Doing business on the web for the first time can be a unique experience for most people. Whereas joint ventures are relatively rare in the brick and mortar business world, these ventures form the backbone of the web in many ways. Where there is money to be made, alas, one will also find people and businesses of dubious quality. If you are trying to evaluate whether another party makes a good potential partner or not, there is one trick that can be used to flush out individuals with bad intentions.
What are we talking about when we discuss joint ventures? The legal definition is very restrictive. For the purposes of operating on the web, we are going to expand it to any situation where two or more parties form a relationship to sell something to a third party group. The third-party group can be consumers, other businesses or the government. The relationship is known as a strategic alliance in some circles.
The affiliate program represents the classic online joint venture agreement. A party with something to sell teams up with a party that has traffic that may be interested in purchasing that product or service. The affiliate is typically paid a commission for each sales transaction, and everyone is theoretically happy.
Another classic joint venture platform is Adsense. Many website operators don’t think of it this way because the thing being sold is just ad space, but Google has built a multi-billion dollar company around the concept.
Programs such as these are what are known as low-risk platforms. So long as you use an affiliate clearinghouse such as Commission Junction or team up with a huge company such as Google, you really don’t have to concern yourself with investigating the other party. The chance of that party not coming through on their end of the bargain is minuscule.
The risk associated with a joint venture goes up significantly when neither of the two participants is a major company. Let’s create a simple hypothetical so we have something to work off of while discussing this topic.
Our first party is Tim Smith. He is a blogger who pontificates on how to make money online. Over the years, he’s picked up an enormous database of loyal followers. Over 500,000 people eagerly await his email newsletter.
Our second party is Bob Johnson. Bob creates marketing apps and programs for online businesses to use in marketing their services and products. Bob has created a retweeting program that allegedly creates plenty of the type of social signals Google likes to see as “social signals.”
Bob approaches Tim about the possibility of promoting his retweeting program to Tim’s list of 500,000 followers. He offers to give Tim 60 percent of the revenue generated, which amounts to a sizeable payout.
Should Tim take the deal?
Most people in Tim’s position would immediately say yes. These people would be making a mistake. Why? Think through the situation.
- Does Tim know anything about Bob?
- Does Tim know how Bob’s products have performed in the past?
- Does Bob have a good or bad reputation?
- Does Tim even know how this retweeting program works?
The answer to all of these questions is no. What if Tim agrees to the deal, promotes the program to his followers and all those who use the program have their Twitter accounts terminated a month later for violating the terms and conditions of Twitter? All the credibility Tim has spent years building up with his followers will be flushed down the toilet.
Instead of rushing into the deal, Tim needs to do a good bit of due diligence. Due diligence is an investigation into the background of the party in question – Bob, in this case. However, there is one trick that often can flush out dubious individuals before even starting the due diligence process – demanding a written contract.
Lawyers have a bad reputation because, well, we do a lot to deserve it. Despite this bad reputation, there is one bit of free advice every lawyer will give you that is worth its weight in gold.
Get it in writing!
This advice is particularly true for online business transactions. The convenience of working on the web makes it easy just to move forward without putting agreements in writing. If you don’t reduce an agreement to written form, however, you risk major problems ever trying to enforce the terms of your agreement.
Here are the two things you need to understand about contracts. First, an agreement in writing is going to be binding on both parties in court. Second, an agreement not in writing is rarely going to be binding.
Let’s return to Tim and Bob to see how this might play out. We will work off the premise that they have moved forward with the deal. Tim has promoted the retweet program to his followers. The program is a disaster. It freezes up, sends half messages and basically is a boondoggle. Thousands of Tim’s fans want their money back. Bob is refusing to refund the money, and Tim’s reputation is going quickly down the drain.
What are Tim’s options? If Tim has a written contract with Bob, he can demand Bob make good on the terms of the contract. Those terms should include language about the program functionality, uptime and so on. If Bob does not fix things, Tim can sue Bob for breach of contract while alerting his users to the situation. Bob will usually roll over and settle at this point with Tim returning the settlement funds to his unhappy followers.
If Bob does take the matter all the way to trial, he is going to be annihilated in court. The court will enter the contract into evidence, and it will quickly become apparent how Bob violated the various terms of the agreement. A jury should issue a judgment and Tim’s attorney then will move to liquidate Bob’s bank account and other assets until the amount of the judgment is satisfied. Tim can then return the money to his spurned followers, an act that will go a long way to repairing his reputation.
Now consider the same scenario where there is no agreement in writing. Tim takes Bob to court. Tim testifies Bob agreed to provide a program that would be up and running 99 percent of the time. Bob swears he told Tim the program was in beta, might only work 50 percent of the time and could only handle 100 people trying to access it at one time. Who is the judge or jury to believe? There is nothing in writing, so the case boils down to whether Tim or Bob is the most believable witness.
Are you comfortable risking your business in this manner?
If not, get every agreement in writing.
The funny thing about using written contracts for online business deals is these agreements often help you avoid going into business with a bad partner in the first place. How so? If a party is unsure it can meet its obligations or is trying to run a scam on you, they will react to the idea of a written contract much like a vampire to a cross. [Well, at least in bad fiction.]
The party will start delaying whenever you mention the need to create a contract for two reasons. First, demanding a written contract tells them you know what you are doing and are not an easy mark. There are tons of easy marks online. Second, they know signing the contract removes the vast majority of their options when it comes to bluffing their way out of any subsequent disputes. As a result, they will often drop the deal, which saves you a tremendous headache.
So, what is our one trick to avoiding awful business partners that can ruin your business? Demand the terms of any deal be reduced to a written contract and require it early on in the negotiating process. Combine this step with an aggressive due diligence effort, and you should be able to move forward with confidence that the other party is legitimate.
Considering an online business relationship with another party? Contact me to learn more about strategic alliance agreements and the language you need to include to protect yourself should the venture not work out.
Richard A. Chapo, Esq.