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.
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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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