The Deal Before The Deal

Only the strongest survive in the jungle, and whether that jungle is on an island or in the business world ' Darwin's laws apply as much to the marketplace as to nature.

This is particularly true in the tech sector. In the tumultuous online economy, firms fail or get bought out round-the-clock.

However, a good entrepreneur knows when to sell ' sometimes to catch a rising market, other times to cut losses.

But deals don't usually get done immediately ' nor should they. Signing the first acquisition proposal doesn't let you fine-tune the deal. Even worse, you'll never learn what your opponent hasn't yet put on the table if you're too quick to scrawl your name on the dotted line.

Letters and Memos

Yet to avoid wasting time, both sides must quickly know if they have a deal, at least in broad terms. Fortunately, a “letter of intent,” or “memorandum of understanding” (MOU), offers a way to commit with confidence, without being irrevocably bound.

The MOU lets principals agree on the key business terms. Legally, however, the MOU sets the procedural rules for negotiating the formal documentation. In most states, it also imposes an obligation to negotiate in good faith. It's simply a practical matter that no business wants to turn on the lawyers' meters too soon, such as before agreeing on deal terms.

It's important to keep in mind that the typical MOU ' an “almost agreement,” as it were ' is nonbinding, except for the procedure. While business terms can change as the parties learn more about each other in due diligence, such legal and procedural duties as confidentiality and who pays expenses are binding immediately on signing.

As a result of this blended structure, the MOU lets the deal proceed, relatively free of the fear of one side walking away. And once the document has been signed, changing key terms, even the nonbinding deal terms, will be perceived as bad faith from a negotiating perspective. But even absent bad faith, no firm wants to become a “stalking horse,” used solely to get better terms from a third party.

Play it Close to the Vest

The MOU also provides some control over the inevitable disclosure of the deal, whether to key employees, or vendors, or government regulators. Disclosure before the terms are set could harm relationships that a firm may need in the future, particularly if the deal doesn't close.

Tech firms also must depend on an MOU's “no shop” and confidentiality clauses, because their key assets ' people, relationships and information ' can easily be lost to a competitor by a careless disclosure. For example, the other party could learn how to get the business without paying for it by hiring certain individuals. Information may be revealed that may not be a trade secret, but isn't obvious to others in the industry. Under the “protection” of the MOU's binding rules, the parties and their advisers can then work out all the details. The MOU is used to try to ensure that the other party is serious about the deal, and isn't shopping for the best deal at the same time it is talking to you. If discussions end, the MOU prohibits poaching of personnel or customers.

Stay on Your Toes

Of course, legal protection isn't always fail-safe. An MOU is not an insurance policy against a deal gone bad, or legal fees if one side breaks it. For example, a right to sue for violation of an MOU can be nothing more than an invitation to spend more money on a deal that failed. Even though an MOU creates a legal obligation to negotiate in “good faith,” skilled buyers rarely leave any evidence of their lack of good faith that could be used in court.

Despite MOU protections for information, a bid to buy a company can be one of the best ways to obtain competitive intelligence ' if that information can plausibly be credited to other sources. Proving that the information in question or dispute was not obtained from public sources can often be exorbitantly costly, if not impossible. Instead, a skilled negotiator must combine practical protection with legal rights granted under an MOU. Most basically, critical information should never be turned over until closing.

A customer list disclosed under MOU due diligence can be seeded with “friendly” e-mail or other addresses not used for any other purpose. The only thing that could be received at those “spy” addresses is proof of a bad-faith violation of the MOU.

Be Shown the Money

Requiring a cash deposit can be perhaps the most significant way to enhance an MOU. Even if the deposit is refundable, writing a check ' putting money under someone else's control ' shows that a buyer is serious about proceeding.

On the other hand, sometimes negotiating the MOU becomes as complex as doing the full acquisition agreement. To avoid doing two deals, many skilled negotiators prefer to go directly to a full agreement, after a basic confidentiality agreement is in place.

But that approach may be too risky for an e-commerce firm, whose critical information can easily be lost. The tech buzz phrase “information wants to be free” sounds great ' to everyone but the e-entrepreneur whose business depends on protecting that information.

Doing deals in the fragile world of e-commerce demands legal and common-sense protection. Get a signed letter of intent, but when deciding what to disclose, be cautious about how much you reveal and when you reveal it.

Only the strongest survive in the jungle, and whether that jungle is on an island or in the business world ' Darwin's laws apply as much to the marketplace as to nature.

This is particularly true in the tech sector. In the tumultuous online economy, firms fail or get bought out round-the-clock.

However, a good entrepreneur knows when to sell ' sometimes to catch a rising market, other times to cut losses.

But deals don't usually get done immediately ' nor should they. Signing the first acquisition proposal doesn't let you fine-tune the deal. Even worse, you'll never learn what your opponent hasn't yet put on the table if you're too quick to scrawl your name on the dotted line.

Letters and Memos

Yet to avoid wasting time, both sides must quickly know if they have a deal, at least in broad terms. Fortunately, a “letter of intent,” or “memorandum of understanding” (MOU), offers a way to commit with confidence, without being irrevocably bound.

The MOU lets principals agree on the key business terms. Legally, however, the MOU sets the procedural rules for negotiating the formal documentation. In most states, it also imposes an obligation to negotiate in good faith. It's simply a practical matter that no business wants to turn on the lawyers' meters too soon, such as before agreeing on deal terms.

It's important to keep in mind that the typical MOU ' an “almost agreement,” as it were ' is nonbinding, except for the procedure. While business terms can change as the parties learn more about each other in due diligence, such legal and procedural duties as confidentiality and who pays expenses are binding immediately on signing.

As a result of this blended structure, the MOU lets the deal proceed, relatively free of the fear of one side walking away. And once the document has been signed, changing key terms, even the nonbinding deal terms, will be perceived as bad faith from a negotiating perspective. But even absent bad faith, no firm wants to become a “stalking horse,” used solely to get better terms from a third party.

Play it Close to the Vest

The MOU also provides some control over the inevitable disclosure of the deal, whether to key employees, or vendors, or government regulators. Disclosure before the terms are set could harm relationships that a firm may need in the future, particularly if the deal doesn't close.

Tech firms also must depend on an MOU's “no shop” and confidentiality clauses, because their key assets ' people, relationships and information ' can easily be lost to a competitor by a careless disclosure. For example, the other party could learn how to get the business without paying for it by hiring certain individuals. Information may be revealed that may not be a trade secret, but isn't obvious to others in the industry. Under the “protection” of the MOU's binding rules, the parties and their advisers can then work out all the details. The MOU is used to try to ensure that the other party is serious about the deal, and isn't shopping for the best deal at the same time it is talking to you. If discussions end, the MOU prohibits poaching of personnel or customers.

Stay on Your Toes

Of course, legal protection isn't always fail-safe. An MOU is not an insurance policy against a deal gone bad, or legal fees if one side breaks it. For example, a right to sue for violation of an MOU can be nothing more than an invitation to spend more money on a deal that failed. Even though an MOU creates a legal obligation to negotiate in “good faith,” skilled buyers rarely leave any evidence of their lack of good faith that could be used in court.

Despite MOU protections for information, a bid to buy a company can be one of the best ways to obtain competitive intelligence ' if that information can plausibly be credited to other sources. Proving that the information in question or dispute was not obtained from public sources can often be exorbitantly costly, if not impossible. Instead, a skilled negotiator must combine practical protection with legal rights granted under an MOU. Most basically, critical information should never be turned over until closing.

A customer list disclosed under MOU due diligence can be seeded with “friendly” e-mail or other addresses not used for any other purpose. The only thing that could be received at those “spy” addresses is proof of a bad-faith violation of the MOU.

Be Shown the Money

Requiring a cash deposit can be perhaps the most significant way to enhance an MOU. Even if the deposit is refundable, writing a check ' putting money under someone else's control ' shows that a buyer is serious about proceeding.

On the other hand, sometimes negotiating the MOU becomes as complex as doing the full acquisition agreement. To avoid doing two deals, many skilled negotiators prefer to go directly to a full agreement, after a basic confidentiality agreement is in place.

But that approach may be too risky for an e-commerce firm, whose critical information can easily be lost. The tech buzz phrase “information wants to be free” sounds great ' to everyone but the e-entrepreneur whose business depends on protecting that information.

Doing deals in the fragile world of e-commerce demands legal and common-sense protection. Get a signed letter of intent, but when deciding what to disclose, be cautious about how much you reveal and when you reveal it.