I have a client who provides programming services. When we drafted his agreement that he uses with his customers, we made sure that he retains ownership of any code his company writes until it is paid for in full. He does a lot of work with startups, so getting paid can be a bit tricky.
He has a customer who is behind by about $200,000 in their invoices. But they do about $20,000 or more business per month. So it is true that they are way behind on their bills, but it’s also true that they’ve paid a TON of money to our client over a few years. So our client came to us for recommendations on how to handle the past due amounts.
We had every opportunity to go for the throat here. First, we could sue and we’d win that lawsuit. It’s basic collection. There’s really no defense to the lawsuit. Or we could simply hold up releasing their code to them, because we retained ownership of it under the customer’s contract, and effectively shut them down. They’d get desperate and find the money somewhere and pay us.
But why not look at solutions that actually STRENGTHEN this customer relationship, but still ensures that our client actually gets paid?
Our client took our recommendation and had the customer sign a promissory note for the unpaid balance. The advantage of this is that it eliminates and bickering over how much is actually owed. The balance of the note is fixed and in writing. Simple. Also, we found middle ground on releasing code. We would not agree to release any code that hadn’t been paid for. That was still a deal-breaker. But instead of seeing the customer’s code as one large ongoing project, which it technically was, we looked at it as a series of monthly projects. We apply any payment to the oldest outstanding invoice, and release the code prepared under that invoice. So the customer has a steady stream of code arriving at their door every time they make a payment. Any failure to pay a new invoice counts as a default under the note, so we isolate these old invoices as past due and work our way through them. Otherwise, the customer could just keep paying late, but also still keep receiving bits and pieces of their code from older invoices but never really clearing their past due balance. Finally, we secure that promissory note with a personal guaranty from the owners of the customer company, and we also secure it with stock options in the company. Our right to purchase that stock is triggered by a sale of the business or its assets, and the strike price is whatever the outstanding balance is on the note at that time.
There are times when you have someone backed into the corner that you have to absolutely go for the kill. But I think these times are exceptionally rare. And without doubt, the primary incentive to “go for the throat” is always far more emotional than it is business. As the line goes from the movie Groundhog Day… “don’t drive angry.” It makes you feel good to drive your opponent into the ground. But it rarely actually accomplishes anything tangible.
Have an awesome day,