Protecting yourself in business

I was recently speaking with one of our entrepreneurs. He was updating me on a partnership discussion that his startup was having with another startup. Until startups get big, they don’t have a lot of negotiating power with larger companies so partnering with startups is a good way to grow.

Our founder shared that, despite his best efforts, he just couldn’t get the other startup’s founder to agree to start the partnership. He described the terms of the partnership and it’s a win-win for both sides. If I were the other startup’s founder, I would agree to the terms and launch the partnership. However, the other founder kept bringing additional clauses to the table designed to protect his startup in the event that things go wrong.

Conventional wisdom suggests that you need to protect yourself while doing business. This is why we have practices like reference checks and why financial advisors and law firms get paid to perform due diligence and write legal contracts. However, while such protective actions are necessary to make sure that you’re covering all the obvious pitfalls, you can’t possibly protect yourself against everything that can go wrong. There may be scenarios which emerge which aren’t covered in the legal documents, and even if they are, if somebody intelligent wants to take advantage of you, they will find a way to do it. You may find out and there may be a penalty in the long run, but chances are that they’ll be able to get away with it in the short run.

As a result, taking protective actions makes sense but only up to a certain point. Do your reference checks. Do your financial due diligence. Write up comprehensive legal contracts. But recognize that you can never cover all the bases. Even if someone isn’t actively trying to take advantage of you, there may be events that you can’t foresee and their behavior may be different in a different context.

After a certain point, there are diminishing returns to taking more protective actions. Once you’ve covered all the obvious bases, you just have to get started, hope that things don’t break, and fix those that do along the way.