Friday, January 16, 2004

AMERICAN IDOL CONTRACTS AND MORE We've all had clients who didn't seem to care about what the contracts say, they just want the deal done. That's fine, it's our job to look after them, but that job is made difficult when the client pays no attention to the risks of nonperformance, of incorrect or weak representations and warranties, or whether any breach is going to require litigation against the judgment proof with no other recourse.

Here's a story on the contracts that American Idol contestants are required to sign - basically, giving immense power to Simon Fuller's 19 Entertainment companies. It's a prime example of the deal being a deal the client must close, without regard to the contractual provisions (see some of those provisions here). After all, the music business sets in stark relief the difference between doing the deal with a bad contract and not doing the deal at all. It's the difference between flipping burgers or being a household name, jetting around the country and performing in packed arenas for money never dreamed of. If Kelly Clarkson makes $750,000 this year while Simon Fuller gets much more from her fame and work, I'm sure Kelly would choose that over her old waitress position. Heck, if Clay Aiken came to me before signing the American Idol contract, I'd have told him that it sucks, but probably would have said go ahead and sign it. You'll be better off than you are now. At least the downside isn't that he could lose everything. And who knows, maybe we could call it a contract of adhesion. But don't count on it.

But with investors (especially angels), nothing is the downside and that potential payoff often blinds the less sophisticated (especially if they don't know they are less sophisticated -- accredited or not). So, we lawyers are in the position of saying "have you thought about warrant coverage for that debt"? Or, "I know you trust the management and they are good buddies, but if things tank, you're screwed and your "friends" can't help you."

Anyway, for you business people out there reading this, my exhortation to you is Open Your Eyes and Ears and Listen to Your Lawyer, don't be blinded by the potential upside. Don't tell the lawyer that you only want him to look for the "gotchas" in the agreement and not to spend a lot of time because you think it is OK. If you don't want protection on the downside risk, don't hire a lawyer. At least then you'll be admitting to yourself that you are flying blind and going on a handshake. Remember, the downside of signing that Amercian Idol contract is that you don't win and you lose the cost of traveling to the audition site and the upside is that you win and make a lot of money, just not as much as you might have made if you worked your vocal chords off playing local clubs for years hoping to be discovered.

As an investor, your downside is to lose everything (and even more if there are capital call obligations). You may be smart, but there's plenty you don't know, that's what lawyers are for.

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