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Fucking Sue Me (pud.com)
695 points by pud 2266 days ago | hide | past | web | favorite | 148 comments

Contract reviews done by lawyers need to follow good-sense guidelines.

Some contracts are routine and don't need any form of customizing. The review in such cases is minimal and can even be skipped if the routine nature of the contract is obvious or if the entrepreneur is seasoned enough to identify a clean situation without lawyer help. Most such routine contracts cover simple cases, such as a simple nda or a recurring situation in which a basic template is used with no material variation apart from non-legal business items that typically get customized in an exhibit.

For most cases, though, the whole key to doing a contract right is to customize it properly on its material points. This means it should be clear, it should accurately reflect the intent of the parties, and it should contain basic legal protections for each party. It is vital to this process that both the lawyer and the entrepreneur understand what is material. Why? Because that determines the proper cost-benefit analysis for how it should be reviewed.

For example, say a startup is negotiating a 1-year office lease for only a few hundred square feet of space at a modest rental rate. That sort of lease needs very little lawyer review because there is not much at stake (the money is small, the location itself not particularly important to the startup, etc.). A quick read-through by the lawyer is the max that this needs and then only to see if there is anything wildly out of line in the document. What about a 3-year lease with more square footage and a higher rent? In that case, maybe a good high-level review is in order, with comments and mark-ups on a range of important points but little or no attention paid to boilerplate clauses that may be highly unfavorable to the tenant as worded but that are also highly unlikely to occur. And what if the lease is for 5 years with two 5-year options to renew, with a location that is very important to the business involved, and with risks (such as potential environmental liabilities) that can far exceed even the value of the lease itself if mishandled? In that case, lawyer review is normally vital and needs to be pretty thorough (including even haggling over much of the boilerplate language) because it is far more likely that contingent risks can come about over a lengthy period, the amounts at stake are greater, and the lease itself may be important to the business (e.g., a restaurant that depends heavily on having a particular location).

This same sort of approach applies to a whole range of contracts. What if your business is getting acquired or if you are buying a business? Well, if it is a little business and the purchase price is very small (say, $50,000), you can very likely be well-served by a canned form used for small business sales (brokers who do these deals use these all the time). Such a form will have basic provisions covered and will usually contain the most important warranties and representations but all of it will be bare-bones. This normally works fine for a small sale. Again, lawyer review can be skipped or done at the quick read-through level. But what if the business you are buying is going to cost you $1,000,000. In that case, you still are in the small-business category but the money is more significant. This likely warrants an intermediate level of lawyer review (contract needs to be customized for the deal, with proper account taken of whether it should be structured as an asset sale, stock sale, or merger - each having different tax consequences - and with careful attention paid to reps and warranties, to conditions for closing, and to collateral matters such as non-compete, etc.). This might take $5K or $10K or sometimes more in lawyer time but it is money normally well spent (it certainly is if you are a small business owner and $1M is a lot of money to put at risk for your situation). And, of course, once you start talking about acquisitions in the tens or hundreds of millions, you need major lawyer time to make sure the complex aspects of such deals are handled properly.

What about a license agreement? A small deal, with non-exclusive rights concerning routine IP needs little or no lawyer review. But a core OEM deal involving the licensing of IP that is at the core of your company obviously warrants significant lawyer review, especially if it involves joint development efforts, sweeping indemnification clauses that might trigger major liabilities, or other complications that require sophisticated handling of IP and other rights. Of course, there is also the issue of weasel language and its nasty impact if it is not caught and deleted from any major contract.

In short, lawyers and entrepreneurs need to be guided by good sense in handling these matters. It is not good sense simply to act as if lawyers are not needed. It takes only one really bad instance for most entrepreneurs to realize how bad a mistake it is to cut corners in really important matters. On the other hand, letting lawyers run wild with their reviews is foolish as well. Their time must be managed and managed well. It should be used where it matters and curbed where it doesn't.

Let the barbs fly, then, but this is one lawyer who will insist that the advice given in this piece may have a grain of truth in it but is too simplistic to cover most serious business affairs. It may work in a number of cases but it can easily get you into trouble.

By the way, I am not saying give an open ticket to lawyers. If your lawyer can't make good judgments concerning what is important and what is not, and can't manage time wisely, it is time to get a new lawyer.

It took me a while to learn how to talk to lawyers.

It is always wrong to ask a lawyer 'What do you think?' of a contract, they will always have different ways of saying what it says, covering different contingencies.

The right question is "What rights does this give me and the other guy?" followed by "What is my financial exposure?"

As an entrepreneur you probably want to leverage your work and sell it to multiple clients so a contract clause that prevents derivative works might be bad. If a contract clause asks you to indemnify someone else, you need to understand if they are going to be sued and for what.

A friend of mine once sagely said to me 'Errors and Omissions insurance is cheaper than a lawyer.' which was basically use insurance and good business ethics to keep your financial risk of being sued low.

That being said, you should read all contracts you are asked to sign. If they are full of a lot of distasteful clauses you can always just say 'no thanks.'

I think the problem a lot of lawyers have is failing to acknowledge the realities of a BIG A v small b situation like the one in pud's example. Of course, it is not the lawyer's place to make decisions on behalf of his or her client as to how much risk they accept in return for a big pot of money. Entrepreneurs need to be aware that their lawyer will always see risk as something to be minimised to the lowest possible level, which is not always something that is possible because of market realities. Equally when instructing a lawyer it is easy to set them on an overtly combative route if you give off too many signs of being up for a fight, or don't give clear enough instructions to the contrary: "Hey, I realise this contract is going to be totally in the other side's favour, and to be honest I have no choice in this. I am doing this deal regardless, so just flag up anything that is totally non-standard or is going to get me in a whole heap of trouble".

Why aren't there more standard contracts for the situations described in the article? E.g Construction contracts are generally standard documents with very well documented procedures in the UK even with large (say £50M+) contract sums. But this seems to be an exception, not many other industries do this. I wonder why?

Here in Sweden a lot of contracts are standardized. Extremely so in the construction industry.

We have a standard contract called "Avtal 90" (lit. Contract 90), that a lot of industries use.

It sounds like the OP didn't consider putting the lawyers in the same room and requiring a contract by the end of the day. That way your rights are protected and the back-and-forth doesn't take forever.

Of course, there is also the issue of weasel language and its nasty impact

Can you give some hypothetical examples of this?

tldr = Q.E.D.


At one extreme: giving your counsel veto power over what contracts you sign, and allowing them to bill time ping-ponging contracts until prospects give up.

At the other extreme: just signing everything and saying "fucking sue me" when things go sideways.

You should be somewhere in the middle. Contracts more often than not have provisions that are silly for you to accept verbatim. And, contracts more often than not have provisions you'd rather not accept, but that are baked into your prospect's own processes and not changeable.

No matter what you do, if you're being sensible, there are going to be tough decisions to make every once in awhile. If there aren't, you're probably doing something wrong. Like, for instance, signing tens of different contracts from giant companies without any legal review.

You need to be able to figure out what's negotiable and what isn't.

I work for one of those massive organizations that everyone hates doing business with, but sort of has to. I've watched dozens of vendors spin their wheels for months over boilerplate stuff that nobody is empowered to change. They ultimately lose the deal over something that ultimately didn't matter.

It's absolutely true. You have to figure out what terms are changeable and which ones aren't, and you have to know that sometimes you'll be accepting things you really don't want to, which means accepting risks, sometimes serious risks. But having said all that: in almost every contract, there's something crappy that can be changed.

Unless you're renting an apartment in Austin.

Isn't the "one extreme to the other" kind of the point of his post? Following his gut has obviously worked quite well for him.

It's refreshing to hear this side. And frankly, it doesn't sound like you know much about him if you're replying about "being sensible."

I don't know anything about him and I don't care. I'm drawing a line between two extremes and talking about the extremes and the middle. If he's somewhere in the middle, that's great. I would just hate for people to get the message from a post like this that legal review is a waste of time. We deal with it every week of the year and it never ends like it did in this story.

I think the point to "fucking sue me" is that you don't "fucking sue" someone over something trivial. So, if the dollar value of some provision in the contract is not worth the cost of a lawsuit, in a way, it is kinda immaterial to the agreement because it would cost more to collect.

So, I think the article is trying to hit the middle road you're advocating, though didn't make it as explicitly clear as it could have.

Here's the problem: if they do end up suing you, and you just accepted whatever provisions they put in their contract, you're going to be screwed. The first version of a contract always strongly favors the party providing it, it's not malicious, it's just the right way to do it.

It is never right to proffer a deal that you know to be unfair to another party.

You're presuming that it's possible to determine that, but generally it isn't. Generally, I know what's fair for _my business_ and it's the responsibility of the other party to determine what's reasonable for them. Different parties will each have their own evaluation of a contract term - I may view something as a major risk and want protection, while the counterparty doesn't view it as likely and is happy to give that protection. This is why negotiating deals can be so interesting.

Providing a contract that is favorable to your own needs, while not deceptive, is in no way unfair or unscrupulous. The counterparty always has the right to negotiate or simply refuse to execute the contract. You can't expect to anticipate the needs of both parties and to do so would just make negotiating a deal more difficult, because you'll have less flexibility to give the other side what they need.

It's not your job to anticipate all of the needs of the other party, but you should offer something that seems like it would be reasonably acceptable to each party. You shouldn't offer a contract you know to be "heavily biased" to the author -- you should write up a contract that details a deal you consider reasonable and fair and a deal you believe that the other party will find reasonable and fair, and further negotiations can flow freely. If you offer a deal you know to be unfair and the other party executes it, you should understand that they probably do not understand the terms or do not feel they have an option except to execute it, and that's exploitative. You can't really just shrug it off by saying, "Well, if they accepted it, they must think it's a fair and even-handed deal!" That's not realistic.

Quoth John Taylor, third President of the Mormon Church:

"It is a common thing among a certain class of men to say I made a splendid trade to-day with Brother So-and-So. But did Brother So-and-So make as good a trade out of you? If he did, all right. But if you, because you happen to be a little smarter, or shrewder on a trade than your brother, have got the better of him, it is not all right, it is all wrong, and I do not think it a credit for a man to be possessed of that kind of smartness. I do not think it a credit to anybody to want something which belongs to somebody else."

> But if you, because you happen to be a little smarter, or shrewder on a trade than your brother, have got the better of him, it is not all right, it is all wrong, and I do not think it a credit for a man to be possessed of that kind of smartness.

Actually, the best kind of deal is the one where each person believes they got the better of the other. To borrow an example that is not my own, suppose two people are arguing over who should have an orange. An arbiter who insists on fairness cuts the orange in half and gives each of them one half. The first person promptly peels his half and eats the orange segments, throwing away the peel. The other person peels his half and uses the peel to bake a cake, throwing away the segments.

You can imagine that if each person got his way, each would feel he had the better of the other, and yet, both would be fully satisfied.

That example does not make any sense to me. Why would one side feel they'd gotten the better of the opposite side just because both are fully satisfied? Surely interests must be aligned for any trade to be successful and satisfactory to the involved parties, but in your example, each man is happy to have had what he wanted, and neither executed a deal feeling they had been shafted. Neither took an unfair advantage of the other or left the other with an unfair share as enabled by circumstance.

An instance of an unfair deal is exploiting the ignorance of a newcomer by offering to take something that has great value locally for a price far below what your neighbors would pay before the newcomer realizes that his belongings have much greater worth in his new vicinity than they had in the old. This is a fundamentally predatory deal, and even if you lay all of this out in the fine print, it's your duty to establish at least a basic reasonable assurance that the party at the other end of your trade understands the circumstances surrounding it and is satisfied with the proposed trade.

Another example is that of an individual in desperate straits who is required to offload a good he'd otherwise keep or sell for a much higher price. It is reasonable to expect this person to sell his goods, but it is not fair to exploit his unfortunate circumstance and purchase the goods at prices in extreme disproportion to market value. While the person may even offer the good at an absolute bargain basement price in an attempt to move it as quickly as possible, I do not believe it is moral to buy something at much, much less than its normal value if you have the means to pay more. Perhaps some discount is reasonable in order to move the merchandise quickly, but it should not be disproportionate to the circumstance; even if the seller believes he'll be happy with the trade, it's not very likely that that happiness will stay. You're better off just biting the bullet and at least paying something that resembles the low end of market value.

Remember that when it comes down to it, our lives are all about the people that are part of them. Things and money come and go, bank accounts ebb and flow; people last forever, and people give real value to experiences and things. It's not worth shafting your neighbors left and right to save some cash.

I recognize that many disagree and believe that it's "every man for himself" out there, and that you should take advantage of your neighbor when you can get it. I believe that is fundamentally wrong, no matter how many others believe otherwise.

> That example does not make any sense to me. Why would one side feel they'd gotten the better of the opposite side just because both are fully satisfied?

They'd feel this way if they did not know what the other side intended to do with what they received. I think it's pretty common to keep quiet on the the reasons why you want something during negotiations, to avoid giving the other party leverage.

I generally agree with you about fair and unfair deal-making. I think it is always important to consider more than just money when you are making deals, for example, you also are dealing in your own reputation when you make agreements with people. A deal that is grossly unfair to the other party from a financial perspective may also carry a heavy cost to your own reputation (which could also have future financial consequences).

That said, I don't think there is anything immoral in coming out of a deal in a better position than the person you made the deal with. Not every deal is equally beneficial to all parties involved. I have made some deals where I am sure the person I dealt with got a better deal than I did, but so long as I didn't feel ripped off, I was okay with that.

"It's not your job to anticipate all of the needs of the other party, but you should offer something that seems like it would be reasonably acceptable to each party."

I don't agree that it's possible to know what would be "reasonably acceptable" to the other party when I don't know the inside details of their situation. I'm not their lawyer. Should an agreement be commercially reasonable? Of course. But there's a gulf between that and "reasonably acceptable."

Define "unfair". Every contract I've ever seen has been biased in favor of the firm writing the contract. Is this "unfair"?

If you want "unfair" - try looking at some term sheets....

Yes, it is unfair to offer a contract that is "biased" to the firm that writes it (within reasonable definitions of "biased").

But it might be legal.

You're assuming companies act rationally and won't sue you if it costs them money. That is a dangerous assumption: one guy that you pissed off is enough to send you down a dark hole.

Also some companies have lawyers as employees. They have to do something with their time.

I know of trading firms who will sue to try to enforce a mostly unenforceable non-compete agreement on a trader who leaves just to piss them off and waste their time and money to protect themselves (and try to scare others from leaving in the future). But...this is the exception. No one said hedge funds were rational!

If you accept their version of the contract verbatim, chances are they haven't specified a maximum dollar value of your liabilities to them. Of course, it might still be a losing game for them to sue you into bankruptcy, but that doesn't mean they won't try.

I think that 'unlimited' personal liability needs to be put in perspective; I mean, you take the same risk every time you drive anywhere. Think of it; If you kill someone, and you very easily can when operating a motor vehicle, you can easily be liable for millions of dollars of civil damages. (not to mention the death of another human being.)

Yeah, you have insurance when you drive, but that only covers you up to a certain limit. you can get liability insurance for your business that does the same thing; and judging from the relative costs of those two types of insurance when I've gotten quotes, when you are small, you should probably worry a lot more about the liability you incur when you drive than the liability you incur when you sign a contract.

> So, if the dollar value of some provision in the contract is not worth the cost of a lawsuit, in a way, it is kinda immaterial to the agreement because it would cost more to collect.

It reminds me a little of something Ferriss wrote about in 4HW - just telling some of his minions that if it would cost <$100 to make a problem go away, they had his standing permission to spend that <$100.

> Then there was the time I wanted to hire my first full time employee. I was apprehensive to do it because I only had enough money to pay him for 2 months, unless I got another client fast.

> “Worry about that in 2 months,” Dad said.

Speaking from the perspective of that employee, fuck you.

OK, for the serious point: you may be not give a shit about risk. Good for you, you crazy risk taker! The world truly needs more people like you.

But for me? I've got a mortgage and a car payment and a wife who is trying to go through graduate school. I need to know that my ass isn't going to come into work on the 61st day and hear you say "Well, looks like we're outta cash -- sorry buddy..."

If, on the other hand, you share that risk with me up front, thanks -- you're a good boss.

Then don't be employee #1. Ever.

I get your point, but if those things are true, then that would not be the proper job for you to take, no matter how risk prone or risk averse the founder is.

Being employee #1 is the worst of both worlds. You get the risk of a startup and you most likely will get very little payout if the startup is successful.

Most of the people I know that were employee #1 got nothing.

Yes, employee #1 is almost always the worst-off person in the company. They get to work like a founder, without the financial benefits. I've been there twice; it isn't a lot of fun.

Either found or join a company that has funding.

There's another perspective that is equally true: Employee #1 is getting paid to see how a startup is created, struggles, pivots, pivots again, and eventually turns into a viable business. There is no better way to prepare yourself to be a founder than to be an early employee in a startup.

I definitely understand where you are coming from (and I didn't downvote you), but I have to disagree.

That employee (we'll call her Sarah) isn't being paid to see how a startup is created; she's paying to see how a startup is created.

She's paying heavily. She's losing money in the form of a lower salary compared to equivalent jobs, and she's losing money in the form of losing free-time compared to equivalent jobs.

Sometimes, that payment is very worth it. But it's a payment.

Not to mention that employee #1, if an engineer, is probably chained to the engine block (figuratively), toiling with keeping the machines running. He/she most likely remains in the dark when it comes to the business development and deal making that are all important for succeeding as a startup.

Exactly. This is my biggest problem with the "earning versus learning" philosophy. Both times I was employee #1 the founders had no interest in sharing any aspect of the business side of the company. I was there to build the product; anything else was a distraction.

Isn't it normally that employee number 1 get's some stock options?

Employees are less likely to make money from stock options than actors are to make a cut of net profit.

If you don't get the same type of stock as the VCs, and under all the same conditions, it's worth pennies on the dollar at best and likely simply zero.

That's reassuring.

(putting in my two weeks notice tomorrow to be employee #1)

I know it's probably the furthest thing from your mind right now, but I think it'd be really interesting to hear how this works out, say a year or two from now

Make sure that you'd be happy if you worked long and hard for the start-up and all you got was the salary they're paying you + the experience.

Even if the start-up is a huge success, the chances of you making substantial amounts of money are low, unless you have founder-level equity.

My husband was an early employee at a company that was acquired in a mid-nine-figure deal. The founders walked away with at least a hundred million each. Employee #1 got a low seven-figure payout, after about ten years of grueling overtime. Keep in mind this was actually a company that is IMO unusually fair and considerate toward employees.

You really need billions of dollars coming into a company before non-founders have a chance to make fuck-you money.

Not to worry, they've just read the article on why you should not be the first employee in a startup, and more specifically, what terms you should not necessarily agree too.

Being the first employee of a startup can be the best thing since sliced bread. You take little risk (compared to the actual owners), yet the reward is usually way better than employee number 100. Who do you think is more likely to get 1) a bumb in pay and 2) a better position first?

Most startups don't get anywhere near employee #100. If you're in a startup that does, you'll likely be happy to be either #1 or #100.

Being #1 means you work as hard as the owners but for much less -- often you will end up making less than you'd make elsewhere.

Being an early hire seems to be about trading salary & security for experience running a business. Friends who have joined a startup early have said it's the absolute best way to learn what to do -- and many times, what not to do -- when you're starting your own company.

Of course, YMMV. I've heard from plenty of early hires that don't end up near the business side, and don't get much out of it.

The learning is incredible - esp. if you've never been in a startup before and you don't have a business background.

Just go in with your eyes wide open, and don't expect to make any money off the stock options. Figure out what you need to do to get your startup off the ground better. Be flexible in doing whatever necessary as Employee #1.

Had huge learning in 6 years. So although I took a pay cut, and I made 0 on stock - I would recommend it to others.

Being employee #1 is fine, but you should be asking questions like 'how much money do you have?' and 'when will it run out?'

I've been employee #1 and in the position of having to find another gig due to the company running out of money. It sucked, but I was prepared for it since I knew what our runway was and what our situation with funding was.

You might be employee #20 - they can still lie to you and tell you everything's fine, then run out of money in a matter of weeks.

Was employee # 100000 or so at Dell. Still got laid off. No security anywhere, sorry, its all an illusion.

Hey, may as well be an entrepreneur!

You should still be honest with employees. They'll prove better in the long run if you are. Not a lot of stories where withholding the truth from your employees ends up being something that a boss feels great about...

It's a very fine line. I'm not disagreeing with you entirely, but every startup I have been at, bar one, has run out of money. Sometimes multiple times. You get bridge loans, venture debt, whatever. I also find that even most seasoned startup employees don't really understand the finer points of finances in a venture backed company and how quickly goings can turn.

It would generally be advisable to tell someone coming in "We have 2 months of finances, but expect (or need) to close this large deal to get some sustainability." But at what point do you not need to have that conversation? With 6 months of money? 12? 24?

Yeah, I see no problem if you tell the employee, "I can pay you for two months." At least he knows what he's getting into. Besides, even a "safe" job can abruptly end, often with much less than two months' notice.

>> Then there was the time I wanted to hire my first full time employee. I was apprehensive to do it because I only had enough money to pay him for 2 months, unless I got another client fast. >> “Worry about that in 2 months,” Dad said. > Speaking from the perspective of that employee, fuck you.

Yep I agree that does sound a bit irresponsible, though realistically I doubt most employers have more than a few months salaries stashed away in their bank accounts to pay employees.

Better advice from his father would have been to wait till he at least got another client first, then he could justify getting another hire - if just to work on the new client project.

There is risk everywhere, getting out of bed in the morning is a risk.

Working for a start up is almost always inherently more risky than working for BigCo, regardless if you are employee number 1 or not.

Why are you automatically assuming that the prospective employee had no idea that his employment was not completely assured beyond 2 months?

Pretty much all employment is risky. It doesn't matter that you have a car payment and a wife going thru graduate school. Those are financial risks you took.

Your employment could end at any time. The company could be seized by the government as part of some investigation and shut down, the CEO could be hit by a bus, you could screw up in a big way and get fired. You could be hit by a brain aneurism and simply not be there to provide for your car payment and your wife's schooling.

Every employee is taking risk that their employment might end for any number of reasons.

This is one of the reasons that, when something like that happened to me, I said "That's it, my livelihood will never be in someone else's hands again" ... and have been self employed / doing my own startups since.

Just because these things can theoretically happen at any company doesn't make them equally likely. Startups are far more likely to go bust or lay off people with little warning.

The difference is that most of those things are risks you can't reasonably plan for. If you know that the start-up you're working for has x months of runway, then you can plan for looking for a new gig, ensure you have savings to carry you over, or decide to work elsewhere.

But you can't plan for it if the company's owner hides it from you. If you think you need to lie to your staff about the company's finances, then you're an untrustworthy prick.

And if you get lucky, no one will ever know. And if you don't get lucky, everyone will know that you can't be trusted, and that could affect your ability to get contracts and employees at your next venture.

I agree with you, but I'd like to point out that the article was expressing apprehension at hiring the guy (e.g.: he was concerned as to whether he'd be able to keep him employed for more than 2 months)... there's no indication that the financial state of the company was hidden from the employee.

At least in my experience, while I haven't known the exact financial state of startups I've worked for, I've generally known the level of risk I was signing up for.

If you're completely up-front about the financials then there's no reason to be apprehensive, surely? After all, the employee is deciding their own level of risk then.

There's no way never to have your livelihood in someone's else's hands ever again; the world's too small. Probably the closest thing is growing your own food in a remote area based only on supplies you produce, but that leaves you exposed to acts of aggression aimed at control or destruction of the land.

Your livelihood depends on so many people when you're doing a tech startup (your clients, the organizations running the internet, the government, the army, your neighbours) it's not even funny.

I absolutely agree. There are zero guarantees in life.

I left a reasonably stable small company to take a risk as employee #2. But where my experience may have diverged from what OP describes was in the hiring process. My new employer was very up front with the fact that, hey, it's a startup, and it might not take off. We discussed some alternative options & put some timelines in place to help reduce the risks I'd face.

Might everything fall apart tomorrow? Sure. But my company was 100% up front with me regarding my risks -- at least if we fail, we fail together.

I've had friends who have joined companies as the #1 where the owner completely misrepresented the situation of the company throughout the whole process, were burned, and are now working stable jobs that they hate. That's the biggest shame of all.

Two things:

1. They will sue. Medium to large - in fact any mature business, considers lawyers and the threat of lawsuits and litigation as a cost of doing business. They don't get emotionally involved, they just do it. FYI, looking at lawyers & legal as cost of doing biz is a healthy attitude and may save you a heart attack.

2. Telling someone to just "fucking sue me" or simply "sue me" makes it combative and I made this beginner mistake early on in being a CEO. I actually simply asked their lawyer if he thought his case "actually has any merit?" in a cocky tone in a phone call. Turns out he thought it did. Once I had capable council on my side she had to work hard to make nice with the other side and bring it to settlement hours before we were irrevocably committed to litigating the issue.

Lets put it this way: Wouldn't it be awesome if everyone you signed an agreement with "just signed it"?

That's right, they will sue. My company has been sued several times - so far, we've prevailed, but it takes time and money to defend a suit. MUCH better to avoid if at all possible.

I have a corollary: you're not a "real business" until you've been sued. (!)

This poor advice is like saying you can save money by not paying insurance premiums. Of course you can - until something goes wrong.

A better lawyer would have been able to amend that contract with minimal fuss. I used to get a legal briefing on the dodgy parts of the contracts I was asked to sign, along with sensible suggested changes that often benefited both sides (eg. termination clauses more appropriate to the length of the gig) I'd then send through the amended contract and discuss all the reasons for the changes with the client. Never had any problems.

I think his dad is a good advisor.

The reason he was hard to sue is that he's so small. If things went really South on a small project, what's the worst thing that happens? He's 22 and talented in New York - he declares bankruptcy, and gets another job or stays on Dad's couch. This is a situational thing - you can accept liability when the downside is so low. This is why legal departments in small firms are much gentler than legal departments in the Fortune 500. Of course this doesn't work for a large firm, or someone with 3 kids and a mortgage. His dad would have said, "Go get a real job" or something like that.

Similar on the hiring - when you're that small, you invite someone to take the risk for you. You can take more risk when there's limited downside. And in this case it was the other guy's downside - if there was no work, he'd be the one in trouble.


Put another way:

Odds of getting sued: 1%

Max downside if he gets sued: What? 50k before he declares bankruptcy?

Ok, so risk adjusted cost of the "just fucking sue me" approach: $500.

$500 vs. $350,000...hmmm...tough choice.

You might say, well, it's not as though it's one or the other. You can request reasonable changes and not jeopardize the 350k.

Well, ya, I suppose so, but what are the odds that any request you make will kill the deal? If it's also 1%, then the expected cost is $3500.

That's still more expensive than the "just fucking sue me" approach. In reality, the odds of killing a deal over contract disagreements are much higher than getting sued.

Right, how much could that company have sued him for?! Hahhaha, he wouldn't have written this article if not for the risk that he had taken! Its a nice way of telling people -- 'go take risks, be happy man!' :D

Here are some specific contract provisions that can cause real-world problems for your business. (Shameless plug: These are discussed, and illustrated with true stories, in my short e-book, Signing a Business Contract: A Checklist for Greater Peace of Mind, at http://www.ontechnologylaw.com/before-you-sign-a-business-co...)

* Most-favored customer clauses

* Exclusive-rights provisions

* Indemnity obligations

* Automatic renewal

* Confidentiality obligations (or no confidentiality obligations)

* Termination for convenience

* Unilateral amendment rights

* Best-efforts obligations

* Assignment-consent requirements

* Non-compete / no-hire / no-solicitation clauses

* Tax consequences

> Then there was the time I wanted to hire my first full time employee. I was apprehensive to do it because I only had enough money to pay him for 2 months, unless I got another client fast.

> “Worry about that in 2 months,” Dad said.

This seems really dishonest. Yeah, everybody knows that startups are risky, but if you can't afford to pay more than 2 months of salary, then don't hire a full-timer. Either find a co-founder or hire a contractor instead.

Not many companies could afford to pay their entire payroll for a quarter, if sales were $0.00 for that quarter.

Most companies also have steady revenue streams.

Or at least revenue forecasts.

Like other comments said, any company should have a revenue forecast. Companies that don't have a steady revenue stream will have enough cash from either capital reserves or financing. If you don't then don't hire a employee.

Companies that already have employees and forecast they cannot make payroll (say) 6 months from now will typically either borrow money or start lay-offs, not hire more people and worry about later. Failing to pay wages is a serious problem.

I once rode a motorbike drunk, with a stranger sitting behind me. We didn't die. Lesson learnt: I got lucky.

I don't drive drunk any more :-)

I still show my contracts to my lawyer, and sometimes really fight for certain clauses, but I'm realistic: Sometimes having a signed contract is more important to me than certain categories of unlikely risk mitigation.

If you have the luxury of leverage -- the ability and willingness to walk away if the contract isn't perfect -- then yes. Hammer it out to protect your interests.

But if the contract is critical to the company's survival, then he's right: Just sign it. It's better to have an income from an imperfect contract, then no company at all because you've run out of money.

Me too, although I think that contracts are only worth how much money you're willing to spend to defend them with lawyers, court costs, etc.

Good customer service gets you out of most predicaments, so I review the contract but spend more time worrying about how to serve my customers.

My experience is that the people who jerk you around with contracts are usually bad payers. If it's a bad contract then the prospect of income is very uncertain.

Business ultimately relies in trust, if they give you a poor contract then it is a strong reason not to trust them over anything.

I went back and forth with one client for about five months on a contract worth about $300k.

They actually started PAYING me on milestones well before the contract was signed. We didn't nail down a final version until just before the last milestone payment.

They paid in full, no delays -- they even paid extra for when they wanted additional changes out of scope. In my industry (games), it's actually quite common to start work on a contract before it's signed.

They were a rather large company, granted. But yes, don't DO a lot of work for someone you neither trust nor have a solid contract with.

If the contract allows them to weasel out of giving you any money at all after you've put significant time and resources into it, then that would be qualify as "I sometimes really fight for certain clauses". Ownership of IP is another critical nonnegotiable for me: If I have a library that I own and I'm using it in someone's product, it's going to be spelled out in the contract that I still own it (work for hire notwithstanding), or I'm not signing.

But if you're talking about unbalanced boilerplate legalese (nonreciprocal indemnification or nondisclosure, or clauses that otherwise aren't ideal according to your legal counsel), then I still agree with the article.

The lesson here: it was 1998. "The industry" was still a little fledgling, so the legal territory was still largely unchartered. But it grew into an ugly duckling, quickly.

Sent the contract to my lawyer. She marked it up, sent it to the client. Then the client marked it up and sent it back to my lawyer. And so on, back and forth for almost a month.

Garbage in, garbage out. During the "ugly duckling" phase, the legal machine is just learning that it can spew garbage. It tests its limits. Just how much garbage can it spit before something happens? When the garbage is between private parties? Apparently, a lot.

I charged my first client $1,400. My second client paid $5,400. The next paid $24,000. I remember the exact amounts — they were the largest checks I’d seen up til that point.

Then I wrote a proposal for $340,000...

The Bust was just growing pains.

It probably could be reasonably argued that the industry is still in an ugly duckling phase (multi-Billion dollar valuations, really?)

But this is part of growing up.

In Code and Other Laws of Cyberspace Lessig writes:

It is a lack of a certain kind of regulation that produced the Y2K problem, not too much regulation. An overemphasis on the private got us here, not an overly statist federal government. Were the tort system better at holding producers responsible for the harms they create, code writers and their employers would have been more concerned with the harm their code would create. Were contract law not so eager to allow liability in economic transactions to be waived, the licenses that absolved the code writers of any potential liability from bad code would not have induced an even greater laxity in what these code writers were producing. And were the intellectual property system more concerned with capturing and preserving knowledge than with allowing private actors to capture and preserve profit, we might have had a copyright system that required the lodging of source code with the government before the protection of copyright was granted, thus creating an incentive to preserve source code and hence create a resource that does not now exist but that we might have turned to in undoing the consequences of this bad code. If in all these ways government had been different, the problems of Y2K would have been different as well.

[source: http://www.code-is-law.org/conclusion_excerpt.html]

This is dated (1999), but interesting. He was wrong about Y2K, of course, but not about the underlying issues and problems with contract law and IP.

Why would a coder ever be held responsible for something not specified in the requirements doc? If people wanted Y2K compliant software in the 70s and 80s they should have specified it.

As for multibillion dollar valuations, what's wrong with the valuations on MSFT, AAPL, GOOG? If you think the PE is crazy on LNKD, just short it. As for what VCs are willing to invest for particular companies those investments are more anecdotes than data.

Because it's not unreasonable to expect the coder to supply you with something which will not fail arbitrarily in 10 years for a reason which is 100% predictable. A parallel example: If an Architect designs you a building which develops a leak because of a mistake in a construction detail you would sue for the cost of repairs and damage to property. Either in contract if available or in Tort for negligence if no contract exists.

>Because it's not unreasonable to expect the coder to supply you with something which will not fail arbitrarily in 10 years for a reason which is 100% predictable.

Really. A coder is supposed to know that he should spend unnecessary resources (memory, mainly) to add a feature that will be needed in ten years for a program only expected to be used for five years? Most of the problems (that didn't happen is it turned out) with Y2K were because many programs that were expected to be replaced weren't. And before the mid 1990s RAM was seriously expensive, people did not buy more than necessary, "Just in Case".

Buildings are expected to last, and cutting corners (on multi decade support, for example) is not exactly a "mistake" like the one that would spring a leak. Aside from that, where do you draw the line?

If the software doesn't work with accented characters and it wasn't in the specs, do you blame the coder? Reading that common-but-not-currently-used-here file type? IPv6 support?

Maybe it's because I'm a coder, but if you want a building to withstand an earthquake, you gotta say so.

Buildings also need to be maintained and retrofitted. Around here in Cambridge, there are countless residential and commercial buildings that were built before the days of electricity and air conditioning, and even plumbing in some cases. The maintenance costs often far outweigh the initial building costs, even given inflation.

Defects that are 100% predictable do not fail arbitrarily, they fail predictably.

I suppose you've never used a fixed size data type (eg. int) as a primary key right?

Linkbait. Some of my competitors write contracts specifically so that they can sue other companies. How about this, I fucking read my contracts and I don't sign bullshit.

Thanks for sharing this. Do you have any tips for things to look out for?

The main thing I look for is unknowable downside. For example, when a big company asks my small company to indemnify them, I always limit the indemnification to whatever they paid for the work. If they don't like that, then I get a different client.

ALSO, NEVER let lawyers run the show. Lawyers are your water boys/girls -- they do what YOU want them to do. If they don't, then get a different lawyer. YOU have to read and understand everything in a contract -- and lawyers can help you do that. But in general, you tell your lawyer what you want, and she does it. End of story.

Keep in mind that Pud is the original Mike Arrington.

Articles like this depress me, because in 1998, I totally knew how to make websites, but didn't know I could make money doing it. Instead I was 18 and doing what I was supposed to do, that is I was busy going to school, and now I'm 31 and still in school not making money. What's wrong with me? Sigh.

When I started out as freelancer, my first three invoices were not for $1400, $5400 and $24000 respectively, and then a potential $340000! They were more like $300, $310, $260 etc. Maybe I'm doing something wrong too. I'd like to see my revenue explode exponentially.

hey, you're not alone :)

I was in the UK in '99 working a string of crappy low paying jobs whilst reading job ads offering £100,000 + car + rent in London for Y2K work. I never applied for any of them because I didn't consider myself worth that much money

Wasn't until years later I found they were taking on pretty much anyone who could turn on a computer. oh well...

It's still possible to make money building web sites, perhaps more so than ever. If you aren't happy with still being in school, why aren't you putting the pieces in place to start your own web development practice?

You make a good point. Mostly the answer is that after 10 years I'm definitely going to see this through and finish my degree :)

But also, 10 years ago I might have been interested in web development, today I have developed skills in other areas (robotics, embedded programming, etc). It would be a shame not to put them to use. Perhaps more importantly, if I got back into web stuff, I'd be quite far behind in the game; I simply wouldn't have the skills for someone with my experience level. Probably I could get up to speed quickly, but I'd prefer to stick to what I know; there just happens to be so much work in web stuff lately that looking at the job market I sometimes get this omninous feeling that I've been making a mistake...

Anyways, looking for work now for when I'm done my degree later this year, so we'll see how it goes. I have an impression that this must be a common feeling for people at the end of their doctoral studies, so I try not to be overly worried.

At certain times in certain industries, it definitely pays to be brazen and shameless, particularly with your rates and aspirations. I never was either but am becoming more so after a great deal of hindsight :-)

A. Men. I recently lost my job, and am re-learning to program. I annoy myself with the skills I've forgotten, now knowing what I missed out on.

I think the lesson is here it's all fine and dandy until someone does sue you. Then it's a different story.

If you're a 22-year-old with no assets it's probably not much different; you lose a judgment and declare bankruptcy and that's that.

If you're older and have a lot of assets, you just do it via a corporation and it's the same, thanks to the magical unaccountability of the corporate veil.

IANAL, but signing contracts in bad faith may under some circumstances be tortious. Your corporate liability shield probably does not protect you from tort claims.

You are shielded far more by your lack of meaningful assets. You aren't worth anything to sue. But there are clients, I promise you, who will turn out to be vindictive.

Incidentally, if you're 22 years old, you should still have an LLC.

Nowadays a lot of companies try to add clauses that pierce the corporate veil (for example, having personal guarantees)

For all kinds of things, like leases and such were the company is too young to have any credit. But a personal guarantee on delivering a website on time would be a bit much.

For longer projects, you should be asking for some sort of upfront payment (to avoid being screwed over -- i learned that the hard way).

In that circumstance, companies may demand some sort of clawback if benchmarks aren't met.

bankruptcy (at least here in England) means you're royally fucked, especially at 22.

In the U.S. it depends somewhat; if you have a place to rent (e.g. know your landlord or it's via a friend) it's not a huge deal. You won't get a mortgage, and it'll make getting new credit cards or rentals from strangers harder, but not life-ending. Especially if you have a glamorous story behind it, like going bankrupt due to your tech startup being sued into oblivion...

I agree with the sentiment of this point in general I think. Having counsel read every single contract and letting them wrestle directly with clients is probably a bad idea. Your lawyer will have only your interests in mind (or theirs, who knows?), and it probably won't lead to much productive happening. And even further, taking a few business law classes would be cheaper than using up tons of lawyer hours and probably net a better end result.

Anecdotally, At Arcturo, both myself and one of my principal guys have a good bit of contract reading experience (he much much more than myself). Every time I get a contract, I toss it to him and let him give me a thumbs up/down/comment. Having him around to handle reading things over and nit picking (often times to the point of having their lawyers concede points to us they hadn't addressed or thought of) has been awesome. If you can find someone who has a lot of business operations experience and can also hack code, they'll add a LOT of value to your company.

Remember watching a vid (1) where Pud explicitly mentioned his mom being said lawyer and his dad (as mentioned in the article) being the entrepreneur. Wonder why he left that out this time. I certainly enjoyed the dichotomy know who his folks were and what role each played. (1) http://vimeo.com/25489184

Certainly puts things in a different perspective.

His mother tanked the first deal? So his father told him to fire her? I'd love to be a fly on the wall at that family christmas.

Just change that one line "He was right. I got the job, they paid, things went well, nobody got sued." to "He was wrong. I got the job, they didn't pay, things went horribly wrong, everybody go sued".

Even if it were changed to that, the story wouldn't end with "I couldn't buy food, my macbook pro got repossessed, and I went to federal pound-you-in-the-ass prison."

If you do get sued and your business collapses you can always start another one.

Personal liability would be a nasty thing to deal with after your business failed. And you may not get to start another company with a huge personal debt.

I wouldn't sign a contract for personal liability on something that big, but bankruptcy law exists for a reason.

Didn't the US essentially nullify bankruptcy laws towards Bush's second term? As in, you can declare bankruptcy, but it doesn't clear your debts?

Uh, no. You're thinking of BAPCPA, which sucked, but was a far cry from what you're suggesting. Chapter 7 (straight liquidation) is harder but still very possible, especially if you've just been slapped with a multimillion-dollar verdict, while Chapter 13 (individual reorg) came out mostly intact, and 13 does result in discharges (but there are limits to the amount of debt you can have and qualify for 13).

BAPCPA: http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and...

Chapter 7: http://en.wikipedia.org/wiki/Chapter_7,_Title_11,_United_Sta...

Chapter 13: http://en.wikipedia.org/wiki/Chapter_13,_Title_11,_United_St...

Cheers, thanks for the info.

It's so easy to incorporate it should always be done. I assume when someone starts working with that kind of money and has knowledgeable lawyers advising them that they'll be told to do that.

The point is that signing a contract for personal liability negates the incorporation.

Incorporating without sufficient capital makes it almost trivial to "pierce the veil" of incorporation and go directly after the company's owners.

That seems somewhat backward, because it would discourage those with limited assets from starting businesses and trying to improve their situation.

The contract had a personal liability clause, apparently. Assuming those are enforceable, it seems like you're downplaying the downside.

"Just be lucky like I was" is rather poor advice.

To clarify though, I believe the success he's had is most certainly NOT luck but rather hard work and merit. My comment was referring just to that specific article.

Did you read the very last line of his post? "I’m not sure what the lesson is here."

I don't see him giving advice to anybody. I see him recounting some rather... debatable decisions early in his career.

Yeah, but if you're recounting what has worked well for you in your career, you're giving advice - even if you qualify it at the last minute with a totally wishy washy ending like that.

Also, if you've followed Kaplan since his (awesome) "Fucked Company" website you'll know that the man is no babe in the woods. IMO he has too good a grasp on the nature and consequences of risk to be "not sure" what the lesson is here.

Well, your business may well not be like his business. First, it was all new then, and the first half of the swhoosh to the top.

But being of the conservative sort, I have generally had a lawyer review whatever contracts people want me to sign, firstly for him to explain what it really means--what are the actual risks. Even as a very young fellow in my first one with a contract, I knew enough that it was for me to make the business decision and for my lawyer to explain what the legal ins and outs were.

Then there was the fellow who liked to do negotiation by contract. It said that everything that I did they owned, probably back a year before I started, and that if I didn't perform the would take my house and my first born, but then on the second page they said that we are kidding about the house. And it was from a law firm that was bigger than most buildings, and Very Famous. But I pushed back and after a couple of cycles got things to be in a reasonable state.

In another long-term consulting contract negotiation, my lawyer's first response after reading it was one word "Egregious". Fortunately, I was able to hammer that into better shape. This was one where the contract was supposedly non-negotiable. I learned something there.

But in no world that I am familiar with does it make sense for the lawyer to do the negotiation. They (in all likelihood) don't understand your business as well as you do.

Even though I have been doing this for a while now, I wouldn't sign anything without a lawyer's review.

But I have also been at the other extreme, where there was no contract for a multi-year deal and it worked out well.

Use a lawyer, but use the lawyer wisely.

The interesting part of this from my perspective is "my dad - a lifelong entrepreneur."

I recently saw that pud is a year younger than me, and we entered the job market at almost the same time with similar skill sets. Why did it take me so goddamn long to pull my head out of my ass and finally start my own company (at 35)?

Perhaps pud's acceptance of risk has a genetic component, or at the very least he was brought up in an environment where he learned to adjust to uncertainty.

He credits laziness - but we all know that lazy + smart = effective. I wonder if that's part of entrepreneurial DNA as well...

We don't necessarily need to turn to genetics to explain this.

When one of your parents is an entrepreneur, being an entrepreneur yourself is a natural and obvious option -- but when no one in your family has ever started a business, it's anything but.

When I was younger, I simply didn't think 'hey, I could start a business' when thinking of things I could do with myself.

I wouldn't be so hard on yourself. We're all products of our environment.

Sounds like the opposite advice to: http://www.vimeo.com/22053820 (Fuck you, pay me).

Should have found a better lawyer.

If you are the small guy, then try to get YOUR document to be the starting point. Use YOUR law firm to write it. Go to a law firm and tell them to use something from a similar contract before.

If you expect there will be negotiations, basically try to use and re-use your standard document. You are going to be in this business for a while, hopefully. So you only have to pay for your standard document once. Plus you'll know the ins and outs of it better than anyone else.

I think the right solution these days is to insist on standard documents and focus on the amendments rather than getting something from scratch. There is a good list of documents to form startups, for example, here:


Similarly there are things at legalzoom and other places. I realize that sometimes the big company will insist on going with their standard contract, but if they were really that adamant, they wouldn't let you go back and forth with your lawyer too much. Just start with your own document or walk away if you don't want to take the risk.

One of my favorite bosses was general counsel for a state government agency. She once told me that "no contract can ensure performance of someone of poor character."

Whenever I'm offered a contract, I boil it down like this: "Do I believe they'll hold up their end of the bargain?" If the answer is no, I do not sign the contract.

This sort of advise works great until they actually do sue. One of my biggest clients got recently sued by a long term client of his - a Fortune 100 company with all kinds of legal resources. My client had to shut down his business and then scramble to protect his personal assets like house, properties, etc.

sounds like your dad had faith in you, above all. don't misinterpret this as careless disregard for risk.


"Get lucky"... Then walk away with survivor bias.

I took something different from this article, which was that if you wait to do business until you have a sure thing, then you are waiting too long. Take advantage of opportunities, and figure out the details on thew way.

> I’m not sure what the lesson is here.

The lesson is : you were lucky. You are the prey to some people who look for people like you to sign a contract and then extort money. Saw that happen at a company I worked for.

Not just a way to run a business, but a way to live life. Might not work for everyone, just as the opposite of whatever this strategy is may not work for everyone.

The two contracts I spent the most time going back and forth with before signing were the two biggest wastes of my time. One was a ridiculous NDA with a paranoid guy with delusions that he had the world's best original idea which turned out to be worthless and obvious. The other was a decent gig but they tanked and ran out of cash before I ever got paid. It didn't matter how tight the contract was when there's no money there.

You have to balance your risk and reward and take the biggest risks when you have little to lose. The riskiest thing you can do is play it safe.

I know it feels good to think this, but often times playing it safe is not the riskiest thing to do. Climbing the corporate ladder, being smart with investments, and doing the right things financially are considered "playing it safe" and would be viewed considerably less risky than alternatives.

When there's nothing to lose, there's everything to gain, but when there's everything to lose, there's alot more lawyering that will keep yer nose clean if something eventually goes south. Get a lawyer when there's really something to lose.

Congrats on constructing the perfect troll for this community!

This is really dangerous advice

I wish someone would write an expert system that works like his dad. Something that had some validation of what was a worthwhile risk and what was a risk that even if you tried to mitigate the risk really would still be a risk. (For instance, even if you had enough work to presume you could employ that employee for more than 2 months, that's not a guarantee. What if the contract with a customer was for 12 months, but 2 months in, right after staffing up, they just cancelled it and said "fucking sue me"? Kinda hard for the small startup to sue... and if they did, and they won, that win would be years after they had to let the employees go.)

You can't mitigate all risk, and being able to ignore the ones that you can't' do anything about is an important skill.

This goes for technical risk as well. I try not to over-architect. I spend a lot of time trying to decide which things need to be handled now, and which things can just be added later.

Great post. :)

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