Doing Business On A Handshake
I often wish we could do business on a handshake.
I've been thinking about it more and more these days. We negotiate a sophisticated set of documents when we invest in a company and for the most part, those documents never come into play. Many times when things go badly, we rip up the documents and decide what to do based on an honest discussion among the interested parties. When things go well, all we need are the stock certificates.
I am not suggesting USV is going to start doing deals on a handshake. We have investors and we have a responsibility to them to act responsibly.
But if I were an angel, I might do things differently. There is something powerful that comes from establishing trust early in a relationship.
I always like to imagine the way that Andy Bechtolsheim handed Larry and Sergey that check for $100,000. I have no idea how it went down, but I always imagine they that pitched him, he said "sounds great" and whipped out his check book and wrote a check for $100,000. I sure hope that is how it happened. If instead he said "I will get my lawyers to draft a purchase agreement" I will be really bummed out.
The biggest problem with doing business on a handshake is you may not be dealing with the same folks in a few years. And when the person you are dealing with changes, things change. In those situations, you have to have a written agreement to fall back on. And it will be too late to get that document in place when the circumstances change.
So the right thing to do is get it in writing before you part with your cash. That is how I have always done it and how I suspect I will always do it.
But the most important thing in business is the understanding, the look in the eye, the handshake, and the personal trust that comes from those things. No piece of paper can beat that.
I was taught by a bunch of very tough negotiators that:You make deals with a handshake between people. You write contracts to memorialize that handshake in the event that the people are no longer in charge.I still try to do this with every new one today.
Agree 100%, and this is also how I work. Relationship first. And then document the boundaries.One thing that keeps coming up as I talk with younger people here in NYC is “not getting paid.” The unpaid so-called internship is one thing. (I have a rant about that one, another time.) The other is people/companies who don’t pay you for work you’ve done or are doing. This just kills me.Arnold, what would you do if someone stopped paying you for your work?
Doing work and not getting paid aggravates me. This is a broken handshake. And not a smart move honestly. Happens almost never to me.Being told that they can’t afford me or that the scope has changed and time to revisit–normal course of events. You modify and move on.I had a client suggest a change which was the right thing, we ‘shook hands’, amended the deal and moved on.Friendship and trust continues even when deals change when you are proactive. They crumble and crash big time when snuck under the table.
broken handshake… well said
Young people have “relationship issues” (in that we don’t have many, and colleges are terrible at teaching aggressive networking)
That’s why consulting is a tough row to hoe when you’re starting a career.It’s job where you can’t do the real work unless you also sell. All Glengarry Glen Ross references aside, most people don’t buy consulting services from cold-callers.My personal view is that “aggressive networking” is an utter waste of time. Better to explore and expand existing relationships, even when they don’t see seem like business relationships. I’ve met clients through people I know through all parts of my life.To the point of this post: when working within a web of connections, however tenuous, you start to build your own personal “diamond network” of true relationships, where people always get paid. Game Theory 101. (See @baba12:disqus’s comment elsewhere in this thread.)(And aside, U of C and “networking” don’t go together at all in my mind!)
Consulting? Write a letter demanding payment and figure out if there’s a way to threaten or publicize that the other party is a deadbeat. Then walk away.Employment? More leverage, as there’s lots of regulatory oversight, and the issue can become a nightmare for an employer obstinate enough to get the state involved.
“Consulting? Write a letter demanding payment and figure out if there’s a way to threaten or publicize that the other party is a deadbeat.”(Note: If the other party is an individual I would follow another strategy.) But if the other party is a company I would simply work my way up the chain and be a big pain and time waster to someone who has the ability to end the pain and give you what you want because a) it’s not their money and b) you are wasting their time and it’s easier to give you what you want than to have to endure more of your diatribe.Along these lines most people think that the right strategy is to start at the top with “the big guy/gal”. Not true. You start at the bottom and work your way up. If the top person doesn’t fall for the strategy and cough up the money you have no place to go. If you start at the bottom you stand a chance of running into someone who is busy and simply says “no mas no mas” let’s just pay them. If you run into attorneys that’s also something you can do. Waste the attorneys time. They will be courteous and bill their client for the time. Or they will be annoyed because they can’t bill their client. Either way the chance that they will give you what you want greatly increases. Don’t have the time to do this? Then don’t complain when you end up with the short end of the stick.Lastly (and there are so many nuances to all of this that I can’t even begin to summarize them here) never ever threaten legal action. The minute something goes legal you loose any and all possibility to make things work that will potentially work by human nature. Notice that I said “threaten” legal action. That’s a classic newbie mistake. Besides most people will simply call your bluff on that and know that it will cost you money to go the legal route. Not only that but the legal route takes time as well.
Agree, agree, agree. 1000%Thankfully, I have never not gotten paid myself. The thing that has distressed me here in NYC is the number of young people who have told me that they continued to work for people who weren’t paying them. Or some variation of that.
Threatening legal action is almost always a bluff; never any follow through. Be wary of those who make you aware they believe you have wronged them, but never follow up. That is where the lawsuits come from.
Every good agreement I’ve ever been in has happened that way. Every bad agreement I’ve ever been in was effectively “paper only.”Paper is good for memories and running things by the “Bus Theory” (if one of us gets hit by a bus, things have to keep moving).But life is too short to work with people you can’t trust. I think it’s been six years since I learned that one and I’ve never worked with an untrustworthy person since.
Agree.Do note that more than once for me, acquisitions have happened, management completely changed and that ‘change of control’ clause was just essential.Most people you can trust will also know that stuff happens and its not that complex to protect intent as long as you discuss it.
“I’ve never worked with an untrustworthy person”Curious what you mean by that in the sense that why would you ever work with a person you couldn’t trust?
Probably an oversimplified way of saying “I’ve learned to listen to that inner voice that says ‘this isn’t someone you can trust.'”I’ve also learned to listen to my wife. She has been right more than she has been wrong in her gut assessments of people, which has been a huge help to me.
That’s exactly how I do it. The handshake or verbal agreement serves as the binding moment.
There’s a reason why we say agreements are “reduced” to writing through contracts. There are always nuances to the relationship not reflected in legal duties and obligations.Sadly, I think Ronald Reagan had it right as a matter of policy: “Trust, but verify.”
my co-worker’s ex-wife makes $79 every hour on the laptop. She has been laid off for five months but last month her pay was $16489 just working on the laptop for a few hours. Ask25.com
Nice post.Wikipedia reckons he handed them the cheque without an agreement:”Bechtolsheim and Cheriton were two of the firstinvestors in Google, investing US$100,000 each in September 1998. Bechtolsheimwrote the check to “Google Inc” prior to the company even beingfounded. The story that says Bechtolsheim coined the name “Google” isuntrue. However, he did motivate the founders to officially organize thecompany under that name. When he gave the check to Lawrence E. Page and SergeyBrin, Google’s founders, they had not actually yet been legally incorporated.”
“But if I were an angel, I might do things differently.”Aren’t you? I refer to your investments outside of USV that you’ve referred to in the past.
That’s the Gotham Gal in action
“in action”… love it
Fred, Have you ever thought about going the Angel route? Maybe a few years down the road?
Yes. I watch the Gotham Gal with great jealousy
Do you ever ask for each others advice while investing, or do you try to keep that part of your lives separate?
All the time
we have a fear-based economy, a fear-based culture, a fear-based government .. as the race evolves this century, fear, lack, insecurity will be replaced by their opposites, and the handshake can be the preferred method.
A handshake or a “word” is a great start for a deal.It engenders the trust between the people involved. And if it starts with a handshake, you know that it will endure during rough times because of the relationship & trust that pre-existed the handshake. If anything, it re-enforces the bond between the 2 parties.I have done one deal where the investor had a $50,000 draft check already cut at his office & half-way through the meeting he gave it to me on a handshake as a down payment towards the rest.But beware of the handshake with someone who proceeds to wrangle you with a hard ass attitude during the legal papers formation. I’ve been there too.
I was told early in my career that, “a contract is only as good as the people who sign it.” And that has proven itself to me to be true.Contracts are a bore, but I’ve learned that they are a useful tool for making sure everyone is genuinely on the same wavelength.
Exactly. It’s good to know what everyone thinks they are promising and agreeing to.
Over the past 10 years, all my projects have been agreed with an informal email (“what no contract?”). I have only had one payment issue early on, and I still kick myself for not trusting my instinct that told me “somehow I don’t like this guy, don’t know why…” This is well worth the legal hassle I have saved.I find when I put myself in a vulnerable position (“no, no, you pay for the project once it’s done, no down payments”, it gets either reciprocated, or the person with bad intentions actually backs out with an excuse.I get most of my work via the Internet, from all over the world. And one of the key skills you have to learn is the “online credit check” based purely on gut feel.So far I got it right (touch wood, fingers crossed).An interesting case example is the Israeli diamond trade, where very strong peer pressure keeps things in order. All business is done by handshake here.
I think that if it is in an email it could be binding. An implied contract?
Probably, but I am sure there are ways to get around a vague, ambiguous email.
My point is that even if you have a 20 page contract there are 19 pages worth of reasons somebody can rationalize screwing you. If you have a one page agreement, its simple for everybody to understand. If they were going to screw you they were going to screw you.
” If they were going to screw you they were going to screw you.”Agreed in general but sometimes people don’t start off thinking they will screw you but then they perceive that you have drawn first blood and all the sudden will do things (feeling justified) that they never thought they would do. (Happens in divorce as one example or in leases and tenants in both directions.)
Real life: Important to consider is cost of enforcement of a contract. Especially with someone located in a different country or even state. Also the dollar amount of the contract. At a certain combination of distance and dollar amount there is literally nothing you can do but keep your fingers crossed.
Even an oral agreement is legally binding, with a couple exceptions. Written contracts are required by the Statute of Frauds (dating back to 1677) for things like real estate, dowries, goods over a certain dollar amount, and performance that will take over 12 months.A contract requires an “offer” and “acceptance,” which can be implied by conduct. If you emailed me that “I’ll send you CMO candidates and my fee, if you hire one of my candidates, is 30% of first-year salary,” and I don’t write back but interview and hire one of your candidates, I’ve impliedly accepted your terms. As a defense I’d have to prove there was no meeting of the minds, for example, I never saw that email, or we changed it by subsequent oral agreement.
When I was a contingency recruiter, I had to rely on this once with a dishonest client who stopped returning my calls, but then hired a candidate I previously presented. They deserved each other, and I deserved a fee. And eventually I got it — a coup of sorts — but more to prove a point by that time.Ironically, the reason the client stopped returning my calls — he said later — is that I asked him if there was any truth to the rumors I was hearing about the company’s unethical practices.
“Binding” is also a red herring … once you pursue enforcement, in most cases, even if you win you lose.
What do you mean, Monty?
recovery – legal fees – lost time – emotional turmoil < 0.I do think that our legal system would work better if fees for both sides were borne by the loser. Needs a few tweaks to prevent abuse but generally the English Rule (as it’s called) encourages pursuit of low-value highly meritorious claims.
Got it. Thanks, Monty.I had a situation once where a client hired a candidate without paying me. Everyone, including lawyers, said that it would not be worth pursuing because of the time and financial cost.Long story short is that I did get them to pay me but it was a lot of work and I had to outsmart them. More the principle of the thing.Funny thing is that I had begun to question their ethics and so my contact stopped returning my calls — but still hired the person I referred before I began to suspect them.
An observation – all of us talking about unscrupulous companies or individuals refusing to honor agreements say on the one hand that reputation is where you have to hit them and on the other hand I suspect none of us as professionals go around broadcasting the names of the defaulters.There are things like BBB but that seems both archaic and noisy. I wonder if any of the folks thinking about online reputation systems are considering this problem?It’s a tough problem because most pros don’t like saying bad things about people, and the folks who find pleasure in complaining tend to be a hit unhinged and unreliable. Imagine the negativity that would flow from a “Hate” button on Facebook or an anti-endorsement on LinkedIn?
corollary: avoid doing business with people you don’t trusti’m starting a new secret project: the first handshakes are in place and we’re starting to talk about who else to bring in — that’s a little scary.
It’s not about who you are talking to today, it’s about who will act on the contract tomorrow. In most cases they are not the same.Start with good will. Codify it the best you can in a contract. Then move on.If you have ever been at the bad end of a contract action you know what I mean.
Reminds me of the Samuel Goldwyn quote, “An oral contract is not worth the paper it is written on.”
That is awesome!
There is another Hollywood saying that goes like this:Question: How do you say “fuck you” in Hollywood?Answer: “Trust me”So whenever you are in a pitch meeting and a producer or studio executive says that they love your idea and they say “trust me” they are going to buy it and make a deal with you etc., etc., you know it is time to leave the room and never look back.
Love it. Its like when somebody says “let me be perfectly honest here”. Ok, so you’ve been lying to me before now.
I got into a fight with my ex wife once when a real estate salesman, as part of their presentation, showed us some pictures of his family (think politician type pictures) in order to convince us that he was honest and family oriented. She thought I was being to cynical and obviously fell for it so maybe the fight was because she realized she was wrong after hearing the truth about it.I had another case many years ago where a salesman for an equipment manufacturer was trying to close a deal but we wouldn’t budge on the price we wanted to pay.  One day he showed up with his wife and two young kids  trying to pull at our heart strings. Didn’t work but nice move. Nothing like a motivated sales person when you are trying to get the price reduced on something you want to buy. It never bothers me when people do what they have to do especially if it’s clever, creative and shows initiative. I don’t hold it against them and sometimes it shows true understanding of the “game”.
Pithy. I love it.
Interestingly, it’s also worth *exactly* the paper it’s (not) written on 🙂
You know pretty quick whether you want to deal with someone.We all have that radar.It’s how people react when things go south that require us to have protection.
Like marriage vows — a form of contract. We aren’t REALLY promising for better… for richer… in health… it’s the other part we are promising.
that’s the hard part, Donna
There is a difference b/tA. a sophisticated set of documentsB. get it in writing before you part with your cashWhat level of docs does the GothamGal use when doing an early round w/ Angels
There are standard seed and srs a docs out there now that are light and founder friendlyMost angel deals get done on them
Japan has a business culture that requires much less paperwork for any given deal. This is because there are established codes of business conduct that serve as an underlying infrastructure.In the US we probably had that culture 100 years ago, but then we started churning out way too many lawyers than this country really needed…
Trust and verify.
In some countries, businesses are still done on a handshake because the legal system is not stable enough to guarantee security. In those situations, a good handshake a knowledge of the family involved in the deal are of extremely important. Still, I prefer a system where you trust the person but still have the legal paperwork to fall back on!
Where I come from, this is called having your cake and eating it too.
word is bond
Business is people. People are business. Treat people well and all the technical stuff will fall into place. If this doesn’t seem to work out for you the first time, try again.
Try again… with someone else. 😉
“Business is people. People are business. Treat people well”You will find over time that while that is normally true if you do enough transactions you will encounter the outliers who might change your perspective.Not only that but people change over time as do their needs and influences.You could have an employee (or relative or girlfriend or friend) who develops a drug problem, a medical problem, a financial situation, has a family member that has a problem (the list is endless) and the behavior exhibited in one year changes for the worse. (Madoff and Mark Drier were trustworthy at one point to name two well known examples)
I think you’re spot on. My philosophy, though, is to understand the potential edge-cases, but to not focus on them; that is, I know that good people don’t always stay good people (same goes for the not-so-good people), but I function under the premise that people are generally kind and well-meaning, so I don’t waste too much time preparing for the outliers who don’t live up to that belief.This has burned me in the past, but scars make for good stories, and nothing ever stays wrong for long.
it doesn’t mean they aren’t people, just people estranged for their peopleness
Appendix H – The HandshakeNeed an app that takes a video clip of that handshake & append it to the legal docs.
What a brilliant notion. On occasions I have thought – I wish I could play back what you said, and how you smiled, and how you shook my hand.And do note that it is a reciprocal gesture – what has been agreed verbally IS binding in law as a contract.
Great point. These moments should be captured. It’s like the birth of a baby almost.
I worry about you.
I suspect William’s never given birth…
But I do know a whole lot about that from another unique perspective. My father is an ob/gyn and he delivered about 30,000 babies during his practice time.
Sounds like our second ob/gyn. The first super bright young one from Penn nearly killed my wife. The second was like a 20min brake job. If we had him first, I think my house would be overflowing with kids.
“super bright young one from Penn”In the above snip one word is like multiplication by zero in a business where number of transactions are key.
Yeah, my dad too. But it’s like saying because you’ve watched Lincoln you know what it’s like to be president 🙂
Lol. I knew we had more in common than being bald.
watch it, buddy. one of these days it’s gonna grow back. someone’s working on some nano hair growth tonic somewhere…
thanks mom 🙂
didn’t we used to pose for pictures of this? all those framed photos of world leaders shaking hands in front on podiums..
Cool, it says something about the power of the idea how new uses for Glass keep sneaking up in unexpected places. GetFresh (I’m an advisor) just launched a competition to demo Google Glass … I’m hoping they let me take it for a spin.
Since you were a long term HPer, I have to state that raising money from HP that included a distribution agreement in the 90s was one of the most painful and lengthy contractual processes I’ve ever gone through.Intent. Connections. Friendships– were so distracted by the power/mess of their legal process that recovery was painful. In fact, never really recovered.Oy!You turned out well my friend coming from that environment.
On one memorable occasion I was well and truly screwed by HP. It really shocked me because at that time they had such a great reputation. A handshake from a v senior guy, we started work, spent time and money then they renegaded and didn’t make it right. It’s funny how we never forget these thigns.
Wow I didn’t know about that sour grape. So many good and not so good things about that company.
This was when I was doing M & A/Channels & Mkting for Moai and we raised a bunch of dollars from HP and Anderson (remember them?) which connected to customizing our auction tech for their channels.Anderson was a snap and the product actually rolled out. HP a nightmare of issues that just churned and churned.
Those were the days where HP was trying to figure out IT Services/Systems Integration but didn’t know too much about it. They were mostly a hardware company, not a services or software company.
How about instead of the legal docs?
You can sort of do this with RightSignature. It allows for enabling webcam and appending resulting image to the digitally signed certificate…
Nice. I’ll check it. thanks.
Meetings of the minds. Agreeing on the (money) damages that result from a breach of the agreement seems to be the most common element missing from the contract and often the most difficult to prove.
Yes, that is the one thing that should be discussed and written down.
Particularly for startup bus dev deals, employee poaching, trade secrets, lack of performance
That’s correct…..write down the big obvious things. Don’t fight on the tiny stuff and realize when you get smacked out of the blue, sit down and talk.
We are not there but we are closer. One step is the “standardization” of legal documents, their public domain availability, and the public understanding of its implications. In this way the previous discussion is much reduced.Much much easier than the VC business but my experience selling services to more than 30 different countries is that the contract is a decoration because it is costly and difficult to enforce it. Surprisingly we never (yes, never) had an issue with a customer. I think Internet strengthen personal ethics.
agreement by fistbump!
That works.And, by the same token, some of the best compliments I’ve ever received have been a high-five.
Lawyers–you’ll either need them on the front end or the back end. I prefer the front end.I made a deal in December on a handshake, against my better judgment. 120 hours later and delivery of the work, I haven’t been paid and won’t be without judicious application of legal force.Contracts suck, deal docs suck. 99% of the language is there for when things go wrong; the rest is about the actual business.I could’ve used that 99%. (btw this is not the estimating software company).
Would the 99% helped or would the person worm out of it anyway? I agree that having in writing I am going to do X and you are going to pay me Y is critical. That is the 1% you need.
Yup….and I find that writing exit clauses for stuff when it doesn’t work out (and that happens) makes it easy and carries the good will forward even after exit.
Writing an exit clause is just part of the agreement. To me it is part of the 1%.
agreed. unfortunately in this case I was a poor judge of character.
It just makes it easier to go after.
“I made a deal in December on a handshake, against my better judgment. 120 hours later and delivery of the work, I haven’t been paid”By “against my better judgement” do you mean you didn’t think you should trust the person or do you mean you trusted the person but should have had things in writing or?My guess is the amount of money involved here is between 6000 and 20000?
It’s a bit complicated to get into here–it’s a mix of both. Let’s just say I got screwed, and it reminded me why I don’t do services work and that I shouldn’t be casual about business.
Not sure your premise is correct. Would you really be much better off with a written contract? It makes your argument in court a little easier, but not much. But the guy who screws you on payment is the same guy who will file a made-up generic negligence claim that will cost you more time, energy, and emotion than your original claim was worth.
I agree, absolutely. A contract–or at least the SOW–is really more about expectations (which were exceeded). I’ll make my presence felt in other ways and move on.
“Would you really be much better off with a written contract?”People are certainly less likely to weasel out of something if you get their agreement in advance as to certain conditions. Not everyone obviously (your example) but it does give you an edge. Even if just on a napkin. Even if you just say “I’ll try my best but can’t guarantee I will get it do you today” and they say in return “I understand ok”. Then you can say “remember I told you that…”.This is the basis for tempering expectations of clients as well and ending up delivering more than you promise.
Sure, the other party may feel more guilty if he’d signed something, and that might help at the margins. Take my point more narrowly as a response to Charlie’s statement about the “judicious application of legal force.” Legal force tends to be a losing proposition. In a case like this with actual performance, the presence of a signed agreement seems unlikely to improve dramatically the outlook on risks and economics of litigation.
Great post. Great thoughts. This reminds me of something I once heard Bruce Rosenblum at Warner Bros. television say during a talk that he gave — something that has stuck with me:”Once you have to refer back to the contract the relationship is ruined.”I have the luxury of doing work that is highly relational — and if it wasn’t relational I’d probably find a way to make it relational — and so this quote means a lot to me. I value contracts for setting clear expectations and ensuring that we have a sense of agreement. I do contracts because it is good business, but if I really thought that I needed the contract, I would opt out of the business arrangement.
That is a great quote. I love the spirit of it. I would say once you go back and pour over the documents (but that is not as pithy)That is my point about simple documents. If they are simple referring back to them should just be to jog your memory. I.e. I owe you what when, not much more than checking an invoice.If they are complex that turns into a several hour long task of interpretation, and guess what? You (and your lawyer) will every time interpret them how you want to. So instead of discussing it with the other party you “lawyer up”
That is an intriguing quote!
i wonder if there is a way to write contracts so that are used to make the relationship stronger
Maybe in a marriage “contract” that is the thought behind writing your own vows, but not sure those creative vows hold in a court of law. I think that the adage “you can’t legislate morality” might have as it’s cousin “you can’t contract relationship.” I think relationship is bigger than a contract. What do you think?
First money we raised was on a handshake and a coffee.i looked the gentleman in the eye at our series A closing and teared up explaining how grateful i was for his trust and his support. Ofcourse the A is the start line not the finish…he knows that, but its not an easy milestone for any company to achieve. His support in the idea early on allowed us to get there.
i think i might know who you are talking about. if so, he’s one of the good guys in the business.
It is worth writing down the key elements of the agreement. Putting them in black and white often highlights assumptions that one side has made and the other side has not thought about.But that is just part of building the relationship and clarfiying what you then agree with the handshake
Yes. Well said.
yes, writing down what to do and what is covered and even, maybe how you did it makes the process before and after easier because you’ve set expecations
Nice to have my feedblitz email notices back… and in real time!
Pardon me if i get on a soapbox. I apologize to the community. This strikes a chord in me.I traded my own money in a trading pit for 25 years. The code on the floor was “my word is my bond”. If you screwed someone over, the rest of the floor found out about it. If you did it continuously, you were labeled a schmuck and run out of the place.How do you measure a persons character? When they are losing a lot of money and they stand by a trade that’s a loser. Or, the next day-after a bad day, they own up to a trade that didn’t get processed correctly that makes their day worse. We called them “standup guys”.Since I have left the trading world, I have run into what Brad Feld labels “grinfuckers”. Pretty consistently in the entrepreneurial world. They make promises they can’t keep, and try to leech off the system. They are toll takers. On the floor we used to call them, “all hat and no cattle”.The only way to kill beasts like them is call them out. Let the community know who they are and then people will stay away from them.Recently, I had a situation that almost cost me a lot of money. At the last moment, I found out I was dealing with a grinfucker. He singlehandedly lied and almost put three companies out of business. I saved them.Meanwhile, when I started dealing with people, they all tried to look for the angle from which I was operating. Deals took longer because they didn’t take me at face value.On the floor, I’d trade 1 billion dollars on a handshake, knowing it was good. In the real world, it takes months to make a deal happen because you have to make sure you aren’t getting screwed.95% of the time, good liars tell the truth. Remember that. They do.
Well said. At the end of the day, all you have left is your reputation.
and you don’t control your reputation. others control it.
one of the hardest, disappointing and unfair life lessons i’ve learned.
.Hmmm, small point really but anyway — never be concerned about what knaves think of you. They are knaves. Only knaves.Care a lot about what the guy who lives in your brain and sleeps in your head thinks about you. He knows the truth of things.Earn that guy in your head’s respect — respect — and you will never have to worry about the rest of the world.I would rather respect myself than be liked by the entire world. I — and you, my friend — are much, much tougher graders.JLM.
words to live by.
Bingo. Now replace “reputation” with “brand” and “control” with “define” and you have a business lesson in addition to a personal lesson.”and you don’t define your brand. others define it.”
.It takes 20 years to build a reputation and 20 seconds to destroy one.Witness for the prosecution: Gen David PetreausJLM.
Strangely, Lance took the same amount of time to build and destroy his reputation. Years of subterfuge and chicanery, not a brief lapse of judgement.
“If you screwed someone over, the rest of the floor found out about it. If you did it continuously, you were labeled a schmuck and run out of the place.””How do you measure a persons character? When they are losing a lot of money and they stand by a trade that’s a loser. Or, the next day-after a bad day, they own up to a trade that didn’t get processed correctly that makes their day worse. We called them “standup guys”.”In fact the dynamic that is being exhibited here is not really character it’s survival.You see while it could be character, more likely the first paragraph that I quoted where you said “If you did it continuously, you were labeled a schmuck and run out of the place.” is the reason. In other words in order to continue doing business they had to stand by their trades.You find this as the basis of how ebay works with ratings. If you try to do a transaction off ebay with someone you will quickly find that they will not stand by things like they will on ebay because there is no feedback mechanism to keep them in line. The importance of this can’t be underestimated. This also happens with contractors that work for a big box chain (used to be Sears now more often Lowes or Home Depot). Hiring that contractor by way of Lowes and hiring them directly are two different things. The hatchet of losing more work from the big box is a tremendous motivator for the contractors. While you could get the same service from them cutting out the middleman you really don’t have the same leverage to keep them in line or a organization that will back you up and have the contractor make good on the work they are supposed to do.
I am going to sound like the old man here, but that is the way it used to be. I think that which each new cycle being larger than the last one, we get people that are in it for the short term, for the wrong reason. They take a while to wash out. Look at the people that have doing this for several decades. You won’t find many grinfuckers.
i have this feeling that as banking falls apart, startups become a “socially acceptable upper middle class thing to do”It is really hard because a lot of jobs that sustained the middle class, particularly for men, went away
You know as LE will tell you in the 80s when I wanted to do this I was considered a black sheep.
To this day I still remember the cringe on my girlfriend’s mothers face. (But then again I’ve always been good with faces.)I think one thing about being an entrepreneur is beating to your own drum and not really caring what the crowd is doing at all or what they think is cool. Three hobbies I did way back when they were obscure are now a big deal – rc helicopters, photography and of course computers.I think part of the thinking in being a black sheep is not needing to please the crowd. I remember realizing early on that I wasn’t going to win a popularity contest with my views so there was no point in caring at all whether people agreed or not with the decisions that I made
Getting across how important ones word is is one of the hardest things we are trying to teach our 7 and 5 year old. They are so right now that getting across the long-term ramifications of lying or going back on their word is extremely hard.
.You don’t really need to “teach” them, they are observing you.That is what will teach them.There is no more powerful former of young men/women than the behavior of their parents.I suspect you are more than OK on that score. Keep it up.JLM.
Funny, interesting and sad that people who probably rank pretty low on the “respectable professionals” list — traders — have a code of ethics that’s more respectable and upstanding than almost anyone else.But then again, the Gordon Gecko stereotype had to come from somewhere, no?
yup, just a bunch of riverboat gamblers on the floor-and also some of the smartest most honorable people I ever met. We had our scumbags for sure. But there wasn’t a more transparent place to do business.
some of my best friends are traders who have been in the game for 30 years. you don’t stay in the game that long without being really good at it and being standup people too.
It’s not because they are ‘ethical’ it’s because the environment demands it and the consequences of people knowing that your word is not your bond are so swift and devastating.
behavior is easier to enforce when the group involved is small and not dispersed. A trading floor is that.whether the rules are ethical is a whole other story.Though I have to say the following: this post made me think if the way we construct our society makes ethics harder because consequences are so indirect to actions. It is much harder to be ethical now as a result (however you define ethical)
This is clearly true. As we move from community to association accountability becomes harder to enforce.
Your last line is the most powerful of all:”95% of the time, good liars tell the truth.”Scary but so incredibly accurate.The real sociopaths know how to weave in the facts to quoted statements into their lies so that as you try to piece things together and expose them, you also find information that can be proven and corroborated by others.And you’re right, the only way to really bring these kinds of people to justice is basically to ambush them as a group. They play off of telling one thing to one person and another thing to another person. But when you put everyone together and they need to make a single statement to everyone, that’s the point where their entire game unravels. It is the only way to call them out.When that happens, my experience is that they eventually run off peacefully because they know the jig is up. They move on and look for new prey.I wish I’d read your sage advice on good liars about 12 years ago. You’d have saved me a lot of money and disappointment. But at least I had that life experience to be able to recognize it now and affirm how brilliant it is.
Love everything in this post.Sharing quality eggs and a good capp together doesn’t hurt either.
i’ve moved to the latte
.In times past, it was golf. I never knew anyone who fudged on the golf course who was more honest or reliable in business.I once played a round of golf with a guy on a world class course in the Caribbean.We had these wonderful caddies and it was just magnificent. As it turned out, we decided to play for a small fortune per hole. A new car total in the aggregate, perhaps.He hits a ball into the jungle and then hits a provisional. Both balls are marked the same.He and his caddie both come out and say they found their first ball. Their FIRST ball.Says my caddie: “Mon, how ya know dat be de first ball?”Long story, short — karma rears its ugly head, I take the guy’s money which was enough to buy a used car.I ask myself: “Hey, Mon, how ya know dat be de first ball?”Never did business with the guy thereafter.JLM.
At least we’re mature enough to avoid the sleazy strip club business deals JLM. Plus, that glitter is impossible to get off the contracts.
.Haha, funny guy.Well played!JLM.
From the perspective of a startup, this would be great. Investors would no longer be looked at as greedy snakes, but as trusting companions. No longer would lawyers be charging arms, legs, and eyeballs. There will come a day….(probably not)
So true.Friendship/trust is priceless.No piece of paper can ever be a substitute for that.
“real names be proof.” applies here.I’ve gotten a few losers out of my life via lost bets they didn’t remember to pay.
I love the quote from Sonny in a Bronx Tale: “For twenty bucks you got that loser out of your life forever, that was cheap!” The only better quote was “Now youse can’t leave”
I don’t know if ’twas ever thus, but duplicity, ego and mendacity have come more to the fore in the past decade or so – we seem to be drowning in arrogance, greed and bullshit nowadays – maybe I am looking through rose-tinted spectacles when I sense that in the last century (lol, ‘last century’ – how odd does that sound?) things seemed to be a lot more earnest and forthright…
paying off bets is critical
Sometime Mr.Wilson checkout the folks in the jewelry specifically diamonds and gold business.That industry at the very top consists of Orthodox Jews and Indians (specifically Gujrati’s). These folks don’t have any written contracts, gold and diamonds are exchanged with each other with a handshake and deals are made. If you screw up you don’t get to work in the business again. For these folks, writing up contracts is time wasting and not effective, what is effective is basic trust until it is broken and when it is broken there is no recourse, you are done and out. You don’t need contracts if you can trust yourself to begin with and then trust the other person, unfortunately it is becoming rarer and rarer to see that.We used to have credit with our local grocery stores and there were no contracts or late payment charges etc, you had a running tab and you trusted that the grocer would not charge more than what you had spent and they trusted you to pay them and not run out of town. THat social construct seems to be dying.It seems like society will trust a person wearing a suit and get cheated time and time again ( Bernie Madoff’s) while being upfront and honest has not much value for many…
“That industry at the very top consists of Orthodox Jews and Indians (specifically Gujrati’s). These folks don’t have any written contracts, gold and diamonds are exchanged with each other with a handshake and deals are made. If you screw up you don’t get to work in the business again.”That’s community enforcement basically. Makes sense in those situations because of the size and the focus. That behavior (at least among one of those groups) doesn’t hold true outside that particular circle from my experience.
True but the VC and Entrepreneur community is pretty small too. Most VC’s have never invested in people they don’t know. So it is possible to replicate that model that works for the diamond guys to work for this niche community as well but I think the reason it does not work in this environment is possibly due to the fact that many of the VC’s probably would screw someone over and thus they would believe the other person can screw them over too.
“Most VC’s have never invested in people they don’t know.”I don’t think that’s true at all.”is possibly due to the fact that many of the VC’s probably would screw someone over and thus they would believe the other person can screw them over too.”You’d have to define what you mean by “screw someone over” not sure that’s black and white as you might think. Also I don’t know if there is a basis for the statement “many of the VC’s probably would screw someone over” it’s a bit like saying “many men would probably cheat” isn’t it? (Or am I not understanding your point?)
Well I said most VC’s. Most them always say they invest in people and by that they mean someone they know or are introduced to.As for screwing someone over, remember the concept of contracts and additional clauses etc did not come about just in one fine dandy spring day, what happens is people have a simple agreement (hand shake) then when one part does not live up to their end of the shake, then you write up a document and both parties sign, then things don’t go according to plan and then you add more lines in he hopes to protecting yourself and so on and so forth.In the end it we are where are because of precedence and we may never have been screwed over by someone but we are told we can be and so we become less trusting of our own self and thereby become part of the game.In the universe, there is no distinction of east and west; people create distinctions out of their own minds and then believe them to be true.That is true for contracts as well, ironclad, titanium clad or plain old parchment clad…
“Most them always say they invest in people and by that they mean someone they know or are introduced to.”All that does is get someone to listen to you.It doesn’t get any more than that. While it certainly takes more effort, there is no doubt in my mind that there are other ways that take creativity and persistence to get someone to listen to what you have to say. And if what you say makes sense to them they will buy what you are selling (or invest in you).Taking this one step further there is the example of where Paul Graham not only got the airbnb founders intro’d to Fred but he went out of his way to try and convince Fred to invest in them. And in the famous story PG has detailed (with the email trail) Fred didn’t invest. By my gut I wouldn’t have invested either. And you can’t go second guessing your gut when it is right more than it is wrong or you will loose your edge and start to stutter.I don’t agree with the entire premise of what you are saying because as cynical as I am when you say this”In the end it we are where are because of precedence and we may never have been screwed over by someone”…you completely remove from the discussion the very important reason to have detail in agreements which is “each party knows what is expected of each other”.If you don’t spell that out how are people supposed to remember all the small details of what they agreed to?This is not a defense of contracts as much as a realization that in many cases you do need a contract for any situation that isn’t very simple or the money involved is so great you want to cover various possibilities to protect yourself to simplify. A contract does not mean legalize although it can.If I meet you in person and want to sell you my Macbook I can show you the Macbook, quote a price, you can ask questions and we can consummate the transaction in real time. While the Macbook might have hidden mechanical problems it is up to me to either disclose or up to you to present me with a piece of paper where I sign or don’t sign attesting to the condition of the computer. While you could view this as “needing the piece of paper to prevent getting screwed” that is because I’ve detailed a corner case here. What if I changed it to “sold you a car and wanted to know if it was in an accident”. That’s a little more fuzzy it’s not absolute that someone not disclosing that is trying to screw someone. Not everyone knows or cares about that stuff.
Fred did not invest in airbnb, his ut instinct despite introductions and he lives with it and is fine. As it pertains to contracts and deals, so you and I meet and you are selling me a car/macbook etc, you can decide to tell me you had “n” problems with the unit, and be upfront about it and we agree on a price and a deal is done. If on the other hand you knowingly don’t reveal the “n” problems with the unit, we make a deal, we sign a contract and I later find out about the problems, it wont matter what was written in that contract it just would be bad business.All I am saying is that if you make a deal with a handshake or with a titanium clad contract, say shit happens, if you are a person who believes you should fix the problem you shall do so not because a contract says so, you do it because it is the right thing to do.I find today that almost always large companies hide behind contracts and will not do the right thing, they need to be forced to do so and that only makes for bad business in my view.Having a contract is supposed to make you feel good but in my experience most contracts that you enter with companies tend to not be fair to you, but you have little choice but to accept their TOS.Ever look at the contract you sign with your carrier or ISP etc they protect themselves, try having them sign your tos and they will laugh and you wont get anywhere.
Baba – this is all a matter of degree and the specific situation it is not black and white it is totally analog and depends on specifics.[We could do an AVC version of the ethicist that would be interesting btw taking an exact situation an seeing how people viewed the behavior would assume all relevant details are disclosed.]”say shit happens, if you are a person who believes you should fix the problem you shall do so not because a contract says so, you do it because it is the right thing to do.”But parties can differ on what they view as “shit happens”. If I sell you the Macbook and it dies the minute the money changes hands the majority of people probably would give back the money. But what if it dies 1 hour later or 1 week later or 1 month later? What would they do then. What would they do if the sold it to a friend vs. a stranger? What if the Macbook you sold was owned by your partner and he/she didn’t even tell you about the problems they had or you didn’t ask? Things aren’t black and white as you present them to be.”but you have little choice but to accept their TOS.”By the way this is not a defense of those contract as much as an observation over time. If you deal with enough of the public you will find that they suck also in their own way. Many people are nice and many people will take advantage of whatever they can with those “big” companies.
i think the orthodox jewish thing isn’t right (can’t say about the Gujrati indians). One of the reason there is so much trust is that at the end of the day, up until very very recently, in order to buy raw diamonds you had to have access to a de deers sight. De beers effectively forced everyone into a system where everyone knew each other and knew that they could use that behavior to control access to diamonds.Fraud does exist in orthodox communities (eg: http://dovbear.blogspot.com… )
On a related note, one of the first things I was told when I looked into artist management was “Contracts are for cowards. Mutually beneficial relationships are the only thing that work. A contract will not deliver a great song or an amazing performance. Etc.” Fearing abandonment and hating to light the stove with money, we rewrote the way contracts were written and arrived at what the industry now calls ‘360 deals’.
More on this, please! If you’ve written about the 360 deal, please post a link.
I put this together a 5-6 years ago. Please have an attorney review it. http://www.musicthinktank.c…
.Superb craftsmanship, great thinking, excellent execution.Just brilliant.Well played!JLM.
Thank you 🙂
There is an in between. I do business on a handshake, but we write down the intents of each party. That’s not because you don’t trust the other party, its not really that the other party might change (but that is a side benefit). It is because you want to write down exactly what you mean. We can hear different things and the discipline of writing is good, no different than this blog.This is in stark contrast to have lawyers paper up the deal, where every possible bad action is thought about written about and attempted to be remedied. There are two major problems with this: the first I call the prenup problem. Ok, if I cheat on you here is what happens. “You mean you are going to cheat on me!!!!”. No, no but if I do….well there goes all trust. The second is that if somebody is out to screw you they will, and you can never imagine all the ways that might go down.
“where every possible bad action is thought about written about”Except when it isn’t and purposely left ambiguous to give more latitude and have a leg to stand on.For example putting in a clause saying “will respond to requests within 4 hours” is different then “will respond to requests in a reasonable amount of time” where reasonable is up to interpretation and can be gamed depending on the pov of the side pursuing the action.There are reasons why you might want to do either depending on what you are trying to achieve in the contract.
I’ll use that example. Without a remedy the first is worthless. I always say “or what” Ok, you want 4 hr response time. What does that cost and what gets refunded if not done? Write it down. The second is just a worthless comment that shouldn’t be written down.
” I always say “or what””Correct so do I. But depending on the way the balance of the contract is written could be an opportunity to void the contract or at least a leg to stand on or to threaten to have a basis to take an action to get something from the other party.We have for example a contract in which Shana agrees in exchange for being a “mod” on AVC that she will post at least 4 comments per day on AVC.com. But the contract doesn’t specify what happens if she doesn’t do tht. But if she posts 3 comments the operator of AVC.com could attempt to take away that mod title because they have a leg to stand on. An attorney working for Shana might say “well they will probably not win this one but there is a 20% chance they could” (FUD) so what do you want to do? Now if they void the contract (on that) we can fight them and we might win but it will cost you $10000 to fight so what do you want to do?Other than that of course I agree that unless you are going to use the “nuclear” option (discussed in the above paragraph) you are right obviously and I look at the same thing which I will call, for lack of a better way “what’s the stick?” I use that all the time. For example I didn’t put a license plate on the front of my car because the stick is approx a $55 ticket so in that case the precision of remedy works in my favor. On the other hand everyone else in my state does either because they don’t care or because that’s what they are told to do and they never question it.
Reporters asked former Yankees pitcher Goose Gossage if he thought George Steinbrenner was a man of his word. ‘Absolutely’ was his reply… then added ‘I just want to get his words in writing so I can remind him what his words were.’
That’s a great quote. And it is spot on for both sides.
Less cynically (not that it’s not a great quote) as people age they also forget more easily what they had agree to.
that is so good
Contracts are for enforcement. They can never replace people from *wanting” to work with each other. Wanting to work together is 9/10 ths of the equation
I just closed a friends and family deal for my new company. The deal was really a handshake deal but I got all of the documents memorialized in about 20 minutes at VentureDocs. Now that is the way to get a deal done!
I wish this could be done as well, but there is one major reason why I don’t think it can.When you do that initial handshake, it will typically be the best of times – your hope, passion, motivation are all at its peak. When it comes time to “do the right thing” because things didn’t go well, you will see people at their most stressed – when the ability to think logically (and empathetically) is dramatically lowered. At these times, you need something in writing to “ground” both parties.Assuming that Andy B. did just whip out his checkbook, the reason he could even consider that is because a loss of $100K may not be a big deal for him – so his downside isn’t a big issue. But for you, and for those of us starting a business, the downside (negative returns, loss of business) is substantial.
I have not been in tech very long, but I have had two handshakes go in opposite directions. In one, an entrepreneur kept his word and we built loyalty with each other. In another, the entrepreneur randomly emailed me 11 months into our advisory agreement (which hadn’t been filed) and asked to terminate it. As furious as that act made me, I still try to put everything in writing but also trust new people based on my intuition. Without some base-level of trust, it’s just not worth being in the industry.
If it does get to paper-wars, careful who you do business with…http://www.youtube.com/watc…
Our founder mantra from day 1 has always been ‘do the right thing’ – whether that is with users, employees, investors, *anyone*…I would absolutely say our first deal happened like this, and has worked out with honest adjustments in good times & bad, relationship building, & integrity since then. I may be naive, but I hope that is the only type of investment deal we make.The meetings you love are those that ends with a firm handshake, someone who will look you in the eyes, a fist bump, high-five…. hell even a hug. Yeah, we’ll hug it out here.
“Many times when things go badly, we rip up the documents and decide what to do based on an honest discussion among the interested parties”This is why I hate complicated documents. I am not saying don’t have documents. You absolutely need them, people forget, mis-interpret etc.But when things aren’t working out they are never for the reasons you expected. If you could have expected it you could have prevented it.If they are simple documents you have one option: sit down and talk.If they are complicated documents you either decide to rip them up and sit down and talk.ORYou start to get lawyers to interpret those complicated documents. Both parties lose, lawyers win.
The key is building trust, being confident the other party has integrity, and both sides are self aware to understand each others’ positions. If those 3 aspects exist, the ‘honest discussions’ can happen organically and the outcomes will be positive.
Thats how real estate business works in India. The Real estate developers and their investors do business purely on handshake. If either party wants to do the paperwork, most of the time deal is not completed. I’m not kidding. And the amount involved is very big.
When I was 23 and starting my company I went to a college professor to show him my business plan. We talked about it for a while and then he asked if we needed a little money to help us get started. I said yes but that I really hadn’t planned on it. He wrote me a check for $10,000 on the spot. The only thing he asked for in return is that I help someone else deserving get off the ground some day. It was an amazing gesture that I will never forget. My debt to him extends well beyond what any contract could ever demand.
.Great story and a real blessing to the world.Well played.JLM.
it is people like him and actions like that which make the world work. awesome.
„If you can trust a person, you don’t need a contract. If you cannot trust him, a contract is useless.“ — Jean Paul Getty, 1892-1976, US oil magnate
that is great
Totally agree that trust is the ballgame in these deals, but just because you rip up the docs when things go pear-shaped doesn’t mean they didn’t come into play; they’re still the backdrop for that decision, showing both sides what’s gonna govern if you don’t renegotiate (there’s always a BATNA…)
to contract, to close the distance (in this case) between two people. if you’re close enough to shake hands why the need to close the distance any further (?), unless you want to seal it with a kiss.
yeah, that’s all good, but don’t forget that a contract in consideration of marriage is not enforceable unless it’s in writing… 🙂
I have found that where the handshake isn’t there, all the written contract in the world won’t solve things. And that a basic understanding and agreement goes very far, beyond any written document. In Japan, where I lived, it’s a much less litigious culture. People spend a lot of time developing a relationship, which then makes them more comfortable to do business, often over the long-term. You do need things spelled out, in writing. But I feel your pain, Fred, or at least share your wish.
The one (perhaps the only) aspect of the agreement drafting process that I have found very valuable in 20+ years of the software service business is that it gives you a snapshot of how the other party will likely handle themselves in the event of a disagreement.down the road. Drafting the terms of agreements brings different points of view to the foreground. Pay as much attention to how the other party handles this situations as you do to the terms themselves.
I agree with the final statement, but this post depicts written contracts vs handshakes like it’s a black and white choice: it’s not either handshake or “lawyered up big time”. Verba volant, scripta manent, and a written contract protects the weakest party, i.e. the entrepreneur. You don’t need a lawyer to write down a basic agreement. The Series Seed term sheet (https://www.docracy.com/0f7… is super-simple. The most popular contract on Docracy is a design agreement called the “Contract Killer” – a plain-English set of reciprocal promises meant to be signed without hiring a lawyer.There is a healthy middle ground of options between a handshake and an army of lawyers, and it’s against the entrepreneur’s best interest to hint that a handshake would suffice. Remember that the greatest pet peeve of freelancers are clients who refuse to sign written contracts just because they can afford to do so. Selling shares is a big deal and you will thank that piece of paper if things go wrong.Long deal terms give you a headache? Lawyer-down Fred! I’m sure you’ll be fine.
it isn’t black and white, but defaulting to contract mode seems to have become a new norm. Liability and all.And Docracy users are not the norm of the population (as a docracy user)
“There needs to be a middle ground between ‘handshake’ and ‘lawyered up.'”Very True.And sorry to rephrase your quote. :o)
i have lawyered down. i don’t use lawyers on most of my deals and just use a standard form.
also a good thing, because lawyers are just so expensive these days
But if I were an angel, I might do things differently. There is something powerful that comes from establishing trust early in a relationship. I always like to imagine the way that Andy Bechtolsheim handed Larry and Sergey that check for $100,000. I have no idea how it went down, but I always imagine they that pitched him, he said “sounds great” and whipped out his check book and wrote a check for $100,000. I sure hope that is how it happened.Most likely Bechtolsheim’s approach was based on several things includinga) how much $100k means to him – very important. He has already accepted that in doing this type of investment he is taking a gamble. This is just another part of the gamble but with benefits (see other points below).b) setting the tone with these young naive college students who would interpret that action differently then someone with more experiencec) feeling that he had significant leverage and security to wrap up the details later (which he most certainly did obviously) and thereby gain an advantage in that processd) shock and awee) In a way you can almost trust someone more with a large amount of money then a small amount of money. f) Investors are gamblers.g) He can accept the downside (really part of “a”)…just to name a few things that pop into my mind.So we have both practical and theatrical reasons for the behavior. One of the ways you gain peoples trust is by doing something that they wouldn’t normally think someone would do that stands out. And I’m sure if you are a college student being handed a $100k check that really stands out and establishes the force and the importance of the person who is handing it to you and gives them quite an advantage going forward in most cases.  I just sold something and the person wired me $100,000 to my bank account where transactions of this nature are typically done by an escrow company to insure compliance. This happened for a few reasons. One, to this particular person $100k isn’t a large part of their net worth. Two the amount of $100k is enough to get lawyers involved to make sure the right thing happens if they don’t. Three, I appear to be trustworthy and the other person most likely checked on my reputation or made some gut as far as who they were dealing with (and we had other interactions as well). Four the person intends to do more business with me (and in fact is) and they wanted to set the tone from the start as far as the way they deal. As an aside there was no “formal legal” contract at all just emails back and forth (which of course is a contract just not a formal contract). Although we are now married when I was dating my wife for maybe 2 mos. she had some financial problems (school loans and her job wasn’t paying that much at that time). She was upset one day and literally was living hand to mouth to pay her rent and school loans. I wrote her a check for $2000 just like that and said “pay it back when you can”. While we ended up getting married I didn’t know at that point that we would and we had no agreement that I would be paid back formally at all. That gesture made a powerful impact on her, gained trust, and made a difference in our relationship going forward.
“The biggest problem with doing business on a handshake is you may not be dealing with the same folks in a few years.”And the people that you are dealing with, even if the same, change over time as well. If that weren’t the case there wouldn’t be as much divorce. People can start out with one set of intentions and then when life throws them curves all the sudden their needs and wants change.
There are two reasons to write a contract that have little to do with enforceability:1. As you say, Fred, they protect against disagreements about what was agreed — was that fee 30% or 25%? (This is why you have a clause saying you can’t modify the contract orally.) Important when the deal will be around a while and the parties or their memories may change.2. They encourage the parties to consider and discuss important issues, and often to talk with someone else (a lawyer) about their own interests.Some contracts don’t need those things, and I use a handshake or an email for them.Enforcement is almost never worth it when there’s less than about $50k at stake. I used to tell my clients that as soon as they filed or answered a complaint, they’d already lost. The fees, distraction, emotional cost, and risk of counterclaims in litigation usually outweigh the value of the contract. (A lot of what a litigator does is think up ways to create costs and risks for the other party.)Better in most cases to figure out how to bring reputation into play.
“he said “sounds great” and whipped out his check book and wrote a check for $100,000.”Notwithstanding the other points I have made on this the other thing that comes into play here (in addition to specifically the gamble of $100k and the downside) is the law of small numbers.Andy B. hasn’t done this “write check for $100k” that many times. He may have done it 10 times he may have done it 30 times but he most certainly hasn’t done it 50,000 times.As such the way he operates is controlled by what problems he has run into with that small data set. So he hasn’t been burned. Just like Space X hasn’t launched enough rockets to have tragedy … yet.One thing you learn in business is that if you do a large number of transactions or even a small number of transactions over a long period of time you fully see what the possible outcomes are and what people will do and then you take steps to protect against those possible outcomes. These are things you may not run into if you do a small number of transactions (and I get that distinct impression from reading some of the comments here by consultants that have done a small number of transactions).
In the events business (for me) a lot of sponsorship deals are at first done on a handshake and I’ve rarely seen them go south…. unless, as you mentioned, “…when the person you are dealing with changes, things change.”That said, if after the handshake you don’t move quickly to hammer out details (priorities) can change quickly for the paying party; don’t leave money on the table.Strike while the iron is hot!
I look at this way: I’m working with some freelancers right now who might come in contact with proprietary aspects of the previous version of my website. I chose the freelancers myself so I trust them and feel bad asking them to sign certain agreements, but it’s all in the context of my responsibility to my users more so than the freelancers’ responsibility to me.
What about doing deals with only a term sheet (but without the usual “not enforceable” disclaimer). Combine with an industry standard interpretation of those terms. Similar to ISDA for the swap industry.
This is a topic near and dear to my heart. I was one of those lawyers you might have called on. Since much of my work involved business litigation where a relationship had already blown up, I may have approached contracts a bit differently than colleagues or what you’d expect. I advocated less is more and use your good time to invest in the business relationship. Best compliment I ever got was when a senior lawyer called me up about an ERISA disclosure doc I wrote on a single page. “My but that was an economy of words!”Today I’m going after the credit bureau industry and the question on my mind is how can we replace black box scores that are all about a point-in-time decision with a platform that drives to deeper trust in commercial relationships. I think of it as enabling many handshakes over the life of a relationship.
.What an interesting topic. As usual.There are really several things in this discussion that are being conflated:1. Honor;2. Commitment — this is where the handshake concept lives;3. Trust; and,4. Relationship.As to honor, you either have it or you don’t. Most folks do but it has to be awakened by some teaching or discovery process. If you don’t have honor the rest of the discussion is moot.Commitment — the handshake — is still a big part of how business is conducted in certain industries. I don’t really see VC being one of those industries. Sorry. It has to do with the people involved and the comparative power structure between the folks.Fred Wilson is the odd man out — no revelation there — and is simply not typical of the folks in this industry. He IS an honorable guy, a mensch — bit of an inside joke there.I can name a hundred folks who if over to my house for a cocktail party, I would count the silver afterward. Now, just spoofing, folks.Trust is the commodity that is the most valuable and trust is not something you buy in a can or spray on like a spray on tan. It is earned. By all parties. Over time and through navigation through the shoals of life.The comparative relationships between folks is very important. In a peer to peer relationship, wherein folks bring similar experiences and reputations, it is easier to build trust and to make commitments and to honor a handshake because they understand each other so well.It is also easier to do when the nature of the relationship is a “partnership” rather than a straight stock investment — small point but very, very important.I was in a very successful partnership with a fellow that I truly respect and revere and we used to joke to each other that it was lucky nobody ever asked for a copy of our partnership agreement because neither of us could locate it.Bottom line — if you want to be a handshake kind of guy, you can. At the commitment instant in the art of making a deal. You can’t make big dollar stock investments with no documentation.But every transaction can be conducted with a sense of honor, commitment, trust and a sterling relationship. If you want it to be so.Make it so.JLM.
i have no idea where the partnership agreement brad and i put together when we started USV is. i know it is somewhere. but it is irrelevant to me. we know the deal we made with each other. 50/50 partners with no caveats whatsoever.
.Exhibit #2 for the plaintiffs.Partnerships are beautiful when they work. They are the thing of real old world folklore.They are the most delicate and valuable relationships and worth the effort.Well played — but you already knew that. And that is the real secret.JLM.
Never a truer word. Wouldn’t it be nice if people’s word could be relied on? :)Interestingly the importance and reliability of handshake deals is related to culture.In a culturally, ethnically homogenous society such practice tends to be much easier because norms, values and peer pressure exert a huge amount of influence. Welshing on a deal in such a culture is beyond the pale and word quickly gets out. The consequences are swift and onerous. By way of contrast, in mongrel culture, such as ours, where there are few such powerfully shared norms, law necessarily assumes a much greater significance.(there are of course communities within the US where norms prevale of over law and a handshake means something)(see Ferdinand Tonnies’s ‘Community and Association’ for an early discussion of this difference.)http://www.amazon.com/Commu…http://en.wikipedia.org/wik…
about societies that are homogenous:homogenous societies that are partially integrated in the general soceity at large means that usually members of the homogenous group don’t have a full picture of what the other person does.It is one the reasons Madoff happened, and one of the reasons I am immediately suspicious of my mom’s advice that one of the reasons to go to shul is because I should network there “with people like me”
Excellent point. Fraud inside such groups – jews, mormons, veterans… – does indeed take advantage of precisely those shared values.
This extends to things besides money. For example, I connect people all the time. Free introductions that hopefully make meaningful things happen. On a few occasions, I have asked people I helped out to return the favor of an intro to someone I’d like to meet. They didn’t. Breach of trust. Done with those people
Agree – at the end of the day it’s all about trust. I’ve learned it in the hard way..
Well it’s either trust, or thinking of every possible scenario in which it can get wrong…
Well, I guess I’m one of those angels that does everything on a handshake- paperwork can come later… I won’t change the way I am and liked the way JLM above describes things…. as for the couple of people that have violated my trust over the last 12 years, I can only blame myself for exercising bad judgment as to their character…
.Tuition, my friend. Tuition.Well played!JLM.
.In Texas in the institutional commercial real estate business in my day, the competition was intense and the money was big. Lots of temptations to color outside the lines. Cutthroat competition.I was involved with high rise office buildings, thousands of apartments and lots of warehouses. Operating in Austin, Dallas, Houston and San Antonio exclusively.This was a brash upstart business and I was struggling to get traction competing against what was at the time the largest commercial real estate business in the US.But I was a pretty tough competitor. Really, didn’t know better or any other way to conduct my affairs. You come to work at 7:00, well, my lights were on at 6:00 AM. You go home at 6:00,,,well you get the picture.We started to get some real traction and the competition became a bit personal. I was working so hard, that getting to “personal” was not even in my deck of cards. I was taking on the whole world, so no individual was getting so much attention from me.I was paid a huge compliment by a potentate in the business, a big institution — “I would take a handshake from JLM before I would take a 50-page contract and an earnest money check from “my competitor”.”This was said to the face of my competitor.The word got out in the marketplace and more than one real estate broker re-told this story. A lot of business was coming our way.So I was put up for admission to YPO (Young President’s Organization) which required certain levels revenue and employment. I was just in my early 30s. It was quite a compliment and, frankly, I was honored and excited.Turns out my competitor, a member of YPO, put the “black bean” on me which meant I was not going to be admitted. He justified it by some cock and bull story.It was all supposed to be secret but some friends of mine got the story to me in a discreet way.I was thoroughly pissed. More pissed than I can recall ever having been in business because of the falsehood of the story but also because I thought it was a product of our successful competition in the marketplace.I slept on it and the next morning I went to see my competitor. No appointment, no warning. Just walked in on him right past his receptionist and assistant.We had a very, very, very frank talk. The kind of frank talk that left him with sweat stains halfway down the side of his crisp blue shirt. It was direct. It was personal. It was confrontational. It held the promise of a bit of violence. I was prepared to be generous on that front.The punk ass bitch backed down like the chicken shit that he was and did right by the situation withdrawing his black bean.This story would be a lot better if I told you we became “besties” but no, I continue to think he is a chicken shit. Though I have not thought about him or this incident in years.So, I wanted to be a “handshake” guy and I made it so. I was not going to allow anyone to besmirch my reputation. Anyone. I made it so.It was all great for business and at that time it served me well. But it was all perfectly genuine. Authentic. Real. As Stonewall Jackson said: “You may be whatever you resolve to be.”I also used to pay the brokers their commissions in person within two hours of a closing, if I could.There is great value to being a stand up guy even if only because you get a lot of stories to tell. It is a good business practice and it makes you feel good about yourself.JLM.
Great story JLM.All the best storytellers I know seem to be from the South. I wonder why that is?
.Probably the impact of Reconstruction following the War of Northern Aggression?JLM.
I love the I paid the brokers within two hours. Finance people just don’t understand this…..how much interest you earn for this. Don’t string them out for as long as you can.Just last week I came home from a trip and showed up at my plumbers shop (I do a ton of restoration work). He said I know we had Slim over today was your wife not happy??? I said no, I am here to pay you….lets settle up right now. He said, you have the well earned reputation of settling up right away, but weren’t you out of town today?Said yup, you know who to take care of first. He said no question….Mamma Bear. (didn’t realize that was the nickname for my very small wife, thought that was funny)
i am a fan of paying quickly unless there are issues to be settled first
They have to be all settled first. No doubt. Once you pay expect nothing else done.
Way to stand up for yourself. Bad ass story!
I love this post and the obvious struggle you have between wanting to do everything ultra-efficiently and on trust and making sure that the deal is appropriately buttoned up. In my former life as a lawyer we constantly struggled with this, but also constantly pushed clients to the latter.As you say, the best approach is look each other in the eye, agree on a deal and shake hands. Then start drafting agreements. There is nothing worse in the legal world (except for the benefit of more billable hours) than drafting documents before you’ve actually agreed on the deal… Not only does it waste time and money, but also frequently kills the deal.
i have seen it many times
I draft contracts for a living. Yes, a handshake society is ideal. And yes, a contract is only as good as the person signing it. But our culture relies on contracts. So here are few things to keep in mind:1. Contracts are a great tool for makings things official such as transferring property. 2. Contracts override default rules. Think of work-for-hire situations. 3. Contracts include provisions that make the IRS happy, if they ever audit you.4. There is no such thing as a bullet proof contract. The contract might keep out the wind and rain, but that’s it. Don’t let any lawyer, no matter how high priced, tell you otherwise.5. Contracts are a great opportunity to establish expectations. They act like a checklist.6. A contract longer than 20 pages is a sign of a lazy lawyer cutting and pasting a contract from previous deals.7. Just because a big law firm drafts the contract, doesn’t mean that it’s a good contract.8. The longer the contract, the greater the chance for ambiguity.9. People without experience are really really scared of signing stuff. Take your time to answer their questions.10. Don’t give your attorney power to kill the deal. The attorney should just explain risks and options and let you decide what to do.Just a few thoughts.
depends on the contract for the 20 pages (If only because I am drafting a contract). Certain contracts (first ones that come to mind are commodity options and futures) are designed to be long because they represent not just the will of two parties, but the will of multiple groups of parties trying to standardize. (if only because I wrote 8)
I learned the corollary early in my career–there is not a contract in the world good enough to offset the risk of doing business with people you can’t trust.I have found that the other valuable thing about the contract process is that it can surface misunderstandings or differences in expectations that didn’t become obvious during the discussion. It’s very possible for well-intentioned people to have different interpretations of a conversation, but the process of putting all the details in writing makes this less likely and avoids ‘but I thought’ down the road.
Great post, I wrote a similar one the other day entitled “The Death of the Handshake” – I wish the world maintained a sense of innocence where a firm handshake and a genuine stare into another’s eyes would “seal the deal.” Unfortunately our world doesn’t operate that way. Situations change (all the time) and it’s always good to have a signature in place when they do. As long as we still have an ambitious youthful generation writing business plans on napkins, or taking spontaneous notes with crayola, I still think there’s hope 🙂
While the provisions in written agreements are important when things go bad, I agree that they will rarely be followed.What I think they are there for is to set the appropriate basis for the honest discussion (i.e. which party has more power/sway in the negotiation)The only time you don’t need a contract is when you are very prepared to take full risk if things do not work out
I guess the level of documentation also reflects the number of dealings two parties have had together and whether its a ‘once off’ deal or a ‘ongoing series of deals’.In the first event, like buying (or building) a house, for example, you’ve gotta be protected – you’re only negotiating once, and you’re not in a position to ‘blackball’ the guy if he stiffs you.The trading floor is different – multiple transactions over a long period of time – every day you get an opportunity for ‘tit for tat’. I guess there’s probably quite a bit of game theory here – http://en.wikipedia.org/wik…Different transactions types need different levels of documentation – and its different for each party.For Fred, he’s doing deals all the time (I assume) – so he’s comfortable with low docs.However, for Fred’s investee, it’s probably the first time they’ve ever done that deal that big or relevant. So they’de be looking for high docs – and I bet that’s quite frustrating!
I guess a simple aphorism might be “Fool me once, shame on you, fool me twice, shame on me”.
I still really like the ceremony of a handshake. To me, the deal isn’t real until the handshake. Agreements are future dispute-preventers and mostly, as you said, to make clear the understanding between the parties as representatives of each change out.But there is another reason we need contracts. It is sad but true. Not only are there people who don’t keep their word and don’t keep their end of the bargain, but stranger still, I have found that large amounts of money changes people.Not always for the worse, not always for the better. My impression is money is an amplifier of whatever is there naturally if there are little or no constraints. I don’t agree that money is the root of evil. But if a person has evil tendencies in their character, money will amplify those tendencies and provide the means to execute on those tendencies.Similarly, it can also bring out the best in people and they can do truly world-changing life-affirming things. But a very very small number of people are unaltered by the effect of a rapid change in financial freedom. The point is, sometimes that hand you shook when the deal started is connected to someone whose philosophies and character have changed so substantially that they may as well be a different person entirely.Money enables, empowers, and amplifies characteristic tendencies that may otherwise remain latent or unexpressed. When they emerge, the effect is unmistakable. I’m reminded of a great quote from Abraham Lincoln, “Nearly all men can stand adversity, but if you want to test a man’s character, give him power.”
Sorry, agree in spirit but not in practice.Trust, but verify.For one thing, as USV, or even as Fred Wilson, you have an unspoken negotiating strength — while you may choose to rarely if ever litigate, you can. Easily. You have the money and the lawyers and the time, no problem. So verbal contracts are at least somewhat less risky for you — the other party knows USV/Fred has the resources to try to extract justice, even if the odds are slim.But as a small company, or an entrepreneur, one doesn’t have that. Much more vulnerable to being exploited. Which, sadly, does happen all the time.Also – the Rashomon problem. Study after study has demonstrated the uselessness of crime scene eyewitnesses, because people’s memories are unreliable, and because two observers to the exact same thing can see two completely different things. So even two well-intentioned partners in a verbal contract can end up in painful dispute.So small guys and gals — get it in writing.My $0.02
100% agree, and for those of you who speak/understand german, here’s my blog post on how to address the lack of handshake-like deals: http://kpfrahm.com/aufruf-z…
Building on Fred’s post, Paul Graham offers a handshake protocol: http://ycombinator.com/hdp….’According to the protocol, you have a handshake deal if and only if the following happens:1. The investor says “I’m in for [offer].”2. The startup says “Ok, you’re in for [offer].”3. The startup sends the investor an email or text message saying “This is to confirm you’re in for [offer].”4. The investor replies yes.’According to Paul, handshake deals like this are a necessity because of how quickly things can move at different points in the process (ie., a YCombinator demo day, for example)… also, establishing a valuation or cap with your offer is a basic requirement for this protocol…
It’s the rotten apples that spoil the barrel.
Man, I’ve been doing good business with just a handshake since I started. I had a team of 5 investors and office all through handshakes not 1 equity contract, etc
“But the most important thing in business is the understanding, the look in the eye, the handshake, and the personal trust that comes from those things. No piece of paper can beat that.”Awesome assessment. I honestly believe that that paragraph should serve as a barometer for investing or partnering. I’ve had blue-chip companies and HNW investors renege on a legal agreement because they felt it was worth reneging vs honoring an agreement. I’ve had clients agree via an email discussion and honor a gentlemen’s agreement.
Totally agree with this post and points are well made. One thing to watch out for, though: someone who REFUSES to put their agreement with you in writing.I’ve been down this road in the past and didn’t think much of it in the beginning because we were all friends. The person who didn’t want a written agreement touted virtues like “trust” and what not, but in the end he was just using that to manipulate his position in the company.
How about a midway solution. Write a check and do paperwork later.I have privilege to have an angel investor who wrote check based on discussion and decided to pursue documents later on. All on trust and firm handshake!
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Entering a deal based on trust will get around a lot of things you can’t anticipate, and will probably make you happier in your work. At the same time, it won’t save you from entering with different expectations, or entering without knowing the contingencies. In a deal where both parties have a lot of experience, a handshake may work well. In a venture deal, the entrepreneur is usually much less experienced in the contingencies than the investor, and spelling it out in writing is a great of way of educating them.
Pointsnfigures — Right on!!! My dad was a trader on the floor of the NYSE for years and drilled into my brother and me the ethical standards that you describe. Although we commit our deals to paper, we’re always seeking out those whose handshake is just as important as their signature.