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Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

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Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#31

Post by smcin »

hluska wrote: post #17
tptacek wrote: post #13

Earlier quoted context omitted.

This particular story doesn't seem like a negotiation failure so much as a grave failure of this person's legal counsel in drafting the final agreement.

They chose the wrong counsel - they went to a general practice firm as opposed to finding a lawyer capable of navigating 1 - 3. A lawyer may be great at holding little old ladies’ hands while preparing their wills. That does not mean they’re qualified to deal with PE.

Can you give more constructive advice on how to find a lawyer that both can draft a non-trivial agreement with PE, and is affordable? What specifics do you look for?

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#32

Post by NoboruWataya »

gamblor956 wrote: post #24
Havoc wrote: post #22

If you read this carefully you'll notice this story is presented back to front. >revenue must not have involvement with "connected parties." >disclosed that two of my shareholders also worked at companies that were customers ...and surprise surprise the revenue gets disputed. Disclosing things doesn't invalidate pieces of the contract - if anything it strengthens it given solid evidence to the opposing party here. Th…

I'm gonna go out on a limb here and say there was no lawyer involved in the capital C part of the story at all Agreed. If "Connected Persons" in the UK tax law was intended to govern the contract's interpretation, that would have been explicitly called out in the contract. (Note: in the U.S., M&A law is part of tax law, but even in this context it is understood that a term has its common/dictionary meaning unless the…

> But also, capitalization isn't generally relevant for determining whether a noun refers to a defined term or not; for example "Connected Persons" "connected persons" and "CONNECTED PERSONS" are all read the same, unless there is something in the contract that specifically states otherwise. It used to be common for the first usage of a defined term to be all caps.

In my experience it is a common convention in UK law contracts for defined terms to have the first letter in each word capitalised whenever they are used.

Completely agree with the broader point though - capitalising a term that happens to be defined in some legislation somewhere doesn't generally mean it has the same meaning as in that legislation unless explicitly linked to the legislation.

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#33

Post by tptacek »

smcin wrote: post #31
hluska wrote: post #17

Earlier quoted context omitted.

They chose the wrong counsel - they went to a general practice firm as opposed to finding a lawyer capable of navigating 1 - 3. A lawyer may be great at holding little old ladies’ hands while preparing their wills. That does not mean they’re qualified to deal with PE.

Can you give more constructive advice on how to find a lawyer that both can draft a non-trivial agreement with PE, and is affordable? What specifics do you look for?

You're looking for M&A lawyers, presumably pedigreed (from a large firm with a well regarded M&A practice, for instance). Your normal contracts counsel should have good thoughts about referrals.

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#34

Post by smcin »

tptacek wrote: post #33
smcin wrote: post #31

Earlier quoted context omitted.

Can you give more constructive advice on how to find a lawyer that both can draft a non-trivial agreement with PE, and is affordable? What specifics do you look for?

You're looking for M&A lawyers, presumably pedigreed (from a large firm with a well regarded M&A practice, for instance). Your normal contracts counsel should have good thoughts about referrals.

What about all the people who don't have a normal contracts counsel?

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#35

Post by BonoboIO »

gamblor956 wrote: post #24
Havoc wrote: post #22

If you read this carefully you'll notice this story is presented back to front. >revenue must not have involvement with "connected parties." >disclosed that two of my shareholders also worked at companies that were customers ...and surprise surprise the revenue gets disputed. Disclosing things doesn't invalidate pieces of the contract - if anything it strengthens it given solid evidence to the opposing party here. Th…

I'm gonna go out on a limb here and say there was no lawyer involved in the capital C part of the story at all Agreed. If "Connected Persons" in the UK tax law was intended to govern the contract's interpretation, that would have been explicitly called out in the contract. (Note: in the U.S., M&A law is part of tax law, but even in this context it is understood that a term has its common/dictionary meaning unless the…

This whole story with the „c“ smells like bs to me.

Your conclusion sounds more believable than his story, it was not the capital c that maybe cost him thousands of pounds, but that his lawyer is incompetent or did not even exist.

It sounds like a justification to himself, that this could have happened to anybody and it’s just bad luck, but in reality he f*cked up and it was preventable.

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#36

Post by tptacek »

smcin wrote: post #34
tptacek wrote: post #33

Earlier quoted context omitted.

You're looking for M&A lawyers, presumably pedigreed (from a large firm with a well regarded M&A practice, for instance). Your normal contracts counsel should have good thoughts about referrals.

What about all the people who don't have a normal contracts counsel?

Look, at the point where you're selling a company in a multimillion dollar transaction, some of these excuses go out the window. Get a lawyer, and then ask your lawyer for a referral to an M&A practice. Company acquisitions are a shitload of specialized work; it's honestly weird for me to hear that a general practitioner handled this person's earnout contract.

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#37

Post by deisteve »

infecto wrote: post #18

Great article and great takeaways. People should always keep in mind that in business people are not your friends. Does not mean they are evil though. The takeaway here is the what I take as the main point. Hire proper legal representation.

[dead]

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#38

Post by lazide »

JumpCrisscross wrote: post #21
vmfunction wrote: post #9

Earlier quoted context omitted.

> so even if they nominally represent the founder they’re not going to do anything that would jeopardize their prospects for future business with the private equity firm. Ouch! Seems like there should be some 'unionised' legal representation for founders. Seems like representation for founder and VC to be a conflict in interests. This seems to be much heavily emphasised on capital vs talent.

> Seems like there should be some 'unionised' legal representation for founders Just pick a lawyer who works for founders. (Any competent firm will also find this in conflicts.)

You’re the only one who reliably can work in your best interest, and even then it’s hit and miss sometimes.

Always ask questions, figure out others actual and stated interests, and look for incongruencies.

And look to be as educated as possible.

Easy to say, hard to do. There is no ‘sure thing’ in this world.

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#39

Post by [deleted] »

tptacek wrote: post #36
smcin wrote: post #34

Earlier quoted context omitted.

What about all the people who don't have a normal contracts counsel?

Look, at the point where you're selling a company in a multimillion dollar transaction, some of these excuses go out the window. Get a lawyer, and then ask your lawyer for a referral to an M&A practice. Company acquisitions are a shitload of specialized work; it's honestly weird for me to hear that a general practitioner handled this person's earnout contract.

[deleted]

Re: Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

#40

Post by tptacek »

gnicholas wrote: post #23

I used to be a lawyer in SV, and whenever my lawyer friends talk about earnouts, it's always in the context of what a bad deal they are for founders. Basically, they take a lot of lawyer time to negotiate, in order to make them as close to airtight as possible. And if anything goes wrong, it takes a lot of lawyer time to resolve them. And lawyer time equals money (as much as $2k/hr, billed in 6 minute-increments). So…

Earnouts worked great for us, but services businesses aren't product businesses; I wouldn't be surprised to learn that effectively every services acquisition is back-loaded with earnouts.
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