Escape Velocity

You need to decide when you're in and when you're out of any contract. Here's how to do it.

If your deal has any kind of timeline, having an "escape" clause can be a lifesaver. It can be a drop-dead date after which all bets are off. Or, you can erect a "milestone." For instance, it can be something like this: "If gross revenues do not equal at least X dollars within 18 months, we stop funding."

With a "step" deal, you hedge your bets by investing time and/or money in stages. Here's an example: A venture capital firm will fund in phases, from seed capital at the outset to bridge financing before the IPO. At each prenegotiated juncture, the firm reserves the right to pull the plug.

As one of the most common devices in dealmaking, the "option" gives you the right to buy something for a set price at some later date. For instance, if I were to give you $10,000 today, you would give me the option to buy your house any time within the next six months for $200,000. Like a milestone, the option leaves you an out. You don't have to exercise it. It also protects you from escalating bids by locking in a price. Not to mention, if it's exclusive, it lets you control something for less than it would cost to buy it.

The "right to extend" a deal is a cousin to the option, so think ahead. If you may need more time, get it upfront. The legendary Sam Walton, founder of Wal-Mart, wrote that his biggest mistake in business was not asking for the right to extend the underlying lease on his first store when he originally cut the deal. Despite his success, when the lease was up, he had to move and start from scratch.

If you think you might want to continue doing business with someone after your original deal expires, but are not sure on what terms, consider a "right of first negotiation." For a set time, this clever clause will give you the exclusive right to talk turkey with the other side. Or you could ask for "a right of first refusal," which obligates the other side to offer you the first chance to make a deal before they go elsewhere (but not on better terms than they offered you). You can even combine this with a "matching right" or "right of last refusal," which will let you match the other side's last, best outside offer.

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This article was originally published in the October 2000 print edition of Entrepreneur with the headline: Escape Velocity.

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