“Bad Terminology is the Enemy of Good Thinking”
-Warren Buffett
What do you think of when someone tells you to sign and enter into a “contract”?
If you’re like me, not necessarily pleasant stuff. Images of never-ending legal obligations, arcane legal terms and court proceedings can pop up. Many people become guarded at the prospect of having to sign a contract.
Or when you find out that someone is “selling” you? Do any of us like to think that we’ve easy targets to be “sold”?
This is precisely why certain sales people dislike using terms like “contracts” and “sales” with prospective customers. Why not use more pleasant words that take the edge off potentially negative thoughts? You don’t sign a “contract,” instead you sign an “agreement.” You don’t review a “sales” document, instead you review an “offering memorandum.”
I believe that using precise words to define things matters greatly in commercial transactions. The more precise, the better.
Why?
Carefully defined objects and terms in a commercial transaction have a way of concentrating a person’s thinking on the key issues at hand, both good and bad. In my opinion, this leads to a better decision-making process. Words that take the “edge” off of an object’s definition and service a transaction have the exact opposite effect.
Prior to a private fund’s initial closing, prospective investors are asked to review “Limited Partnership Agreements,” “Subscription Agreements,” and “Side Letter Agreements.” Agreements? Who has agreed to anything yet?
Let’s call these documents what they are more precisely during the document review phase: “Limited Partnership Contracts,” “Subscription Contracts” and “Side Letter Contacts.” If this helps focus more attention on the potential unpleasant aspects of entering into private fund “agreements,” so be it.