Watch Your Back

I’m much too young to remember this, but there was a time when a man’s word was as good as done. A handshake was worth more than a contract written by a team of top lawyers. This was mentioned in the play Jersey Boys when Frankie Valli and Bob Gaudio seal a deal with a handshake, and it was enough for both of them to trust.

Sadly, for many people, those days are gone. While not everyone is lying consistently through their teeth, that honor to keep a promise is much rarer today than before. Undesirable contracts can be fought to be avoided. Deals can be written off because a verbal promise was conveniently forgotten. In fact, many contracts clearly state that all verbal agreements are null and void as relating to the content of the contract.

However, to get around in the world, one must still have an element of trust. Even where the law might help you, it is often insufficient to implement. For example, a bad debt can be collected, and for small amounts, you can go to small claims court. But the cost in terms of time might be more than the debt itself, and so you would have to write it off. You, however, trust your clients to some extent to pay their bills, even if from a practical point of view you could not force them to.

For that reason, many contractors require deposits, installments, final payment on delivery. All of these are ways to protect yourself as much as possible from not being paid. However, they do not fully accomplish that task.

Take, for example, a company hired to do some work. They can create whatever payment structure they want, but if they don’t formally arrange for changes to the scope of work, they can end up doing work with no way of collecting. If the project takes 50% more time than originally planned because of changes to the requirements, but the only agreement to pay for those changes was verbal, there may be no way to recoup that cost.

For this reason, anyone running a business needs to learn the lesson to always watch your back.

Any deal, or arrangement, needs to be in writing. It needs to be acknowledged by all parties. It needs to be enforceable, though even an informal email can often suffice.

Most of all, it needs to make clear the rights and expectations of all parties. It is not safe to assume that verbal agreements will be honored, and it only takes one occurrence of someone violating such an agreement for someone to understand why.

But why should you have to learn the hard way, when it’s so straight-forward to simply protect yourself in the first place?

Mixing Family and Business

There’s a well known saying, which is expressed in a variety of ways, but essentially boils down to the simple statement:

Family and business don’t mix.

However, in recent months, I’ve witnessed cases where family and business truly don’t mix, and other cases where it was perhaps because of family involvement that the business was such a success. Certainly, no two cases are exactly alike, but perhaps with this article, some of the issues will become clear, and you can judge for yourself.

Why should you mix?

Perhaps before dealing with the reasons to avoid going into business with members of the family, it is necessary to understand why people might choose to go into business with family members.

  • You already know the people, so it’s unlikely that you’ll be surprised by unexpected behavior. This predictability can help hold a business together when two random people might have fallen apart.
  • You’re all in it together – there is often with family members a desire to succeed as a family unit, as opposed to each partner being in it for themselves (whether or not they act that way is a completely different story).
  • They’re available – families will often stick up for one another, so raising capital, or getting a critical introduction can often be facilitated through members of the family.
  • Your family will stick up for you, often even when you haven’t earned it yet.

Why you should stay away?

This is actually the easier question to answer:

  • You have to deal with these people all the time, so it makes it hard to turn off the business and turn on the family life, and the same applies in reverse.
  • Failures will likely haunt you for the rest of your life, especially if a family member loses money on your venture.
  • Customers will find that if they have an issue with one member of the family, they are less likely (though still possible) to get a satisfactory resolution from another member of the family.
  • Conflict resolution can be nearly impossible.
  • Dealing with a member of the family slacking off can often destroy a business by either creating too much fighting within the business, or allowing the slacker to stay because they’re family.
  • Nepotism is rampant in family-based businesses, as the name implies.

Which should you do?

If you’re debating working with a family member, make sure that you would want that person as a partner even if they were not related to you. Also, ensure that you can maintain a division between work life and family life, and that you have in place a means to resolve conflicts, which will arise (it’s not a question of if, but when, and over what).

Mathematics of Hiring

At what point does it make sense to hire someone for your business?

How much should you pay your new employee?

These are questions that are asked on both sides of the table – the business owner expanding the size of their business, and on the side of the prospective employee, trying to get paid their fair share.

First, in order to hire someone, your business must be able to afford that employee. While this sounds simple, the reality is that often a business will need to hire someone but cannot afford to do so – the payment for the new employee has not yet been received.

As an example, John owns a lawn care business. He accepts 10 new customers, but does not have the time to do all the work for them. Because he is only paid after doing the work, the cash to pay another employee is not yet available, but without the new employee, he may not be able to earn the money from the additional contracts.

The solution, in John’s case, might be to take out a short-term loan, or make use of an operating line of credit at his bank. The mathematics of borrowing money will be explained in a moment, once we discuss the second part of the equation.

An employee is not worth the amount of work they do. For example, a lawyer might be billing at $300 per hour, but that does not mean the lawyer is earning $600,000 per year. Even if the lawyer managed to bill 2000 hours in a year, they would not be paid that amount. He might earn about a third of that, or $200,000 based on those numbers. He might earn even less.

The reasoning for this is simple. The company does not need to bring along another employee who exactly earns his keep. An employee who costs $50,000 and only does $50,000 worth of work is not worth keeping around. They do not bring value to the company. While there are times when such an expensive employee is justified, those times are few and far between.

In order to be worth hiring, an employee must therefore do more work than they are being paid for – their billings must out-weigh their cost. So an employee earning $50,000 has to do work that can be billed outside the company for more than that. One of the common multiples is 3, so that employee would have to do $150,000 worth of work.

Getting back to John’s case, the reason he’ll be able to borrow money to cover the cost of hiring an employee is because that employee will be doing more work than they’re being paid. If they bring in twice their salary, then the cost of borrowing their salary (that is, the interest on the loan) is offset by the additional income they bring in.

The problem, of course, is that many employees don’t see this side of the equation. They see themselves working on projects where their work is being billed at $50 per hour, or $75 per hour, and yet they’re earning only $45,000 or $50,000 per year. Since they know their value to the company, they don’t understand why they aren’t being paid more.

However, there is, of course, additional costs to having an employee. Some companies will regularly provide their employees with their adjusted salary – factoring in all benefits, the rent on the space they occupy, the equipment they use, the software licenses they require, the food and drinks available. Once all these costs are added in, the employees will usually see that they are earning significantly more of their billings. The employee doing $200,000 worth of work might actually be costing the company $125,000 or more once these items are considered.

Secondly, the company can also create a profit-sharing system based on billable hours and the rates for those hours. An employee who manages to generate 2000 billable hours in a year at $50 per hour would get a bonus relative to the fact that they managed to generate $100,000 in revenue for the company.

The amount of the bonus? That would depend on how much money is actually available at the end of the year, and how the various employees performed in relation to each other and in relation to their function.

Hunting for Space

Having recently gone on a search for office space, I realized that I had not the faintest idea of what I should be looking for, or at. I knew what the space was going to be used for, but not what kind of space I would want, nor what types of terms and conditions would accompany the space.

Area

The first question I therefore had to answer was about the amount of space required. This question was actually fairly easy for me to answer, and then I got it wrong, and learned something in the process. The space was to be used by 3 people, so I add together the size of 3 standard cubicles (64 square feet each) plus a little extra, working it out to 225 square feet.

Ouch, that’s cramped.

I forgot that in an office which uses cubicles, there’s usually some larger space available for when you need to spread out. 225 square feet just wouldn’t cut it – the three of us would be driving each other nuts after a very short while.

In attempt 2, I just added a fourth space as the boundary space, and decided to look for a 300 square foot office. That would be a little more comfortable, and, if necessary, could allow us to bring in a fourth (or even a fifth if absolutely necessary) person for short periods of time.

Furniture

When shopping for space, you need to remember that you don’t have any furniture, so you need to consider that when looking at offices. Is the type of desk you want suited for a wall? A window? Center of the room? All this makes a big difference in terms of the shape of room that you need.

Facilities

Something to ask about is the location of a washroom relative to your space (is it inside your space, or down the hall?) and the location of a kitchen. You’ll want to be able to get fresh water, and ideally a small fridge. If you have to set aside some of your office for the fridge, then that will add to the amount of space needed.

Hydro, Internet

Make sure you find out if the rent includes the utility bill. When comparing spaces, you need to know what the included and excluded extras are, because there is no standard set of inclusions. As well, if you know that you’ll need something special (for example, you’ll require a dedicated high speed internet connection), then make sure that the terms of the lease allow for that. In the example given, since you’ll be arranging for your own internet connection, be sure that you aren’t paying for one that comes with the space.

Pricing

There are two pricing schemes used when it comes to office space – total fee, or per square foot fee. In any given neighborhood, you can see both systems used, so you need to be able to convert quickly between the two. Also, when looking at a price in square feet, make sure you find out what’s included – and measure the space yourself. If you aren’t careful, you could find yourself paying more than your share of some common areas of the building.

Second, look at the terms of the lease, if there is one. You may be required to stay for a minimum of a year. You may be able to transfer to another space in the same building during the term. Look at what the penalties are for leaving early – it may not be possible (that is, you may be charged the balance of the lease regardless of whether or not you use the space). Are you allowed to sublet parts of the office? This might be a good option if you find a place that’s larger than what you need at the moment.

My Story

What did I do? I went to a commercial real estate agent, who walked me through the process. He helped me find the type of space I was looking for, in an area that worked for me, at a price I was willing to pay. Most of all, though, he made me think about what I was using the space for to ensure that I ended up with what I needed. Too often, you will only realize after using the space for a little while that the place you have is not the place you need, and you’re now stuck there until the end of your 12 month lease.

Where to Splurge, Where to Save

In any business, there are things you try to save money on, others, you spend what it costs. For example, you might try to pick up your desks on clearance sale, but spend what it takes to get good lighting. Or, you might buy refurbished computers for your workstations, but have the top-of-the-line servers for your website.

However, in looking at a business, you can tell a lot about the people running the business from how they spend money. The miser spends not a penny more than the minimum on everything. The irresponsible never shops for a deal.

The wise owner? She is the subject of this article.

The wise owner will sometimes ignore the cost, because it’s either irrelevant (for example, saving a few dollars on a lamp that took an extra hour of your time and a few dollars worth of gas driving to pick it up) or because having the right item is more important (for example, anyone sitting at a desk for long hours must have a proper chair regardless of the cost).

Other times, however, she’ll look for savings, because the effort to save is minimal (for example, ordering books online from one of several retailers takes seconds to look up and can save dollars each time), or because the dollar figures are significant (for example, spending thousands of dollars on a new server can have savings worth several hundred dollars by shopping around), or because the item itself is not relevant, and therefore not worth the expense (for example, the foosball table for your employees to mess around with doesn’t need to be brand new).

In any business, what falls into each category is important. Some business owners, though, when asked about a particular item they are purchasing, can immediately tell you if they’ll look for savings. Others will make a comment about waiting for a sale (which is, of course, saving money by waiting). But there are many who will just make the purchase immediately, regardless of the item.

So which type of owner are you? Do you try to be frugal, at least at times? Are you always frugal? Or do you spend freely, and hope that the money to pay for everything will always be around?

Start Fresh or Expand and Modify?

This question is faced by programmers just about every time they are presented with code which they did not write, and have been asked to fix. Our ego tells us that we can do a much better job than the original programmer, that the entire code is a waste, and should be completely thrown out.

In a few cases, we’re actually right.

In most cases, management might wade into the discussion and veto the idea of starting over, claiming budgetary constraints, or perhaps an unwillingness to admit that the money spent on the original solution was a complete and total waste. The new programmer must therefore adopt the [horribly written] code and modify it, expand it, until it resembles scar tissue – one layer on top of another to fix things as they arise, rather than determine the original cause of the first problem and correct that.

We’re not alone.

In any type of project, there is often a desire to hold onto the current version of it in its entirety. Perhaps it does certain things well. Perhaps we spent a lot of time on it. Perhaps it was expensive.

The bottom line, however, is that the current version of the project doesn’t work. It does not accomplish what we need it to accomplish. It needs to be changed, updated, corrected. There will be a version 2, the only question that remains, however, is how closely it will be tied to version 1.

The decision that really needs to be made is whether by starting over (and using the lessons learned from Version 1) you will end up producing a better product. Sometimes the answer is yes, sometimes no. What was true the last time you made that decision might not be true this time.

As an example, take writing an article for a formal publication. After the first draft, you need to decide how to revise it. Sometimes you’ll just go back over the article and fix a sentence here, a word there, a paragraph over there. But other times you might realize that the entire draft is poorly structured, perhaps as a result of changes that occurred during the writing that left the article poorly structured. In that case, you might be better off writing a second article from scratch, loosely based on the first draft.

The decision needs to be made, and most people do make a decision. The problem, though, is that most people don’t realize that they are making a decision, since they always take the same action.

Don’t let that be you! Think about what you’re doing. Are you really saving anything by keeping hold of the first version? Are you really improving the product by starting over from scratch?

Tolerance for Error

Most areas of life have some tolerance for error in them. In work environments in particular, there is usually some tolerance for error, but often, it is dependent not on the person making the error, but on someone else. As such, the topic of this article is the tolerance for error on the part of other people.

There are a few reasons why an error should not be tolerated, but even in those cases where the reasons are valid, the level of response to an error is heavily dependent on the nature of the error.

For example, a mistake that costs a business the equivalent of 1% of its annual revenue is not of the same caliber as one which does not have any noticeable effect on the company’s bottom line. Likewise, making an error on a formal filing to the government resulting in late fees and time-consuming audits is much more severe than the same error made in a weekly report to a manager.

As such, the tolerance for the error is actually the same in both cases, but the level of reaction is not. In both cases, the error must be pointed out to the person who made it – otherwise, how will you ensure that there is not a recurrence?

However, the real question is what happens after that mention is made?

On the one hand, you can choose to let it go, and ensure that whatever steps are necessary to ensure a relapse does not occur are taken. For example, if the cause of the error was a lack of training, then ensure that the training happens. If the cause was “I forgot, but now that you mention it, I did know about X” then it is necessary to determine if anything needs to be done, and it would depend on the outcome of the error to answer that.

On the other hand, you can insist on treating each and every mistake like a crime against humanity. You can ignore the explanation for the error, and whether a lesson was learned from the mistake. You can act like the mistake was the root cause of the deaths of millions of people.

However, bear in mind that reactions like that have the following consequences:

  • People will never own up to a mistake under such rule, even when doing so could reduce the effect of the error
  • People will leave such an environment as soon as another opportunity presents itself
  • People will shift blame as much as possible and FAIL TO LEARN FROM THE MISTAKE other than the most simple lesson – DON’T GET CAUGHT

So, which will you be? Will you let people learn from their mistakes, with a tolerance level that promotes learning? Or will you push people and harp on all the errors, forcing them to leave an environment that punishes honest mistakes rather than educate?

A Preferencial NDA Clause

I recently had to look over several contracts, each which was for the same purpose, but all three were quite different. One was 2 pages, another 9, and the third 18. All three, however, contained the same basic elements – who the contract was between, what the purpose of the contract was, and several clauses outlining various limitations of the agreement.

In all three there was what I call the Non-Disclosure Clause. The purpose of this clause is to prevent someone from gaining information through the agreement and then using it for their own purposes. For example, a bakery might hire a baker, but doesn’t want their new hire to be able to use their recipes except while working for them.

Naturally, this clause does not have a fully standardized phrasing, since it is highly dependent on the nature of the agreement, and the type of information that might be expected to be exposed through the arrangement. As a result, I was not surprised to see that all three had completely different phrasing for this clause. (To bring this point out, the clause regarding Governing Law was almost identical in all three contracts.)

One of the three, however, I found to be much better written than the other two, and not from a legal perspective, but from the perspective of someone who might sign the document. The reason I liked it so much (although it was not the most open, or the most closed of the three versions) was because it was reciprocal.

In almost any relationship between two businesses or individuals, information will be shared in both directions. As such, while one party is “issuing” the contract to the other (remember that contracts are unilaterally binding when signed by both parties), many of the issues at hand apply to both parties.

As an example, take an employment contract. There is likely a phrase regarding non-disclosure, or confidential information, and it might be written stating that the employee cannot use any confidential information they acquire through working for the employer for any use other than the benefit of the employer. That’s fine, but the employee will also be giving the employer some information, for example, their Social Insurance Number or Social Security Number.

As an employee, you want to be sure that the employer will not hand out that information, and they will treat it with the same respect they expect of you when dealing with their information. What better way to ensure this than to have a reciprocal agreement when it comes to the handling of confidential information?

After seeing the clause phrased this way, not mentioning who is giving and who is receiving the information, but making the clause binding on the receiver of the information, I recommended that an adaptation of that clause be used. If both sides of the contract are willing to bind themselves by the same clause when it comes to confidential information, the level of trust between parties (not necessarily from a legal perspective though) is likely to increase.

As a note, I am not a lawyer, nor an expert in law by any definition of the word. This article is about my impressions of a particular clause – it is not intended to provide legal advice. If you have a question regarding a specific case, please refer to a lawyer who can provide advice relevant to your situation.