In the final episode of Season 7, Michael and Brad share the story of a Silicon Valley music company whose team had a “simple and easy” attitude about business, life, and, unfortunately, their legal documents. Tune in as we discuss the concept of back-of-the-napkin business ideas, and developing them into actual enforceable contracts.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences. Creating simplicity in 3, 2, 1.
Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I am your host Brad Adatto with my co-host Michael Byrd.
Michael: As a business and healthcare law firm, we are sometimes triggered by certain buzzwords our clients will say in conversation. We know there is potential disaster when we hear these words and we’re immediately on high alert. This season’s theme is red flags.
Brad: Michael…
Michael: Ding!
Brad: Michael, after 10 shows this season, you don’t have to ding me when we start the show. Hopefully our loyal listeners know that this season is spotting the red flags and we’re allowed to say ding, when we hear a red flag.
Michael: I [00:01:00] can’t help it that your voice is a red flag.
Brad: Okay. Fair point. Now let’s try this again. Michael, have you ever heard the statement, “the back of the napkin idea?”
Michael: Yes, it warms my heart when I hear it. A back of the napkin idea is a concept that’s normally created on the spur of the moment. You quickly capture something and jot it down on your quick notes on the back of whatever type of paper happens to be available at that time. And sometimes it’s actually a napkin, especially if you’re in a bar.
Brad: Yes. Correct. So, no ding. What most people like about the term itself is indicative of how an idea may occur while you’re doing something else, like dining out with others or as you said, being out at a bar. But the basic idea quickly is recorded on the back of a dinner or a cocktail napkin while it’s still fresh in your mind of those particular creators. The concept being immediately shared with others if you have it, or you put it away from later [00:02:00] so that you can refine it and build it out with a greater degree.
Michael: Yeah, and because it’s a spur of the moment type situation you’re usually looking at kind of a big picture concept. Like you’ve got this, as you said, idea and so you’re just trying to capture the thought. There’s not a lot of detail behind it
Brad: Well summarized. And everyone thinks I’m the smart one.
Michael: Ding again!
Brad: What, what? I don’t understand that one. Anyway, I was thinking of all these great businesses that started on the back of a napkin. And so for example, did you know that Southwest Airlines was started on the back of a napkin?
Michael: Yeah. I mean, everyone knows Herb Kelleher is famous here in Texas.
Brad: Is it Texas or Texas?
Michael: That’s how you say it and just trying to hide your Louisiana background. It’s okay. Yeah, so he and his partner many, many years ago, walked into a bar, Brad, in San Antonio [00:03:00] and had ordered drinks.
Brad: It sounds like you are trying to tell a joke. Two men walk into a bar…
Michael: Ding! Brad, yeah, no Brad jokes. Back to our story. They grabbed a cocktail napkin and drew a simple triangle on the napkin. At the apex of the triangle they wrote “Dallas”, the bottom left they labeled “San Antonio”, and the bottom right they wrote “Houston”. And that’s the business plan. They were going to create an airline that would fly between these cities several times a day, every day. And that’s how Southwest Airlines began on a simple napkin in a bar San Antonio.
Brad: Yes. And over the years it’s become legend of a simple concept to start a business. For those listening to us, we have dropped the image of the Southwest Airline napkin so you can see it on our YouTube channel if you’ve never seen this image and check it out and you can see the actual triangle drawn between these three cities.
Michael: And Brad, I know of another famous business that was started on the back of a napkin. [00:04:00]
Brad: Yes. In 2014, two very handsome men walk into a restaurant and they’re trying to determine what they want to do with the rest of their lives. There at that restaurant on the back of a napkin, they developed an idea of the pros and cons of starting their own law firm. Michael, do you know whose story this is?
Michael: Yes. And it’s probably good that there’s no one else in here but the two of us, because we probably would’ve gotten dinged by your reference to two handsome men walking into a bar. But it’s just the two of us so we can allow it, right?
Brad: Yes, yes. Thank God Riley did not ding us.
Michael: Okay, good. But yes, Brad, this is the story of us starting our own law firm.
Brad: That’s right. It is. And so over eight years ago, you and I sketched out our thoughts. Riley, please drop a picture of us holding this actual napkin because we were smart enough to at least get the picture made. And then the second picture, you’ll see if you want to zoom in on that napkin, Michael, this is the actual napkin because you had the good sense to [00:05:00] actually keep it.
Michael: Yeah. I mean, what I remember whenever we tell the story is just the emotion of the time. Like we went into go offsite and happened to be serving beer there. But we really wanted to just get away and put all the ideas on the table of what are we going to do with the rest of our lives. And we had several, that one was the one that instantly got both of us excited. I can still remember you getting up off the table and pacing around the restaurant and me thinking, okay, he really doesn’t like me and he’s trying not to yell at me and run out, or he’s really excited. And thankfully you were really excited.
Brad: I was super pumped.
Michael: We at a very basic level, sketched out the pros and cons of opening a national boutique business and healthcare law firm. [00:06:00]
Brad: Yep. Riley, if you can put that picture up again of us holding it up, those who want to see what young Brad and Michael look like, back when we had that idea, you can see it one more time.
Michael: So connect us between this napkin talk and our episode today.
Brad: All right. While developing a business plan on the back of a napkin is a great start, as we stated earlier, it’s a placeholder based on an inspirational flash at that particular moment. The idea of this type is usually the starting point to form the basis of all these details that you will need to do later on, because details matter, Michael. And on a napkin or on a one-page agreement…
Michael: Ding!
Brad: Usually only captures the high level terms and conditions.
Michael: Sorry I had to ding you, we had our napkin talk, but then you threw the one page agreement in and we know that’s a red flag.
Brad: It is.
Michael: That is a trigger word that I think we will talk a [00:07:00] little bit about here with our story. So Brad, let’s start. You know that music that comes out of your phone?
Brad: Yes.
Michael: That is music streaming out of an app.
Brad: Ding!
Michael: What?
Brad: The fact you’re implying that I’m so old that I don’t know about Spotify, or Apple Music or other alternative apps like Deezer. It hurts Michael.
Michael: Nicely played Brad, trying to be socially relevant to your youngins by making the Deezer reference. And just so you know, you can also play music from your Myspace account.
Brad: Ding!
Michael: Before Spotify and Apple Music dominated the streaming music world, downloadable digital music was the trend. And that was the big thing after Napster, which was the illegal pirating of music. And so we had a client many years ago with a business plan to sell digital music on their website. A song [00:08:00] used to cost 99 cents. We’ll call this client “Gore’s Music”.
Brad: All right you have to explain that one.
Michael: Well, the name was inspired by Al Gore.
Brad: Oh, I get it because Al Gore invented the internet?
Michael: Ding! No, because his political platform was built on saving the environment.
Brad: I’m going to resist the urge to raise a ding there. What does saving the environment have to do with digital music?
Michael: So smart move, not dinging any political talk.
Brad: Yeah, no political talk.
Michael: Gore’s Music were big believers in saving the trees by trying to have one page contracts.
Brad: Ding!
Michael: Yeah, the founders of Gore’s Music are all from Silicon Valley and had a Silicon Valley attitude on how things got done.
Brad: Ding! Knowing the story, and knowing who the players are, I’m assuming your reference to Silicon Valley attitude, you’re not going with a [00:09:00] toxic work environment, which can perpetuate racism, sexism, and intolerance.
Michael: No, that would be even worse than a red flag. That’d be a problem. No, these are really good people. Great clients, friends, and this was not an issue. Their Silicon Valley attitude was, “everything should just be simple and easy and not stressing over the big stuff”.
Brad: Well, that sounds a great concept in general.
Michael: Yeah, right. But the problem is when it comes to legal documents, simple and easy is not always better. The sales team with Gore’s Music had all adopted this kind of let’s get the deal done approach, we don’t want any friction once we quote, sell the deal. So they would go pitch to the other music and non-music companies out there, and they would want to get the deal done fast.
Brad: Ding!
Michael: And to them, a one page document… [00:10:00]
Brad: Ding!
Michael: Which they could sign on behalf of the company…
Brad: Ding!
Michael: Would be their path to having no friction to going from a verbal sale to a completed contract. I knew you might have issues with those Brad, so I heard those dings loud and clear, but let’s keep going with the story before we discuss the red flags. So Gore’s Music had a huge chain store they were negotiating with, by far the largest client to potentially utilize their platform. And like some of their smaller deals up to this point, the sales team really wanted a simple agreement.
Brad: Ding!
Michael: Even though this deal was completely different than the other deals today.
Brad: Ding! When they contacted you to develop this simple agreement, what’d you tell them?
Michael: We pushed back to explain to them that this was so different than any deal to date. Not that we didn’t push back before, we were always fighting. It was like a constant swimming upstream, [00:11:00] but this one in particular, there was bet the business type stakes to it. They needed to have a more robust terms and conditions, and really just build out the arrangement so that everyone was on the same page. But their response was they had struck a good deal, all the parties understood what Gore’s Music was going to deliver…
Brad: Ding!
Michael: And the sales team didn’t want to make it complicated…
Brad: Ding again!
Michael: With a big contract that added terms and conditions that they were not needing.
Brad: Ding!
Michael: The big box store might not sign it if it’s too complicated
Brad: Oh ding again, Michael! Gosh, please stop. I can’t keep up with all these red flags. Michael, let’s just go to commercial and when we come back maybe we can address all these red flags in the story.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd. Now, Michael, this season’s theme is red flags and in today’s story we had a bunch of them. I was dinging you a ton.
Michael: I lost track.
Brad: I know, and I think part of it has to be because in casual conversations that you typically have, it’s really rude to ding people. So that’s probably why you shouldn’t do it in real life.
Michael: That’s a good idea. Yeah, it probably would break the flow of a conversation.
Brad: You know, there were a lot of dings and I think we should address as many as we can. I can’t remember how many dings we had in the first half of this, but one of the first dings I hit you with was when someone wants to say, [00:13:00] well, Michael, “I want to sign this real fast”?
Michael: Yeah. All of us can kind of connect with that temptation. We think we have something and we want don’t want anything to interrupt it so we feel that rush to make it true and to make it complete. Yet I think we also intuitively know the counter to that, the whole, “is it too good to be true” adage. I mean, just think about how many times on one of our episodes we’ve talked about this concept of too good to be true. We had a guest on who was talking about that adage last season. And I think we actually have one episode titled “Too Good to Be True” or something along those lines. And so number one, you don’t know if someone’s a bad actor. That’s going to be one of their strategies. And even if they’re not, you’re just [00:14:00] accelerating, or accentuating is probably a better way to say it, the likelihood that you’re not going to be on the same page because you’re just going to hurry up and get it done. And so you’re going to walk into this arrangement together and there’s going to be things that haven’t been flushed out or discussed.
Brad: I think what I’d like to add to that is, we’ve seen it as a strategy that other people have used because they don’t want you to spend the time and effort to analyze a document and they want you to sign it real fast. So speed, you know we’ve said this before, slow is fast and fast is slow. So going back to how we started this though, as I said, sometimes you just hear these things in everyday conversation.
Michael: Yeah. We hear these words in everyday conversation and we realized that the person speaking doesn’t even know that they triggered a red flag. I mean it’s really, if you think about it, just using the one-page contract for example, [00:15:00] I can understand why someone would say, I just want a one page contract. They don’t want to complicate the situation and like I said, they want to get the deal done, but they don’t understand what they’re really saying because they just are looking at it through their lens. I’d like to explore a little more why you were dinging me so much, besides just being rude.
Brad: Besides me being really, really rude. Well, based on the story we already addressed the first ding, which is obviously the signing fast, but I’m going to break it down probably to three other major issues that I’d like us to address. First is probably to understand the nature of why we need to have written agreements, second is the actual purpose of an agreement, and third, who actually has the authority to bind the company agreements. I think those are three that we can concentrate on and if we have time, maybe we can address a few more.
Michael: Let’s go.
Brad: Well first, details [00:16:00] matter in any arrangement. That just goes without saying. In situations like today’s story where the sales rep is negotiating deal points, and that can be either on calls or back and forth on email chains, and all of these terms are summarized into one page document leads a lot of room, or tons of room for unmet expectation. And as we’ve discussed before, in most states, oral contracts are enforceable, which is the entire reason why you should have, and you should develop an actual well-written written document.
Michael: I’m having flashbacks to back in my litigation days. And as a recovering litigator, I can tell you that attempting to enforce a contract based on kind of loose terms and conditions set in a conversation or over email is a nightmare. And remember, when you get into an organization and you have someone that’s pinging emails and [00:17:00] they’re trying to close the deal, they also have a limited perspective of what they’re trying to accomplish. So, you know, there may be something important in the contract for them. Hopefully not something selfish, like a commission, but that does happen. But it also just may be their limited view of the world where they aren’t really even thinking about how they could flush the whole thing out. And so it does create a vacuum for unmet expectations. There’s a legal term called… man, I’m going to have to say it. And I’m trying to bore the audience. Y’all don’t ding me, audience. It’s called the four corners test. It gets this name by the courts will say when they’re enforcing a contract, that they’re going to strictly adhere to the language inside the four corners of the contract.
Brad: That sounds very legal.
Michael: Yeah. And so with that being said, a lot of times if there’s emails out there that might influence how you interpret the [00:18:00] contract, the courts won’t allow it. And I’m not going to say what the legal term is for that because that would really put everyone to sleep. Basically, it prohibits them from looking at outside facts like conversations and emails, et cetera. So in essence, if it’s not in writing, it doesn’t exist in a judges eyes.
Brad: Right. And that’s why it’s so important that if the details are in writing and it’s part of that agreement, and I can’t emphasize that enough, where if you’re going to sign a document and it’s really, really important to you, and that detail is not in the agreement, don’t sign it because it doesn’t exist. And that’s the part where I think, as you said, that that’s because the courts are directed to do that. So let’s go to the second point Michael, why even have an agreement? And we’ve discussed this before, as a reminder, the purpose of a contract is established agreements between two or more parties and detail their rights and duties in accordance with [00:19:00] the agreement, or Michael real-world, that the contract shall allow all parties that have eyes wide open to the deal points with an alignment of expectations. Right? So you’re minimizing unmet expectations.
Michael: So are you saying this cannot be accomplished in a one pager?
Brad: Okay for the most part, yes this is what I’m saying. It would be unusual to be able to capture the full nature of an arrangement in one page. Not saying it can’t be done, but absent of items in a contract will for sure create unspoken expectations much like you said, that vacuum, you mentioned. I dinged it in the story as the agreement should have been more robust terms and conditions based on what you were describing to help actually protect both parties as they are handling licensed music, means to safely download this information, I am sure there is other means with credit cards. I mean, the security terms alone should be almost two or three pages.
Michael: Agree. Finally, you dinged me when I mentioned the sales force [00:20:00] wanted the authority to bind the company into this agreement. Why’d you do that?
Brad: Yeah. And this confuses many people. So they don’t realize that you should limit who can bind the company to an actual legal obligation. The vast majority of time, it should be limited to a select few individuals often called, again, authorized agents of the company. These are the people that sometimes are actually officers of the company, like a CFO, or CEO, or president, or secretary. Other times it can be your office manager or the head of a certain department. You know, whomever this person, is it a given authority it should be first and foremost for the best interest of the company, much like you were saying, oh, I sign this because I get a good commission and they have to be acting as a fiduciary. Second, this should be authorized by the board directors, and third, have some checks on their authority to make sure they are acting as a fiduciary.
Michael: We unfortunately have stories where these checks and balances were not in [00:21:00] place and it led to some bad decisions and someone stealing money from a business. We did an episode called “Embezzlement from the Top” during the dumpster fire season. Surprise, surprise it was in the dumpster fire season.
Brad: Yeah. And I think one more thing I want to add to that is where people don’t realize is when you give that person authority, if you’re trying to then get out of the contract, you, the business, it’s now up to you to prove that that person didn’t have authority and that the individual who relied on it, didn’t know that a person. So of course, if it’s someone they know and they’re part of the scheme and they know that person really doesn’t have authority to go buy that car on behalf of the company or whatever it is sure that they were kind of in cahoots. But a lot of times, especially in these larger organizations, the assumption is that person has the authority, my gosh, that it was on the same contract with the Gore’s Music name and he signed it. Why wouldn’t I think that a sales person couldn’t sign it? [00:22:00] So speaking of Gore’s Music, what happened?
Michael: Well, the contract was finally signed. We had a handful of conversations internally about the importance of spelling it all out. Now, when I say handful, I mean, first I talked to the sales guys and they completely ignored me. And then I talked to my main contacts and they’re like, I get it, I get it. And then we had to have a call with all of us on the phone. And so that was the nature of life back then was just this constant parental feeling like I was trying to keep them from getting themselves in trouble. The saving grace in this deal was the huge chain store of course had their council too and they wanted a more robust contract. Now I use the term robust a little bit lightly because we’re comparing it to a one pager, which is what our guys wanted. [00:23:00] So no, it did finally get done and that particular arrangement went well. Any final thoughts you have as we wrap up?
Brad: I guess it must have the chagrin of the request for those one-pagers huh?
Michael: Yeah, exactly.
Brad: Well, you know, in today’s world we act in the speed of business, I mean, you have instantaneous gratification with your phone. You can take pictures and videos and load it up on your social media accounts. And so people are used to things moving fast and if they have a deal in front of them they want someone to sign it right away. It’s because look, we had this great idea, Michael, and let’s start this right away and let’s get going. And, however, last season we talked multiple times on zoom in that the devil was in the details. Well, this is a perfect season when we’re talking about why we hear red flags. So when you have those kind of conversations [00:24:00] and someone wants to abridge a very complicated document, what they’re really doing is they’re increasing the risk that they’re going to have unmet expectations. And so our process as an attorney, advising someone is always to minimize that risk. And so you asked me a question earlier, am I against one page documents? Absolutely not, but I want to make sure that, you should make sure the client understands that risk associated with that one page document. In this case, with Gore’s Music, it definitely increased massively with such a big deal going on. Michael, I’d love to hear your final thoughts on this one-page contract.
Michael: Well first, if you ever figure out how to capture an arrangement in one page, I can’t wait to see it because we’ve been doing it for a long time and I can’t think of a contract that I was able to do that, that we were able to actually capture everything. But in theory, I agree with you. I think about [00:25:00] how we began the conversation today, talking about the back of the napkin and that’s really endearing. Like why is it that there’s just like this heartwarming kind of energizing thought behind sketching something on a napkin to get a deal done? And then at the same time, there’s this kind of negative vibe with, oh, you want to do a one pager? And I think it’s just how you use them. I agree with a one pager, if it’s kind of done like a term sheet or a letter of intent. Let the sales guy bullet point the principle terms of the deal and then document it accordingly so that the entire thing is captured. But if you started to try to use the napkin as a contract, which by the way that has happened and there’s been lawsuits over that, then the napkin becomes less endearing as well. It’s all about flushing everything out and making sure everyone’s on the same page.
Brad: Well, [00:26:00] Michael, believe it or not, this closes out season seven of our podcast. But do not panic audience. Stay tuned or keep up our social media and website accounts because we’ll be announcing the start of season eight very soon.
Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five- star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues. [00:27:00]
