Drawing the line – walking away from a deal

October 30, 2009 at 8:07 pm Leave a comment

Getting anyone to even consider being the first customer is hard.  When you find such an opportunity you don’t want to lose it.  You feel you want to get the deal done no matter what it takes.

As an entrepreneur who is eager to get their idea validated by someone, it’s easy to get tunnel vision. It’s easy to become desperate.  Be careful!  Watch you step. You don’t want to agree to things that trip you up when you do have a successful company.

If your objective is customer capital, you are already well inoculated against one common disease among rookie entrepreneurs – dropping the price, even giving away the product.  Free trial!  As a First Sale First (FSF) professional your objective is cash.  As much as possible.  As soon as possible.  So, I’m going to defer the “value” discussion and talk about the silent killers.

In any B2B deal you are going to have some form of legal contract.  Not surprisingly, this document will be full of legal language.  Most business people I know avoid reading the contract carefully.  Some desperate entrepreneurs have been known to sign a contract from a customer without reading it.  They were very surprised years later when no one would buy their company unless they could get that contract modified.

First of all, you must read and understand the contract.  Don’t sign it unless you really understand what you are agreeing to.  Second you need to look for and address issues that come up often when sophisticated companies deal with early stage startups.

Look at the problem from the customer’s perspective.  They worry that:

  • the startup will fail and the solution they bought will be worthless
  • the startup will succeed but change direction, leaving them in the lurch
  • the startup will be bought by the customer’s competitor

These are all very legitimate worries and as a FSF professional you need to find ways to mitigate these risks for the customer.

Some customers try to deal with these risks in the legal agreement in ways that can be a real problem for you.  You should not agree to those terms.  One example is the worry that your company will be bought by the customer’s competitor.

One way I have seen customers try to mitigate this risk is to ask for a right of first refusal on the sale of the company.  They will require that you offer them the opportunity to buy your company on similar terms.  They think they will not let their competitor buy you without a fight.  If you agree to this, you will significantly reduce your chances of selling your company at a good price.  Many buyers will walk away from a deal because this contract exists.  If that happens, your only option might be to be bought by this customer.  Remember if only one person shows up at the auction, you, the seller, won’t get a good price.

If you cannot get them to remove this provision altogether, you should get them to limit the scope of this provision in the following ways:

  • make this applicable only for a small, named set of potential buyers – that should address their fears about their main competitor(s)
  • make this dependent on a certain level of spending by the customer – if they aren’t spending a lot of money with your company, how important is the issue anyway?
  • limit the term of the provision or the entire contract

This is an example of one issue that you need to watch for and fight for.  If you cannot get what you want, walk away.  You don’t want to win the sale and lose the company!

Advertisements

Entry filed under: new venture, raising capital, startup.

How do you find your first buyer? Anyone remember vaporware?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Previous posts

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 6 other followers


%d bloggers like this: