Three rules of thumb on deal making I took away from a conversation with an electrical engineer and serial entrepreneur.
Don was Theresa’s boss at 3Com for a while. He had earned a PhD but the process hadn’t stamped out his practicality and creativity as it can in some. An electrical engineer by training, a manager by title, he carried a small toolkit with him in case something needed fixing. And it’s a funny thing, but if you carry a pocket knife you find a lot of things need cutting; if you carry a toolkit a lot of things need some fixing.
One day his badge didn’t work in the card reader and he couldn’t get in the building. It was early and he didn’t feel like waiting. Since he couldn’t fix his badge he summoned his inner Harry Tuttle (who was, to be completely honest, never that far from the surface) and dis-assembled the card reader mechanism (those small tools come in handy), shorted out the interlock, got the door to open and more or less re-assembled the reader mechanism (apparently a few wires and small parts had multiplied as they are wont to do when turned loose). The door stayed unlocked until a freaked out security guard got someone from the cardkey firm to come out and repair the mechanism.
As I said, he had some long entrepreneurial stretches in his life. Those of you founding startups know you wouldn’t let a small thing like the cardkey reader not working prevent you from getting into the building (and no, you wouldn’t be calling security so you could answer a dozen questions, produce various documents, and submit to a hairy eyeball inspection or two).
I had left Cisco in the mid 90’s to make a small fortune in the dot com meltdown and Theresa suggested I sit down with Don and get the benefit of his perspective on how entrepreneurs who knew what they were doing made deals.
We had a long talk that covered a number of topics related to starting a company and making deals. He mentioned that in his youth people would talk of “men, money, and machines” as the key ingredients for a successful business. In Silicon Valley that had become “team, technology, and traction.”
Don’s Three Rules of Deal Making
He made three points about making deals that I wrote down and still follow:
- Spend 1% of the value of a deal on lawyers.
Before you sign a final contract (but not before you get to a meeting of the minds), have an attorney review it to advise you of the risks. Be prepared to spend 1% of the value of the deal on legal fees to manage/minimize the risks.
- Before you accept money figure out two ways to repay it.
Don had started several ventures by borrowing other folks retirement money and he had been careful to repay it. I meet many entrepreneurs who can explain how they plan to spend investors money, but very few who pay attention to how they can repay it, preferably with some return, and what their contingency plan is if the first approach doesn’t work.
- Before you get into a deal figure out what it will cost to get out.
Many deals look like a marriage, which is characterized by low barriers to entry but high barriers to exit: they are easy to initiate but difficult or expensive to end. As Mark Twain once observed “It’s easier to stay out than get out,” negotiate how you can end the deal at the beginning when everyone is still talking and optimistic about the future.