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How to spread the risk of a deal around

The more people you can look to if your deal goes awry, the better off you'll be. Here's a survey of some standard techniques. In all but the simplest cases, you'll need a lawyer to do it right.

  • Make them a party. Getting others to sign the formal contract with your opponent can be the simplest way to rope another more responsible party into your deal. If possible, make everyone on the other side jointly and severally liable. This lets you recover everything you're owed from one individual without the hassle of suing the others.
  • The guaranty: Formal legal guaranties are better in theory than in practice. Historically, judges have been sympathetic to guarantors, and case law provides many technical defenses that let them off the hook. Thus, even if a lawyer can draft around these issues, there are limits to how airtight this document will be.
  • Bonding/suretyship: A surety bond is the Rolls Royce of guaranties. A surety's liability is joint, direct and primary, just as if they had signed the original deal by themselves. Put another way, a surety is a policeman who makes sure your opponents live up to their obligations.

A speaker and attorney in Los Angeles, is author of Deal Power.

This story appears in the February 2005 issue of Entrepreneur. Subscribe »