How to Negotiate Big Company Agreements for Emerging Companies – Part 2: Should You Even Try To Negotiate At All?
Note: This conversation has been organized around dealing with ‘big’ clients. But many of the lessons apply to large, important vendors.
Last month, we discussed the first steps you should take when you’re about to land an important client and they insist you need to work their template vendor contract, not yours:
Make sure you have a copy of the entire contract in your possession, including any exhibits, addendums, etc., or links to online terms and conditions that could contain real surprises.
Check to see if anything customary or industry standard is missing altogether (a common legal drafting tactic).
Check to see if anything is clearly unfairly one-sided or excessive.
If you and your teammates are not sure about these items, these really are the right questions to ask an experienced commercial agreements lawyer to look into.
SO, Should You Even Try To Negotiate Any Legal Terms?
* Caveat: to keep us focused, this post is about negotiating ‘legalese’ items in a contract. It assumes you and the potential client have already worked out the ‘big picture’ economic/business terms (pricing, potential discounts, the actual basket of products/services you’re providing, etc.). And, even if those items are still open, negotiating those items is often a much quicker and simpler process – a discussion between the business people leading each side of the deal.
So, let's imagine that after getting and going through your potential client’s standard contract, you (or your lawyer) have flagged a number of items that you (or your lawyer) think should be changed.
At this point, your company has this big initial decision to make: do you even bother to negotiate any legal terms? Or do you assume this would be a useless exercise and go straight to signing?
This is a question I get a lot from clients, especially my smaller clients or clients facing a cash-crunch situation.
Sometimes, clients make this decision without ever talking to a lawyer because they assume that trying to negotiate is an exercise in futility (-- and then my team only finds out they signed the contract when our client has a problem later on and comes to us for help).
To be clear, this is a good question to ask. Sometimes it is clear to an experienced lawyer that your company won’t get anywhere if you try to negotiate the legalese with the particular potential client you’re dealing with.
BUT…even if negotiating with the client doesn’t appear guaranteed to fail, my clients inevitably list all sorts of reasons why trying to negotiate is a non-starter for them:
Reasons Not To Negotiate
1. Time, Effort, and Opportunity Costs.
Here, the conclusion is that negotiating will need way too much time, way too much effort, and take way too much attention away from practical things the company needs to move on to. The client needs the deal to close “now” so they can book major revenues, receive a major initial payment they need to keep the lights on, get a press release out about their new flagship customer, etc.
And, as we discussed in Part 1 of this series, the reason that these sorts of legal negotiations with ‘big clients’ take cost as much time, effort, and mental bandwidth of the team as they often do is the fact that you are no longer dealing primarily with those “let’s make a deal” client executives who love your product or service and were more than happy to work out deal terms in an efficient, equitably, everybody’s happy way so you could all get down to business.
Instead, asking for any material legal changes to the contract means pushing back months on the potential client’s in-house or outside lawyers, or, if the company is big enough, to the client’s contracts management department first (teams of non-lawyer personnel at big companies who usually handle the first round of contract approvals and, if applicable, negotiations).
These are the people who are there to reduce risks to your big client. These are not the people who are there to say “yes” unless the word comes from on high that the deal is that important to management (which it very likely will not be).
2. Expense in Legal Fees.
This is a corollary to Reason 1 but expressed in terms of a small company having to pay real cash to outside lawyers (instead of non-cash costs your teams pays for in other ways). The nature of these negotiations can be incredibly frustrating: the people involved on the other side tend to be cautious, nitpicky about details, often slow to respond to your lawyer(s), and, perhaps worst, will insist on keeping in various legal terms just because that’s what in their other contracts. And, in the end, there is no guarantee that all this expensive lawyering will be able to win any significant concessions at all from the ‘big client’.
No wonder young companies view this as trading high spend for a very uncertain return on that investment. And when what you are arguing over are legal edits to cover hypothetical events that will probably not occur, the ROI looks even worse.
3. Don’t Want a Reputation as Difficult to Work With.
People are afraid of looking difficult for putting up a fight. After all, if you’re working with a big-name client, you should be grateful to get any kind of boilerplate contract, right?
Many business leaders who are new to big client contracts are hesitant to push back because they think it could harm their reputation in the long run, with this client and other potential future clients. It doesn’t help that business people on the other side are happy to ‘remind’ them there are a zillion other small vendors the big client could be working on. For all that, It’s a common reason to not make a fuss.
4. Could Kill the Deal By Taking Too Much Time
Sometimes a deal feels like a fleeting thing, you have to lock it down before it disappears. And it happens all the time: interest from your biggest champions could go away, budgets for your contract could reallocated to something else, etc. So many leaders opt to not negotiate, for fear that the proverbial clock will run out and they’ll be left with nothing. Compared to that, a less-than-ideal contract might not be such a bad thing.
5. It’s just a starter contract, so it’s not important enough to argue over.
This comes up when the contract is an initial ‘starter’ contract – not of big economic value, but something quick and easy that could lead to much bigger things if all goes well. Since it’s just a small value initial contract, the reasoning is that – at least this time – it’s not worth it to waste too much time squabbling over details. If all goes well, an expanded contract is potentially to follow and you can push back on the items you don’t like then.
6. We’re not going to get anywhere anyway with such a big company: we’re so small – why would they change anything for us?
This is maybe the biggest reason my clients hesitate to negotiate contracts. After all, this is such a huge company, and it feels like they’re throwing a bone to the smaller guy. They don’t want to rock the boat, especially considering the big dog might not back down for us anyway.
But although these ideas are commonplace, they’re not always correct…
Reasons You Actually SHOULD Negotiate:
1. It could be a lot less expensive and/or take a lot less time than you expect.
If you've already had a lawyer review the contract, she or he should have a handy list of whatever types of questions you should consider asking for.
Likewise, if your contract is below a certain dollar threshold and involves products or services that are classed as ‘low legal risk’, the Biz People may be empowered to handle it by themselves, without going to the company lawyers or some legal team. If that’s the case, you could actually be dealing with reasonable individuals, willing to be reasonably flexible, if it means the project can get started quickly and easily.
2. You could actually save money.
Depending on certain issues, you might save a lot more money in the long run by getting things changed.
A great example here is insurance policy requirements that are way out of line with the actual risk your products/services could cause for your client.
Another good example is the very detailed, very expensive-to-implement IT security requirements you now see tacked on to a big company’s standard vendor contract just for when a vendor handles personally identifiable information (PII). If your company won’t be handling any PII, getting these requirements removed from your agreement could end up saving your little company an enormous amount of money, time, energy, headache et al.
3. They could be expecting negotiations.
Often big companies have template agreements that their teams are fully aware are extraordinarily one-sided given industry norms. A classic example is a vendor contract with extremely pro-client IP ownership and assignment provisions.
In those cases, the big companies will be used to real pushback from vendors who are willing to to put in at least some time and effort on pushing back and, when your lawyer points out how ridiculous their contract is on this or that point, they’ll agree to your desired compromise without much hesitation.
4. These contracts may have lots of parts that obviously do not apply to you.
Client companies will often recognize when they’ve added something that’s just not applicable to your business and the products or services you are providing.
For example, these agreements often have significant insurance requirements, including automobile insurance. I’ve never seen a client company object to removing this automobile insurance requirement when the vendor is a SaaS company whose personnel will never show up in person at any of the client’s offices or facilities.
Another example is the dense, complicated, exacting processes often included for a vendor reporting process on the assumption that all vendors work on a “Time and Effort Basis” – something just not applicable when your business model involves clear flat fee billing and the extra requirements would be all down-side for you, the vendor, and no potential upside for the client.
5. Sometimes, there are Red flags that NEED to be pushed back on.
Some contracts have terms that are genuine, bona fide major red flags’ - dangerous, costly, or otherwise problematic enough that it simply is worth all the potential costs and consequences to eliminate or change.
Here are some examples of what I mean:
No limitations on liability language
Indemnification obligation where your business is on the hook for any legal claims for any action or omission (i.e. instance of not acting) regardless of whether that action or omission was a breach of the contract/otherwise improper or was actually entirely proper and faultless.
Rights to terminate the contract or an SOW and only pay for any deliverables already provided and approved as of the date of termination. For businesses that have to invest large sums and huge amounts of time to produce client-specific deliverables, this freedom to cut and run could kill your company.
A contract term that is drafted so broadly and vaguely that it could easily result in your company being in contract breach with another big client OR with this new client because of your work for another client. For example, we’ve seen requirements that our client had to notify the big new client about any agreement it had with a third party that could “potentially” result in “hampering, diminishing, or otherwise affecting” anything done for the new big client. Who knows where that stops and ends? And, as important, your current client contracts very likely include confidentiality terms that this obligation would require you to breach.
6. It’s often very difficult to get changes to your contract later on.
Right before you sign your initial contract - even if it’s a small ‘starter engagement’ contract – keep in mind that, business-wise, it’s very hard to get changes made later on. At that point, you could be heavily reliant on this major client and the revenue it brings in. Or the business team who initially loved you might have found reasons to be somewhat critical of your performance. Whatever the cause, it is often harder and much slower to get legal changes made to your contracts once they’re in place compared to pushback at the start.
This even applies in those situations where technically you are dealing with a new contract instead of merely continuing an existing one (e.g. you have a new contract for a new project now that your first project has been completed) – even here, the business pressure (both from the client and from inside your own company) pushes very strongly to “not rock the boat” and to simply keep working on the already-established legal terms, however bad those are for you.
A good example of this is very pro-client early termination rights, letting them walk away at any time with essentially no cost to them - and regardless of the cost to you. Maybe you thought it was an OK risk for your small ‘starter contract’. But is it really what you want unavoidably hanging around your neck when you are at the next stage and putting 5x resources into the relationship?
7. You likely won’t get a bad rep for pushing back.
Unlike contracts with smaller companies, these client lawyers and contract management personnel are not going to usually be part of your day-to-day activities. So, the danger of getting a ‘difficult to work with’ reputation from trying to negotiate over legal terms is often greatly overstated – simply because the people giving you a hard term with legal terms are not the same people who will be dealing with day-to-day once the contract officially kicks in.
8. To your surprise, big clients are often much more willing to compromise – even to requests for multiple legal changes – that you’d expect.
Despite all the bargaining advantages big companies have, I’ve been surprised time and again about how reasonable many of these big companies actually chose to be when working with vendors, even new, smaller vendors.
Sometimes this can happen just because of company culture at the big client: not every big client legal department thinks it needs each vendor agreement to be exactly the same as all its other vendor agreements and are much more ok if your contract ends up looking somewhat different from the next guys. And/or sometimes this happens because of luck - for instance, you are lucky enough to get your contract in front of the client’s legal team during a slow period - when they don’t mind spending the time on something smaller - instead of during their some crazy busy period where only their top legal projects are given any attention and anything else just needs to be dealt with as quickly as possible).
9. Most importantly…
IF YOU DON’T ASK, YOU WON’T GET. Why not try your hand if there are reasonable items that you think should be amended?
CONCLUSION: This is a Case-By-Case Discussion
There is no automatically right or wrong answer to the question of whether you really try to negotiate legal terms or not.
It all depends on the specific dynamics of the current deal, the specifics of the legal agreements (i.e. whether the terms have any genuine no-gos), the potential client and their legal team and internal processes, etc.
Obviously, this isn’t a decision to take lightly. Some things might be worth conceding on, if all else is good, just to move along. But a lot of the time, negotiations are just an expected part of business, and you could make out a lot better than you assumed.
Having your own legal counsel can help you weigh the pros and cons yourself, so you can make a decision that feels right for your business.
Find: Negotiating Big Client Company Agreements for Emerging Companies – Part 1 here.
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Disclaimer: This article constitutes attorney advertising. Prior results do not guarantee a similar outcome. MGLS publishes this article for information purposes only. Nothing within is intended as legal advice.