contractual norms for the industry can help a client get a better economic deal. In addition, a clearly written agreement that spells out all of the necessary performance obligations of the parties will help facilitate a smooth working relationship between the parties and avoid squabbling about ill-defined responsibilities. As a result, the company operates its business with fewer expensive delays.