“The devil is in the details.” – quote with various attributions
As I reflect on what has been keeping me so busy these last few weeks, I realize that there are three problem situations that have their roots in owners not fully understanding (or reading) certain underlying documents. Now I know everyone is busy and all of us have been guilty of asking a more knowledgeable advisor, “What does the document say?” Fortunately, in most cases, we get a complete picture but in many cases, there are some final changes added that the owner may not see (there is something called “deal fatigue”) so they do not do a final read. So let me highlight my three recent situations.
In the first, I was asked to review an equity option plan and stockholder’s agreement for a prospect that was a growing company. As one of my hot buttons is any provision which requires the Company to provide liquidity to the option holder, I asked if there was such a provision and the CEO was adamant that he would never provide for it but there it was in the agreement. It clearly stated- – if an option holder exercises and leaves for any reason, the Company has to buy back the underlying shares at the then fair market value in cash within 90 days.
In the second, a buyout agreement between two shareholders of a very profitable and growing prospect required the surviving shareholder to buy out the deceased shareholder’s interest at full fair market value. What made this standard provision very unusual was that it stated any shortfall between fair value and any life insurance proceeds would be covered by a full recourse note with short payment terms. In a call with one owner and the current corporate attorney regarding this agreement, that current attorney was incredulous and used some choice “legal terms” to describe his reaction.
Finally, using a combination of informal legal advice and documents obtained off the internet, two shareholders in a startup filed incorrect 83B elections in addition to creating some major tax problems with the timing and incorrect data on various formation documents. The situation as described to us was fine; unfortunately, the underlying documents bore no resemblance to what was intended.
We were able to find solutions to each of these situations, but that is not always the case. So some simple advice to all entrepreneurs. Documents, especially those related to ownership, should never be signed without a reading and thorough understanding of what they say. There are no stupid questions in this area; and ignorance can really cost you. And if legal counsel tells you when to sign something; sign it then and not later. Many documents are time sensitive and while it might seem like a small issue, if it is ever challenged, you will find that what is documented is what is considered done and the devil will be in those details. Please do not let them come back to haunt you.