Escape Velocity You need to decide when you're in and when you're out of any contract. Here's how to do it.
By Marc Diener
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If your deal has any kind of timeline, having an"escape" clause can be a lifesaver. It can be a drop-deaddate 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 18months, we stop funding."
With a "step" deal, you hedge your bets by investingtime and/or money in stages. Here's an example: A venturecapital firm will fund in phases, from seed capital at the outsetto 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 setprice 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 anytime within the next six months for $200,000. Like a milestone, theoption leaves you an out. You don't have to exercise it. Italso protects you from escalating bids by locking in a price. Notto mention, if it's exclusive, it lets you control somethingfor less than it would cost to buy it.
The "right to extend" a deal is a cousin to theoption, so think ahead. If you may need more time, get it upfront.The legendary Sam Walton, founder of Wal-Mart, wrote that hisbiggest mistake in business was not asking for the right to extendthe underlying lease on his first store when he originally cut thedeal. Despite his success, when the lease was up, he had to moveand start from scratch.
If you think you might want to continue doing business withsomeone after your original deal expires, but are not sure on whatterms, consider a "right of first negotiation." For a settime, this clever clause will give you the exclusive right to talkturkey with the other side. Or you could ask for "a right offirst refusal," which obligates the other side to offer youthe first chance to make a deal before they go elsewhere (but noton better terms than they offered you). You can even combine thiswith a "matching right" or "right of lastrefusal," which will let you match the other side's last,best outside offer.
In Your Back Pocket
The more people you've got on the hook, the better offyou'll be if something goes wrong. That's exactly whatbankers are thinking when they require Daddy to co-sign for SonnyBoy's first set of wheels. It's the best way to ropeanother, hopefully more responsible party into your deal.Similarly, you can try to get a formal written guarantee from thedeep pocket of your choice in the negotiations at hand.
If you can, also make sure everyone on the other side of thetable is "jointly and severally liable." In contracts,these magic words are the legal equivalent of "one for all andall for one." They allow you to recover everything you'reowed from each individual without the incredible (and costly andtime-consuming) hassle of suing all the others.
Finally, from the sky-jacker taking hostages to the localbowling-alley attendant holding your driver's license,dealmakers love collateral. Call it a lien, mortgage, trust deed orsecurity interest-the concept is the same. When someone haspromised you something or gives you some other property, you get tokeep it if they don't honor their word. But giving or gettingcollateral is technical stuff. To get it right, you'lldefinitely need a lawyer-and probably a specialist, atthat.
A speaker and attorney in Los Angeles, Marc Diener is the author of DealPower: 6 Foolproof Steps to Making Deals of Any Size(Owl Books/Henry Holt).
