Name: Bootcamp Module 2: Structuring pricing and financial contract terms to manage risk
Uploaded: 2025-06-17T17:16:08.343Z
Duration: 57 min 4 s
Description: Bootcamp Module 2: Structuring pricing and financial contract terms to manage risk

Transcript for "Bootcamp Module 2: Structuring pricing and financial contract terms to manage risk": Hi, everyone. It is Laura Frederick. I think we are live and excited to be here for module two of the vendor contracts boot camp series. I am so thrilled to be partnering with Agiloft to provide this training series and, with a really a big focus on vendor contracts and helping people who are either lawyers or procurement or paralegals, anybody who's doing contracts that are involved with vendor contracts. And so often these kinds of trainings, they really look at both sides. You know, you're looking at when you're on the sales side, when you're on the customer side. For this series, when we're on the the customer side, and that's gonna be our exclusive focus. And I'm so thrilled to be talking about this issue because the financial terms is something a lot of people kinda gloss over, especially these days with AI being so critical and all of us trying to get up to speed on all the AI issues. We can't lose sight of how important these financial issues are as well. And so joining me for this episode, I'm very excited to have Sterling Miller and Jonathan Propell. Hi, guys. Hi. Hey there, Lua. Now Sterling and Jonathan have been, past speakers throughout a contract, two past contracts cons. So we've all kind of worked on a lot of these issues. There's worked on a lot of training together, and I'm thrilled that they agreed to help out and share their expertise here. So let me start with you, Sterling. Let me if you can tell us a little bit about yourself and, your background. Sure. Currently, I am the CEO and senior counsel at a at a law firm, Builders Graven, which is the largest female owned law firm, in The United States. We're in most states, a 150 lawyers, and we keep growing. So it's a it's a full time job, doing just managing that. But most of my career was spent in house. At, about twenty five years of it, I was general counsel several times. I've written a few books and a blog. So if you wanna check that out in the in the LinkedIn profile, feel free. But I am I am thrilled to be here and happy to get going. Great. How about you, Jonathan? Hi, Laura. And welcome everybody. This is, I I'm the, chief legal officer of a company called Isuzu, which helps people build better credit by having their on time rental payments reported to the credit bureaus and and a month a number of other things. This is my fifth, position as the head of a legal department. I started with my first start up in 02/2001, dating myself a bit. At one time, Sterling was my my boss at Sabre Holdings when I was a GC of Travelocity. So, it's a it's a nice little reunion going on here. I started at a number of law firms in New York, and I had a lot of, of finance training in those positions representing lenders, secured lenders, and and things like that. So lot of lot of different experience dealing with, vendor contracts and and other types of contracts when it comes to financial terms and credit. Yeah. The thanks. And and that's where it's so great. Because I've never worked in that general counsel role. I've always was commercial counsel, supply chain counsel, manufacturing goods counsel. Whatever it was, I I was really focused on the day to day transactions. So it's really great, having you here and and all of us bringing our different experiences. So to give everybody, well, let me just run through a bit of the, the plan for this session. So we are going to go through the slide deck. I for each we're covering four different topics. I'll I'll share in a second. But for each topic, I'm gonna start us out with a mini lesson for about five minutes or so. I'll just really go over the basics and the core things that I think are important for everybody to know on that topic. And then once we get through the mini lesson, we'll go to the, discussion with Sterling, Jonathan, and me and kind of dive a little bit more into our experiences with that. So with that, I'm gonna kick off, and start diving in. And as I said before, the these price and financial terms are so, so critical, and we have to keep focused on them. And at least for me, when I'm working as a supply chain counsel or then on a vendor contract, what I'm always looking for are flexibility and options. That if things start getting a little screwy, either with the vendor's performance or with their credit the creditworthiness or other issues, I wanna make sure that I have options there. And a lot of the contract drafting is around that. Also protection for you, but as often you're gonna be in a bad situation if your counterpart is not performing, doesn't have good credit, or is, you know, looking like they're becoming insolvent, and you need to have choices of what to do next. So our agenda, the four topics we're gonna talk about today, it's pricing negotiation, payment terms, credit and payment security, and then vendor bankruptcy strategies. In other words, what are how do you approach it when your vendor is either about to or has declared bankruptcy or filed for bankruptcy, I guess? So our panel of experts who you just met, we've got Jonathan Purkel and Sterling Miller. And so excited to have them here today. So let's just launch in the pricing negotiation. If you've been doing contracts for twenty years and done a ton of these, you know what I'm what this involves. You've been very, active in helping the, you're helping your teams do this. And so what I wanted to do is just first go over the six most common pricing approaches that I see in vendor contracts. And the first one's fixed pricing. This is your classic you know, here's a widget. It's $50 each. It's very predictable, but it can cause some problems if thing if the market is shifting, if you have a lot of inflation, if commodity prices are going up, or any of those kinds of things. It doesn't give you a lot of flexibility, especially if you have a longer term contract. So what some people do is they do these tiered pricing so that you have a lower price if it's you buy us, a great or a larger quantity of goods. And this is great, but but one of the things I see where people make a lot of mistakes is where they're building in assumptions to those tiers. And they're looking at, okay. So this is the price for zero to $9.09 9. And then at 1,000, the price drops. Is that really the right number? Is that really where it should go? Should it be the tiers be smaller or wider and thinking about those assumptions? And then time and materials. We see this a lot with services contracts where we don't have a fixed, performance for an outcome. We'd wanna just pay by how much time they spend and what kind of cost they incur. These can be really good when you don't have that predictability about what you're getting, but quality control I said quantity control. Quality control is the bigger issue there, especially because you're not tying payment to an outcome. Index pricing. This is something in in my world of, manufacturing and goods. We did a lot of where you tie pricing or at least component of pricing to an index like the steel or it could be an energy price or something like that, which is great. It gives you flexibility to kind of float with the market. But if you are the customer and you have a budget, having these index pricing flexibility for the vendor can really hurt. And so I find the index pricing typically favors the vendor, and customers need to take extra steps to make sure they're, facing it or they're it's fair to them as well. There's also concept of cost plus. You don't see this very often except when there's a lot of trust involved. And this is where if you pay the cost, you pay their cost plus profit margin. So we're always trying to be careful about that. And then the last one I put in here is some floor and ceilings where you basically have some flexibility on prices, but everybody knows what the bottom price is and everyone knows what the top price is. These can be great for predictability, but, ultimately, somebody is gonna have to pay if the prices are higher or lower either on the you know, particularly the vendor may have to eat some of those costs. So I wanna go quickly through some of the four big pricing traps that I see, with vendor contracts. And so the first one is and this is presumably the vendor talking. Now we can add the rate card for the time and materials contract after we sign. So the and a rate card is a list of the hourly rates of the people who are doing the work. This is something that gives the vendor a lot of flexibility, but it's not necessarily in the customer's best interest. So one of the big pricing strategies I encourage all customers and supply chain teams to do is to make sure we're really clear on all the rates that you're gonna be paying for the services, any add on costs, then it's not just a blank check for the vendor. So time and material the rates always have to be included. Even if you're not expecting a lot of services, I still wanna see that rate card in the contract so that I have that predictability. And then being monitoring compliance. I see a lot of customers and supply chain teams who put do the right thing in their contract, but then they don't really watch what the vendor's doing. So they end up having cost overflows. Pricing track two. We're gonna calculate your SaaS license fee or SaaS user fee based on the total employees of the company. This can work in some cases, but often, everybody in the company isn't using a particular platform. So you really wanna drive that drill down into the pricing structures and make sure that how you are getting charged matches how you're gonna use it and adjust accordingly. And there's some, things that we see a lot of people ask for and a lot of vendors give, which is you can sometimes negotiate in some free use, for implementation, for training, maybe even some free admin time. And then consider think about how you wanna deal with partial periods. If you start again the fifteenth of a month, Is it gonna be prorated? You're thinking about those kinds of things. Pricing track number three. The price is firm only for the first three months, and firm in the contracting world means fixed or locked in. So in a sense, here's our price. We won't raise it for three months. Well, you have to really think about, do you are you locking into a purchase commitment for a longer period than the price is firm? So I've seen vendors do this, and they'll say, we'll lock it in for three months. And some of them don't even tell you what it's gonna be after the three months. But you have signed up for a year of service, and they have the right to raise the prices after that firm period. So this is a big red flag, and, really, we want when we're doing the contracts to be careful to ideally I mean, ideally, get the firm price for the whole time. But if you can't get that, at least get some limitations on how much they can increase it and when. And I love getting advanced notice. So even if they wanna increase it, they have to give us, you know, as long as I can stretch it out as a customer. That's ideal, but it at least, some advanced notice. And then the last pricing trap before we get to our, questions is gonna be we need to add your forecast to the contract. This is more of a goods issue. It could be also in digital contracts as well where they're forecasting how many users they're gonna get. The big risk here is that those forecasts, those estimates that you're giving are put into the contract in a way that they become binding on you. I've seen this happen so many times. The vendor's like, yeah. I know it's not I know it's just an estimate. Let's put it in the contract. And you get in the contract, and they expect to order along those lines. And or it's a something called the take or pay in in some of the industries called that where you have to buy no matter what, whether you need it or not because it's in the contract. So you really wanna be watching those, kinds of issues. If you do have to commit to a certain minimum purchase in your contract, then make sure you're really detailed on any assumptions or conditions that you have and include some escape hatches, some ways to get out of this commitment. Let's say the whole market goes under. You know, this could be a change of law. It could be a, other activity. There could be a recall. Different things that will basically excuse you from that commitment. And then I always also like to make sure that the vendor has an equal commitment that they have to sell to me. It's not just that I have to buy as the customer, but they also have to sell. So that's my mini lesson, and now I wanna get into discussing things with Sterling and Jonathan. And, Jonathan, I'll start with you on this one. How are you know, what kind of vendor contract pricing strategies are you seeing as the most successful or the ones that you prefer to or your teams prefer when you're facing this particular issue of you're looking for you have a budget price stability, but, you know, everything's scaling, everything's moving. So I'd love to hear Sure, Laura. We you mentioned a couple. I'll just drill down a little bit on that. You mentioned tiered pricing. That's obviously great. But you have to look at how it's implemented. So am I automatically gonna get the benefit of that volume discount if I hit those levels? Or do I have to or am I going to, like, wait for somebody in procurement or somebody in engineering to tell me that they've been exceeding the levels for several months and we have to go back and request a change to the SRW? So that's one thing to look at. You know, the capped percentage increases is another great idea. The grade the greater of a of an index or a percentage. But in lockstep, I tend to want to insist upon fixed pricing for the for the initial term. And then I need at least whatever notice period I get for any proposed price increases. I like to build in at least thirty day gap there. So they can't come and tell me they're raising prices, like, two days before my notice of non renewal has to be given on the auto renewal provision. So you really have to look at the timing. You know, when do they have to notify you versus when do you have to say no? And you wanna build in a gap there because you wanna be able to negotiate. You want a time to negotiate. You don't wanna say no because you may not have another vendor lined up, but you wanna have time to say, look. That price is not gonna work with us. Here's a notice of non renewal. If you wanna talk about the price, we'll we'll be happy to keep you off. So that's a strategy. I would also say, you know, sometimes people sell you things based upon, results, and they say, you know, this will increase your conversion rate by x percent, or this will make your subscription more sticky. Build it in a three month trial period and see whether or not there you get the results that you're paying for. If not, maybe you don't wanna continue because, it's based on a lot of assumptions that turn out not to be true. Yeah, that's pretty much the the the the takeaways for this at this point. Yeah. And those those I I loved all those points, especially the trial period because I never used to use that. And it's you know, you build in these assumptions, and I would put them in the back end of termination rights. Like, if we don't achieve this, we can terminate. But building it that it's easier to extricate yourself from a trial period that's everybody's going into it as a trial than to try and terminate, and it both through the vendor and the customer. So Right. I don't know. Sterling, do you have anything to add in terms of your strategies? Yeah. No. Jonathan's, points were were fantastic as always, which is why I never fired him when he, when he worked for me. So Yeah. Just Yeah. Going going yeah. So going back maybe up a little a couple levels up. You know, one of the first questions I would ask the business is what's our commercial leverage? Going into that negotiation, do we need this? Can we walk away? Are we really stuck? Because that's gonna tell me a lot about where you're gonna be able to either nibble or go in hard saying we're not doing that. We can do this. We can do that or or whatever. So understanding what the business thinks about the need to have this product and your ability to walk away. Your best option as a customer when it comes to pricing, if you could get it, is the ability to terminate, and walk away without penalties. Any termination for convenience that you can get or tied to something where if it doesn't go the way you need it to or expect it to or goes outside of whatever parameters you put in, you can you can terminate. Very hard to get, but if you can get it, that's fantastic. And the last thing I would say, because you talked a lot about trust, Laura, in some of your some of your points. If it isn't in writing, it's not part of the deal, and you have to really convince the business of that because, oh, we've been working with these guys forever. We love these guys. They're super trustworthy, and that should all be, red sirens and and red flags. You better get in writing because it's not in the contract, doesn't exist. So I'll just I'll just look on the file. And just two quick points on what Sterling said, which reminded me, like, you know, one thing on the leverage issue, if you have tremendous leverage, all the leverage, you can try to get most favored nation pricing, which is very controversial because it basically says that the best price that they give to anybody else, they have to lower your price to match it. It could be similarly situated volume clients. It could be other things, but people are very, very reluctant to give that because it requires them to go back and cut, you know, if they have to agree to one deal with the large company, they're gonna have to give everybody that price. And and the last thing is, just dovetailing on your, your last point, Sterling, regarding, termination of convenience. You know, one of the reasons why it's it's very hard to ask for is because of the way the contracts are looking for business contracts. And this is where it helps to understand accounting when you're a lawyer because, basically, what these SaaS companies are doing is they wanna realize the revenue upfront, and, they don't wanna do it every month. And so what happens is if people have a right to terminate for convenience, they won't be able to do that. They'll only be able to recognize the revenue as the as the period of time goes on. And so they they will fight that tooth and nail many, many times. Yes. Revenue recognition is the bane. But but so critical. Yeah. But so critical. Absolutely. Yeah. Well, let me go to the next question. And and this one and I think we've probably covered a lot of these things, but what are there other ways that you think of for the business to make sure that they're uncovering kind of hidden potential cost, potential cost overruns? I think, Sterling, you talked about, you know, getting it in writing. It seems like that's the most obvious and probably most important one. Is there anything either of you would add in on these kinds of in this kind of category? I think, two things don't jump to my mind. One, don't try to do this on your own. You really need to get a broad view from multiple people within the company, not just the the procurement team or the people who are gonna use it, but the implementation team. Whatever whoever's gonna touch this some way within the company, get their thoughts on how the pricing should work, what you need to know in order to make sure you understand what all what all the costs are. And then, you know, really think hard about what is involved here. Is there training? Is there maintenance? Is there support? Change orders. All those things that happen that sometimes don't make their way, into the contract. And then if you can have the the right to audit, a reasonable audit provision to make sure that whatever you did agree to, especially if it's kinda complicated or wonky, you have the ability to to to check it. So that those are what jumped out to me. JPM or two that you saw now. One one one tip I would give is is take a look at the especially in the services contract. Take a look at how the services are defined. Is it a list of six things and anything beyond that is out of scope, or is it kind of a catchall with these examples? You know? And and when it comes to the change order provisions, take a look and see, like, is it any change from what was described, or is it only a material change from what was described? Because you I don't want them to, you know, nickel and dime me if if something's oh, well, that's not included. You know? So you have to really you have to really pay attention to those services definitions and what can trigger a change order. You know, obviously, tying payment to to performance or milestones, to avoid the rooms and and just kind of, you know, they're gonna be ongoing monitoring to see how things are are be are are are playing out, versus what was projected, you know, because you may cut you may have to come back and and try to reopen a negotiation after a few months and say this is unsustainable. And people are often if they wanna have a long term relationship with you. Yeah. Oh, great points. Well, let's move on to payment, the next section, part two, which is payment terms. And I'll give, just start off a quick overview for people who are newer to this area. Two of the main things I'm looking for in my payment terms provisions are what is the obligation to pay? How is it described? And then if there isn't a payment, what happens? What are what are the options? What's, if there's a dispute? So if we're looking at obligation to pay, it's often just a real simple sentence. And in a lot of contracts, it stops here. It's just customer will pay the price to vendor within thirty days from invoice. But there's a lot of nuance you can add there, and I'm gonna give you three different ways to add nuance. One is what I would call an objective condition precedent. This is a condition precedent is the legal term for something that has to happen before the obligation arises. And so here, the obligation to pay is dependent or conditioned on something happening first. And in this case, it's an objective, objective, action or event, which is they delivered goods. And so in the context of this wording here, if they deliver, you have to pay. So that's pretty straightforward. But you can phrase it in a different way that adds a subjective element, meaning somebody is making a judgment call about an event or occurrence. And so here, it's customer will pay the vendor if within thirty days after they receive goods that are satisfactory to customer. Well, at least right now, there's no standards of what's satisfactory. It's a very subjective standard. You could go a little bit more objective by having it conform to the specifications, but that's only really I mean, it's still somewhat subjective because somebody's having to evaluate whether it's conforming to the specifications. So that's another, way to add some flexibility and options if you are the customer. And then you can also sometimes I see people tie payment to the absence of a dispute. And they're saying customer will pay vendor within thirty days after receiving an accurate invoice or something like that. And that is saying, basically, the condition precedent of the customer's obligation to pay is receiving an act accurate invoice. Now a lot of these are are nuanced wordplay, and so you can't necessarily hang your hat and say, I'm taking this. I'm gonna win the case on this little nuance word thing. You don't wanna treat it that way. But what we're looking for, again, is flexibility and options And having some of these kinds of, things in your provision can give you a little bit more room to make decisions you need to make. And so the second part of the payment provision is disputes. This is a big part we're always talking about, and it really does have this wrinkle. And you can see the woman on the screen saying, why does it matter? If I don't think I owe it, I'm not gonna pay. Well, the reason it matters is because it's gonna make the difference of you potentially being in breach versus not being in breach. And so if you have a conditioned payment obligation, for example, that you have the right to dispute and it's that's given to you in the contract, when you are in dispute, you are still in compliance with the contract. You haven't breached. But if you don't have the right to not pay when it's in dispute in the contract, if it's a very explicit hard, line that says you have to pay, then you potentially could be in violation if you choose not to pay. And then once you breach a contract, there can be a lot of repercussions for that. Could be anticipatory repudiation that gives them the right to breach and do other things. So staying in compliance with the contract, at least for me, if I can, if I can set up the payment provision to allow me as a customer to do a dispute, and not have it be a breach of contract if I fail to pay an invoice when I have that dispute, that's my best case scenario. So here's two examples of kind of a pro customer, pro vendor provision. The pro customer one says customer can customer's good faith dispute does not relieve the vendor of a obligations performed. This is always a nice one to get if you're a customer because we're basically saying we might not pay you, but you still have to perform. Of course, vendors, you know, will have a reaction to that, and that's not fair, all that kind of stuff. I've dealt with that sometimes with credit support that says, in the end, if you do if I do owe it to you, you know, I'm a credit worthy person, I'll pay you, or credit worthy customer. The other side, you can see the pro vendor side giving the vendor the right to suspend performance for any failure to pay on time. You see, it doesn't talk about disputes, and that's not a factor. It's just right line test. Did you pay on time? No. I can suspend performance. And that that's also you'll notice it's like with the nonpayment permission. Now we're giving contractual provision permission for the vendor to not perform if you're 1p short, one day late. They are not in breach when they suspend performance. So these are kind of two extremes of the ways these things can go. And then sometimes you have to really watch for any limits on your ability to dispute. And this is just one version where there's we're saying customer can delay payments on disputed amounts for up to thirty days if they're in good faith and have a reasonable basis. So this is a a much steeper climb to make for customers because you have to not only do you have to pay in thirty days even if you're still in dispute, but that you can't even delay any because unless you could show it's good faith and a reasonable basis. Presumably, we always act that way, but this is a situation where we're gonna have to prove it to somebody, potentially if there's a the dispute continues. The last thing before, or the next thing is adding a time limit on the vendor's invoice submission. This is something that, it's really great for customers to have so that you don't have this open ended liability on your books, that you've got this language to support that idea. Not necessarily a 100% enforceable in every state and jurisdiction, but it I personally like to have this if I can, as a way to kind of, reduce the likelihood of those random invoices showing up a year later. So that's the mini lesson for payment terms. And so I wanna go back to to I'll start with you, Sterling, on this one, which is what's your approach for balancing, you know, this need? The vendor needs to get paid. They're our vendor. They're a good vendor, but we need to have some flexibility around invoicing and paying the right amount at the right time. Any words of wisdom there? Yeah. Well, this ironically, this this is one of those provisions that you can go into the rabbit hole really deeply on. If you're I can hold I can withhold payments if I give a reasonable basis, but I maybe I have to pay the part I don't dispute. And then if there is a dispute, you get into, like, who needs to meet and how soon do they need to meet to resolve the dispute and what happens if they don't resolve the dispute. And to some extent, you just it comes down to trust. I mean, is there is there a trust factor between you and the vendor that if there's a dispute, you know, you're gonna you're not gonna withhold everything. You're gonna probably pay most of it unless it's just a total failure. And then you have a reasonable process that you can try to work out the rest. And how deeply you go into that, again, you can make the contract with an extra page. I've I've seen that, and it's really, it can be really painful. The one thing I would never do if I'm the customer is prepay for anything if I don't if I absolutely don't have to, because coming up on the litigation side primarily, if you have the money, you have the leverage for the most part. So Yeah. Holding on to that cash usually is an incentive for the vendor to try to find a way to work it out because they they want that money, to come in, to come in the door. The the the other thing to be careful of is when is the payment triggered? So when does it mean from invoice or from invoices received? Who gets to determine that date? When does the thirty days start to run? Those are things that you you tend to gloss over, and it never really matters until there's a problem. And then I've been in those meetings where you're spending a lot of time trying to figure out when did this invoice actually, start to run, when did the thirty days start to run. So, I think, also being very specific about the obligations of the vendor and the failure to meet those particular obligations or service levels or whatever it may be, is, is going to be really critical in this, this, instance as well. And then lastly, if you are getting credits for, like, a service level failure or something like that, is that with respect to the invoice that is in the period that the service level occurred the the failure occurred. So do you need to wait until you get the numbers about the service levels? Because sometimes those aren't instantaneously available, or is that a role? Is that into the next one? You're gonna offset the next invoice. So it it's just a a very long way of saying, yes. Really spend a lot of time and attention on when do we get invoice and what can we do if we don't agree with the invoice. And it's not just accept the voice the usual boilerplate language and go, yeah. Fine. We'll we'll see what happens when it happens. Because it it can really make a difference, at some point in the in the contract relationship. And I would Yeah. Go ahead. Yeah. I'm sorry. I I would just echo all that, and I would say, you know, the time and materials, contract, you often have, reimbursement for, travel and entertainment expenses. You know, what is the basis for that? Do they have to be doc I mean, you have to talk to your finance team. What do we need? Do they have to be documented expenses? Do they have to be out of pocket expenses? Or are they gonna be billing us for their own travel time? Is it gonna be, according to your travel and expense policy that you have that you don't if it doesn't comply with any of that, you don't have to pay? You know, but more basically, like, I'm not clear financing. How long do they really need to to process invoices? Small companies need a lot of time. You might wanna go to net 45 or net 60, and make and is are people going to be reviewing the invoices? Like, is you know, the finance team may not be in a position to know whether or not what's on the invoice is correct or not. So is the engineering or the product team or the marketing team, whoever's receiving the service, is actually in the loop on approving the invoice and making sure it's it's accurate. Sometimes, you know, if you get to that period where you you have a period where you have to pay even if you're still in dispute, In larger contracts, you may have a situation which is okay, but we're gonna put it into escrow pending the dispute. And that's a middle ground. Is it is it possible that and that's why I say it's only really relevant for large contracts, but that that might be a way to go. But typically, yeah, that's that's that's those are all good suggestions. Yeah. On that, on that travel, point that Jonathan made, make sure you put in without markup. Right? Just as the actual expense that is incurred, but then they don't get to add a 10% administrative fee and 3% administrative fee. I've seen that. But if you're not clear about that in the in the documentation, if no one's checking, as Jonathan said, you can end up twelve months. Like, wow. This is a lot on travel. And then you realize, well, they're baking in an extra 15% on top and you Yep. You didn't catch it in the contract or in the review. And going back to what you said earlier, just just to the last notice that, you know, maybe not tied to the date of invoice. Maybe it's tied to the date of acceptance. So you you don't actually get a payment obligation until you've accepted the the the the that the that the delivery is is is conforming. Yeah. It's conforming. Yeah. Yeah. I probably should have said that first, actually. Probably said it for last. There you go. Yeah. Well, I'm gonna move to the next part just so we can get through the whole program. Let's see. So the next part that we're gonna be talking about is credit strategy. And this is a situation where you are trying to act strategically to manage risks that are associated with poor credit. And that poor credit could be the customer, your own poor credit, or it could be the vendor's credit. So we're gonna start with your options when your vendor has poor credit. So and this is not we're gonna talk about bankruptcy, vendor bankruptcy later, but these are just some things to do. So one of the things I always try and do when I'm it's either a start up that maybe I don't know that they're gonna be around in six months or it's a, another company that I can see is flailing a bit and not paying its bills on time is we really avoid, and Sterling talked about this, avoid minimize avoid prepayment, that you really don't wanna be paying vendors who have who don't have the balance sheet and the, credit standing to repay you. And so in tying if you do have to pay before everything's final, make sure you're getting milestones or product delivery or something that is demonstrating performance, as opposed to just, you know, sixty days after the effective date. The second one is really tying, and that's tying payment timing to the deliverables and performance. As much as you can, you're you're describing terms payment terms with things that are needed, the useful work product or the, things like that. And then third is protect your interest. If you have goods, there's a lot more we can do in advance to when we're dealing with vendors with bad credit. So because there are physical goods in place, you can have you have tooling or other things that you, as the customer, loaned to the vendor. You can get repossession rights that you can enter the property and go repossess those, or you can get security interest in the goods, at a certain stage in the process just to make sure you don't lose those if the vendor went bankrupt or, you know, stop performance. So then when we get to customers, how can we manage our own credit? And that would be prepayment is something. Even though it's not ideal, I have used that a lot over the years. Because at the end of the day, when vendors are sign this credit application and then you don't have good credit and you're gonna lose pricing protection and you're gonna get all these kind of negative consequences, or in some cases, they're not gonna accept your order without some kind of prepayment. And so if the vendor has good financial standing and is reliable, you know, a lot of companies are okay to prepay, especially if you, as the customer, have failed to pay on time in the past. Maybe you're owing things. There's a balance due. You can really prepayment can solve a lot of problems in those cases. The other things that we can sometimes offer are a parent guarantee or a letter of credit. And I'll just go over those real quick, and then we're gonna dive right into some more discussion with Sterling and Jonathan. So with guarantee, if you're not familiar, this is essentially just a contract where we have a vendor of the Verint's and it's often the parent company, but it doesn't have to be. It can be another affiliate, or even an independent party. But, usually, it's in the family of the vendor, and they are basically promising to the customer that if the vendor doesn't perform, this guarantor, this parent company is gonna step in and cover those costs. There can be different kinds of guarantees. Some cover only money. Some cover performance. But one of the things you that's nice about a guarantee is it usually doesn't have any cost for the vendor, so it's an easier thing for them to give. But as a customer, you have to remember that guarantees are a little bit harder to collect on because your guarantor can use a defense. They could you know, you go customer goes to the guarantor and says, give me my money, and the guarantor says, well, you've reached this, you've reached that. I I don't know anything. So it's it's a little bit more, complicated whether you're gonna get your money or not even though you have a guarantor. Then the other type is a letter of credit. This is something that comes from the bank, and it's basically a a bank guarantee that of payment only. And the nice thing with these are that when you can show some objective standard, the company the vendor did not perform, did not pay, did not do something, you can go to the bank with the letter of credit, says, here, you promised you'd pay. You have to pay. There's the downside is it costs money. It can be expensive, so vendors don't like to do it, or that there can be other complications, in terms of it's expired. It's a narrower scope. It's there's a lot more limitations that banks impose that are more common in these things than sometimes guarantees have a lot more open ended obligations. So that's, yeah, that's the the quick lesson on the credit support issues. So I'll start with you this time, Jonathan. And in terms of protections that you see that are most effective in the real world, kind of moving away from the theoretical, what kinds of things do you like to do to protect customer, customers either dealing with their vendors' bad credit or their own bad credit? Well, I think, one of the things that you need to be careful about is, being realistic about what you use a a a a vendor with poor credit for. So if you have if you're if you're trying to build some functionality that's gonna because if it doesn't work, it's gonna break your app. You have to be really careful with with with that because there's only so many things you can do in a contract. And if if you're dealing with somebody who's gonna be gone, what is that gonna mean? But that's you know, one example was, but but we we had done one of my prior companies, I deal with a very brilliant start up team that everybody was talking about growing leaps and bounds. And we built some functionality into our you know, in their technology. And then some large social media company came along and hired the three of them out of their company into the bigger company. And they sent us a notice that we're shutting down in thirty days, and we had to scramble because even though our contract said a million things, the company is gonna be gone, and and we had to figure out negotiate our way out of that one. So, you know, obviously, you can get prepayment, you can get prepayment. You know, being able to to suspend being able to get, like, financial reporting sometimes we put into contracts, that you have to notify us if someone at the c level leaves the company, kind of early warning signs. You have to give us any financial statements with your investors. We can see, you know, if their cash burn is so high that they're gonna be running out of cash, and the and the right to suspend, performance and request adequate security. So you can build all these things in, but from a from a reality standpoint, it's really hard. Even if it's they may just breach all those provisions and and go out of business. So cash is king. Get prepayment if you can. It escrows or the right to demand them to continue the contract or whatever. Yeah. No. Those are great points. Let me go to the next one and just to cover this one. And this is a little bit of what you've been talking about, Jonathan, of these red flags and what you're looking for. But apart from I mean, it requires us to actually know that those red flags are happening. And sometimes the people who have those who are in a position to see the things going on might not know that they're supposed to report up or, you know, may not realize that's worth mentioning. Sterling, how do you approach that in terms of making sure your team is cognizant of these kind of financial issues and paying attention to, what's going on? Yeah. One one of the very first things to do even before you enter into the contract with the vendor or with a potential customer, I'll I'll take this from looking at the vendor, viewpoint, is spend some time with the finance team digging into who who are you doing business with. I've been in a lot of meetings where, wow, we never knew they were so then thinly capitalized. We didn't know there was only two guys in other garage. No one spent any time upfront looking into who you're doing, who you're doing business with. So it's a real opportunity, I think, for legal and finance in particular to get together and unless it's a, you know, well known brand name, you know, dig in, a little bit more here. And then, you know, it's it's if you see something, say something kinda attitude throughout the legal department in particular because that is something either you're part of or you're you're the head of. If we are become aware of vendors who are, you know, missing deliverables, that that they have inner service interruptions or reading things about them and not flattering things in the Wall Street Journal or wherever you may see something, raise that to the right people on the business side of the finance team because that is your first clue that you may need to take, some type of some type of action, to, to protect the interests of the company. Because if you wait until it's too late, they file for bankruptcy, and we're gonna talk about that in just in just a second, you're out of luck for the most part. You're probably an unsecured creditor, so you're right at the very bottom of the valley and, you wanna you wanna really be front of the front of the line, and that starts before we even sign, the paper. So that that's what jumped out to me when I when I look at this question. Yeah. Okay. Well, let's go to our last subject, which is always the most fun, talking about vendor bankruptcy strategies. And, again, this is the strategy is if you are the customer and your vendor declares bankruptcy or is about to. So one core thing to remember is that for the most part, not all things, but for the most part, the bankruptcy laws when somebody files are gonna take precedence over those contract rules and the traditional ways that we, contract law governs how the parties act according to the contract. There is a this is the provision we all see in all of our contracts where it says if either party, you know, either party may terminate if the other party is bankrupt or files for bankruptcy or does all has a receiver appointed, all these kinds of things. And what a lot of people don't understand is it's not really enforceable by and large in The United States. So if they've already taken bankrupt if they've already filed bankruptcy, you can't terminate the contract. And there are restrictions on how much you can do. So it I know as a a young lawyer, I was so confused why we'd have these things that have proofed in the contract that aren't enforceable. I've heard different answers. The one that kinda makes sense is why not, maybe the law will change, or it could be, that you may want, or it would produce some, moral leverage. If you're just negotiating with somebody who maybe doesn't understand the law and they see this, they might be okay with you terminating, in advance of, even if you didn't have rights to terminate. So I wanna just make sure everybody's clear about what I consider the three hard truths when we're talking about bankruptcy. One is you can't just walk away. So if your vendor has filed for bankruptcy, you can't just terminate the next day when you found out they filed for bankruptcy. You're kinda stuck for a little bit while things get sorted out. And how that gets sorted out is really goes to the bankruptcy process. Number two, in some cases, they can cherry pick. So if you have multiple deals, multiple transactions that are independent of each other, they can select the ones that they like and and confirm those or affirm those, and then they can reject the ones or cancel the ones that they don't like. So let's say they sign two really good deals at a great price and three deals with a a terrible price. Then they may wanna just affirm the the two good ones where they're gonna make a lot of money and reject the three that they can't. And this is possible if each of them stand alone as an independent agreement. You can't do this if it's under a master agreement and all the transactions form one contract. So a little bit of a nuance. And I've been with companies that some of them prefer to have those stand alone, transactions for each order for this specific reason because they want to be able to do this cherry picking of the contracts or this the context is such that that's an important consideration for them. And then finally, be ready. They could take your money back. So if you have paid any money or if you have made a payment ninety days before or I'm sorry. If money has flowed from the vendor to you within ninety days of their filing for bankruptcy, The bankruptcy trustee potentially can claw that back. And this goes both ways. So it's the same with the customer. If a customer declares bankruptcy and they've already paid the vendor, the vendor can trustee can potentially claw that back. So we're always very careful those ninety days before filing, but you don't you you don't know the future. You don't know what date they're gonna file for bankruptcy. So it's a it's a delicate time that you are when you have a vendor who is on the brink or you can tell they're insolvent, maybe you're hearing rumblings from the other side that they're gonna declare bankruptcy. This is a time when you're really being proactive with your finance team, thinking about what kind of payments are being made. Do we wanna pay? Do we wanna hold back? You know, potentially be in breach, but it's much worse that I'm never gonna get my money back, and I'm not gonna get my good. So you're doing a lot of strategic thinking at that moment. But you don't have to give up. Just because they're, insolvent or declared bankruptcy. There's some things well, particularly on the front end, not necessarily after they've declared bankruptcy because then you're just, whatever the the rules are, you're gonna have to comply with. But you can do things on the front end to to help yourself. One is if you have critical deliverables, you wanna get those as soon as you can in the contract term. So let's say you're getting deliverables of, you know, 10 widgets a month, but the you know, 20 of the widget widgets are really, really important to you, move those ones up to the front and shift your schedule around for things that are not as critical to come later in the contract just in case something goes wrong. Really proactively manage the relationship. That's what, Sterling and Jonathan were talking about in terms of paying attention to things that are I are, indicating that there's a problem going on with the other side. Making your vendors' intellectual property licenses to you immediately effective. This is a real important one. You don't wanna have what I call springing IP licenses that vest or start some point in the future. Same with assignment of IP. You want it to happen at that moment, not in the future, such as when it's paid. Because once they file for bankruptcy, if you don't have that license in place, it's you're in a much worse position. There's some, you know, equitable grounds in which you could continue some use in some circumstances with some payment. You know? It gets really messy. But if you make them effective immediately, then the bankruptcy code actually has some protections for you for, a license that's already in place or assignment that already took place. So that's gonna be really important. And then separate out the most important SOWs and orders for immediate performance. That's kinda like the point I was making before about trying to move up things when you know your vendor's having financial difficulty. You know, I'd get a change order and try and really accelerate everything that's really critical and then get that performance and delivery as soon as I can. And that's that for that lesson on bankruptcy. So let's get into these issues in terms of bankruptcy and the best ways and contract terms, and I talked about a few of them. Are there other kinds of contract terms, I'll go to you, Jonathan, that really are helpful when your vendor is gonna be, or has filed or you expect to file for bankruptcy? Yeah. I mean, it's it's, the the IP one you mentioned, I think, in general, it's good to talk about briefly because it's not just a bankruptcy issue. Like, I see this all the time in content agreements where somebody is preparing, like, social media posts or marketing materials, commercials, anything like that, and they want to say that you don't own it until it's paid in full. What happens if there's a dispute and and you don't agree on what's paid? Then you do do you own what you're using? Many times, you're actually doing that stuff real time, and you're running those ads or running that social media content before you paid for it. So you're violating the law by you by doing that without and and sometimes they'll say, well, we'll give you a license until you're paid, and it gets very complicated. If I don't pay you, sue me. But I want to own my IP when you give it to me, and it's created, and that's it. No no question about it. In terms of, like, cash, we need to understand that there's this automatic recapture available to the bankruptcy court for any payments that you can receive within ninety days. That's true if you're exercising, like, set off rights. Right? If you if you have some cash, you can set off against what they owe you or maybe you you have access to some cash. But you can get around that by getting a security interest in their bank account. So if one of the things if you if you suspect somebody has bad credit or it's getting to the point where they might have bad credit, you can get a a security interest in their receivables account or in in just a cash account with an agreed upon amount of $10,000 or whatever. If you foreclose on that security interest, you actually can get priority to the end. So that's that's unusual, but in a larger deal, that might be something to think about. And then, you know, if you're dealing with data, do you have the ability to download that data from their now defunct website, without or or or are you doing it on a regular basis so that if the issue comes up, you you have already you you're not missing all your data, basically. Exactly. Exactly. Some examples, that I would point to. And I'll just let's move to the last question. I'll ask Sterling, and then we'll get to our wind up and give our final thoughts. But before we get there, other than kind of some of the things we've talked about, is there anything else either of you, but I'll start with Sterling, that you can help your business prepare for especially these mission critical services? Because that's the scariest part when your vendor declares bankruptcies. If it's your accounting software or your ERP system or something that's really in, so important to your day to day operations. And I'll ask you, Sterling, if you have anything, any advice for people counseling their internal clients. Yeah. Boy, that's a it it's it's a challenge, bankruptcy. We used to call it the seven stages of bankruptcy grief when we go talk to the business people about, well, there's this thing called a preference and you can't eliminate, and you can't do this, and they just couldn't believe it. You know? That it's you're so limited in what what you can do. This is this is hard for a lot of companies, depends on the size, depends on, the the financial situation. If it's really critical, but it's something that other vendors offer, can you have a dual, vendor strategy where you're taking maybe part part of the service from vendor A and part of the service from vendor B. So if vendor A goes bankrupt, you can move everything to vendor B. Depends on the circumstances, depends on the caps. Or at a minimum, if you start to get the heebie jeebies about a particular vendor, what is your strategy in terms of helping the business? You're gonna have to pivot here likely in two or three months. Let's give yourself a runway. How are we gonna move all this stuff to a new vendor on a, like, on a crash basis? So your your crisis planning with the business or if the worst happens, how are we gonna get our systems moved to a new vendor as soon as possible. And the last thing I'll mention though, Jonathan, stopped at this, I know, is is the IP, escrow, some type of critical software or something in a in an escrow account. But as Jonathan, I'm sure he'll tell you, there's a lot that goes into making sure you can use it, if you have access to it, in an escrow. But those those are the three things that that jump out at me. Yeah. Fantastic. And I think with that, we'll wind up. We've only got a couple of minutes left, so, we'll just finish up with this. And I wanna say well, first, let me just talk about we've got our next episode is coming up on July 10 or I should say module, and we're gonna be talking about how to negotiate contracts to buy manufactured equipment. So that's gonna be module three. Just to give you a preview, module four is gonna be the same but for digital goods and then or products. And then module five in September will be for, services and services with deliverables. So those are the ones coming up. I wanna say thank you to Sterling and Jonathan so much for being here. I really appreciate it. And thanks to the audience for being here as well. Thanks, everybody. Thank you. You too. Bye bye. Bye. Pleasure. Bye now.