Contract reviews done by lawyers need to follow good-sense guidelines.

Some contracts are routine and don't need any form of customizing. The review in such cases is minimal and can even be skipped if the routine nature of the contract is obvious or if the entrepreneur is seasoned enough to identify a clean situation without lawyer help. Most such routine contracts cover simple cases, such as a simple nda or a recurring situation in which a basic template is used with no material variation apart from non-legal business items that typically get customized in an exhibit.

For most cases, though, the whole key to doing a contract right is to customize it properly on its material points. This means it should be clear, it should accurately reflect the intent of the parties, and it should contain basic legal protections for each party. It is vital to this process that both the lawyer and the entrepreneur understand what is material. Why? Because that determines the proper cost-benefit analysis for how it should be reviewed.

For example, say a startup is negotiating a 1-year office lease for only a few hundred square feet of space at a modest rental rate. That sort of lease needs very little lawyer review because there is not much at stake (the money is small, the location itself not particularly important to the startup, etc.). A quick read-through by the lawyer is the max that this needs and then only to see if there is anything wildly out of line in the document. What about a 3-year lease with more square footage and a higher rent? In that case, maybe a good high-level review is in order, with comments and mark-ups on a range of important points but little or no attention paid to boilerplate clauses that may be highly unfavorable to the tenant as worded but that are also highly unlikely to occur. And what if the lease is for 5 years with two 5-year options to renew, with a location that is very important to the business involved, and with risks (such as potential environmental liabilities) that can far exceed even the value of the lease itself if mishandled? In that case, lawyer review is normally vital and needs to be pretty thorough (including even haggling over much of the boilerplate language) because it is far more likely that contingent risks can come about over a lengthy period, the amounts at stake are greater, and the lease itself may be important to the business (e.g., a restaurant that depends heavily on having a particular location).

This same sort of approach applies to a whole range of contracts. What if your business is getting acquired or if you are buying a business? Well, if it is a little business and the purchase price is very small (say, $50,000), you can very likely be well-served by a canned form used for small business sales (brokers who do these deals use these all the time). Such a form will have basic provisions covered and will usually contain the most important warranties and representations but all of it will be bare-bones. This normally works fine for a small sale. Again, lawyer review can be skipped or done at the quick read-through level. But what if the business you are buying is going to cost you $1,000,000. In that case, you still are in the small-business category but the money is more significant. This likely warrants an intermediate level of lawyer review (contract needs to be customized for the deal, with proper account taken of whether it should be structured as an asset sale, stock sale, or merger - each having different tax consequences - and with careful attention paid to reps and warranties, to conditions for closing, and to collateral matters such as non-compete, etc.). This might take $5K or $10K or sometimes more in lawyer time but it is money normally well spent (it certainly is if you are a small business owner and $1M is a lot of money to put at risk for your situation). And, of course, once you start talking about acquisitions in the tens or hundreds of millions, you need major lawyer time to make sure the complex aspects of such deals are handled properly.

What about a license agreement? A small deal, with non-exclusive rights concerning routine IP needs little or no lawyer review. But a core OEM deal involving the licensing of IP that is at the core of your company obviously warrants significant lawyer review, especially if it involves joint development efforts, sweeping indemnification clauses that might trigger major liabilities, or other complications that require sophisticated handling of IP and other rights. Of course, there is also the issue of weasel language and its nasty impact if it is not caught and deleted from any major contract.

In short, lawyers and entrepreneurs need to be guided by good sense in handling these matters. It is not good sense simply to act as if lawyers are not needed. It takes only one really bad instance for most entrepreneurs to realize how bad a mistake it is to cut corners in really important matters. On the other hand, letting lawyers run wild with their reviews is foolish as well. Their time must be managed and managed well. It should be used where it matters and curbed where it doesn't.

Let the barbs fly, then, but this is one lawyer who will insist that the advice given in this piece may have a grain of truth in it but is too simplistic to cover most serious business affairs. It may work in a number of cases but it can easily get you into trouble.

By the way, I am not saying give an open ticket to lawyers. If your lawyer can't make good judgments concerning what is important and what is not, and can't manage time wisely, it is time to get a new lawyer.