From Mark Ford, editor, Creating Wealth: When it comes to business relationships, I have an aversion to paper. I prefer handshakes and have done 80% of my deals with oral agreements.
Some of my friends and colleagues think I’m being foolish, but I feel fortunate and proud. To work like that, you have to be honorable and flexible and choose partners who are the same.
Looking back at the hundreds of unpapered deals I’ve made, I can see that 90% of them worked perfectly well. But there have been a few that turned out badly.
In some cases, the problem was my partner and I had different memories of our original deal. (It was made before email, and neither of us had a record of the agreement.) In those cases, we almost always came to a mutually agreeable compromise, but the process was uncomfortable and embarrassing.
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In one case, a partner died, and his estate wasn’t willing to accept my account of the deal. They should have, but they didn’t know that. Coming to an agreement cost us both, in terms of time and legal fees.
On three occasions that I can remember, my partners tried to screw me. They were honorable in the beginning (when they needed me much more than I needed them). But when the relationship changed and they were able to operate on their own, they tried to change the deal or, in one case, walk away from it.
So this is my current thinking on “papering” deals:
When it’s time to make a deal, think about whether you could trust this party with a handshake. If the answer is “no,” then you should reconsider doing the deal. In the long run, a bad partner will be bad for you. But if you decide to do the deal, get a reliable lawyer to write you a good contract.
If the partner is trustworthy, you should still get something in writing. It doesn’t have to be a long and involved contract. In some cases, it can be as little as an emailed memo with a positive reply from the partner.
It should include the basic components: what each partner is expected to do (in terms of money, time, expertise, etc.) and what each partner will get (both compensation and equity). It should also include how shares can be bought or sold in the event that one partner dies or wants out.
The final word is this: Having some paper—at least a letter of agreement that outlines the big points—is better than nothing. And contracts are good on those rare occasions when you want to do business with someone you don’t fully trust.
But the best thing is to do business only with flexible and honorable people. In the long run, these qualities will compound over time, making future profits faster and easier than they are in the beginning.
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