what might be completely fine from a legal perspective can actually have like significant implications for your customers welcome to the contract teardown show from law insider where legal experts tear down contracts from some of the most well-known companies and high-profile executives around the world in this episode attorney andrew antos and accountant nick tiscornia tell us why the money language matters in contracts they review three clauses from three different master services agreements to underline how your drafting language choices can impact the money team this is so important for proving your company's profitability as you contract so let's tear it down hey everybody welcome back to the contract tear down show from law insider i'm mike whalen the purpose of the show is exactly what it sounds like we take contracts we beat them up we're a little mean to them occasionally finding the good i'm here with a couple of friends in a special episode because there's three of us uh i'm here with andrew antos and nick tiscornia we are going to do something weird we are talking through three documents let me show you what these guys are they are all master subscription and services agreements um one of them comes from a company called juno the other one comes from guide spark and the third one is coming from workday so these are all available on law insider we'll make them available in the post but to you guys let me ask you why are we looking at these documents andrew what's special about these three master services agreements yeah so what's really interesting is that um as lawyers like we often think about only the legal implications of the language that we're you know negotiating or putting in agreement but the really interesting thing is that once we actually get that agreement signed there's a lot of accounting um implications and the reason why we're looking for at these three different agreements is that they have three different clauses that actually have pretty significant accounting implications and so if you're you know a business um or negotiating on behalf of a business um as a lawyer like it's actually important to understand that what you might be negotiating what might be completely fine from a legal perspective can actually have like significant implications for your customers and so what we are gonna what we're gonna do is like we're gonna look at these three different um contracts and three different clauses um and um walk through um what those implications uh might be and why it's important to know these that's right andrew with the tease we are doing like a venn diagram of nerdery we're combining we're crossing the streams to make a ghostbusters reference that you guys are probably too young to get uh but yeah we are bringing two kinds of nerd together that's why we have both andrew and nick so andrew let's talk about you quickly why you and we'll talk about why nick why are we discussing this uh with you in particular these documents with you yeah totally um so you know i was a corporate lawyer in my previous life so originally from europe and i came to the us five years ago to do my alem at harvard um and like as a corporate lawyer i had to review a lot of documents not just agreements but like all kinds of documents and i always wanted to automate as much of it as i could um and i met a guy at mit who was working on a natural language processing engine and we decided to automate document review for the world um and we spent years building this natural language processing platform that can understand a type of a document um and then we started looking for like what are the best applications for this right our initial logic was like if we people are reading a lot of documents every day if we can help them not having to read all of these things again and again um then that could be a a really big impact on the world um and so we built that platform and then we started looking for use cases um and i met nick um through a friend who was um on the legal team at slack where nick was at that time and nick was on the revenue accounting team um and you know i started talking to him about his document um review workflows um and we ended up working together yeah nick uh we got a brief taste of your background there tell me about your background and how it relates to the documents we're talking about today yeah absolutely um so my background is you know 100 in accounting um until i until i came to clarity uh so before clarity i was at slack for three years went through asc606 adoption which is the revenue accounting standard that every company that has a contract with a customer has to conform to uh went through the ipo there as well before that was at a company called riverbed technology in a similar capacity at both companies i ran the technical revenue accounting team which was in charge of reviewing the msas master agreements order forms purchase orders with their customers in order to validate that those contracts and the accounting related to those contracts were in line with asc606 as well as the policy that each company had developed for revenue accounting specifically before that i was at pwc in the audit practice and and a couple other places so so really a career focused in accounting well thank you guys so what we're going to do now is go to the actual documents i'm going to start first with this one in junio and what i'll do is point out specific sections uh in these documents and then you guys can talk us through real quick how there's like this financial overlap that matters and also the legal part so uh in this first document we're going to jump down to 3.2 which has to do with acceptance uh andrew tell me about this acceptance section in this document yeah absolutely so acceptance clause basically says that um the customer can inspect and review and test um whatever you're selling to them so in this specific um case it's software um and services related to the software um and so basically rather than just saying hey i'm buying software and like you know you start paying on the the date when you sign the contract what this actually says is like that the customer can review can test the software um and can decide if it's acceptable or if it's not acceptable um and if it's not acceptable it sets up a certain process on how can that be um kind of revised or revalidated um but like if it really like if you don't um meet the the test criteria as determined by the customer um ultimately um you know it terminates um terminates the contract and so that's the that's the that's the legal um reading of that clause hey everybody i'm mike whalen i hope you're enjoying this episode of the contract tear down show real quick i want to ask you to do me slash you really a quick favor look down below you'll see a discount code to join the law insider premium subscription when you do that you get access to more content like this you'll see webinars daily tips on contract drafting not to mention access to the world's largest database of sample contracts and clauses it will help you write better contracts faster if you want to do it right now there's a code below so get there also if you're part of a larger team if you're in-house or in a law firm just email us we're at sales law insider.com we'll make sure you get a deal as well come join us in the community the code is below let's get back to the show yeah nick tell me i'm looking at this and i don't know that i've ever is this a common section actually let me ask you andrew is this like this sort of format where there's the test and then sort of the rejection of the test is this a normal uh protocol in these kinds of contracts yeah it's it's pretty normal and i think like this clause specifically is a little bit more worded than usual um has a little bit more details in terms of the actual procedure um and so on and exactly how it's gonna how it's gonna work so it's a little bit more prescriptive in terms of the process which i actually see as a good thing it means that that it's it's fairly certain how the procedure should work um but generally speaking it's um it's fairly representative most of the time it's going to be a little bit shorter a little bit more ambiguous um but not conceptually different but nick money-wise this is bugging you what's bothering you about this section yeah absolutely so an acceptance clause could give you pause to to recognize revenue at all on that contract because if the customer has the option to review you know what you've delivered to them in this case software and services and say no this doesn't conform to the contract or what i would want to see in this product um they might not pay you might not be able to even collect on that so so you wouldn't be able to recognize revenue until either that acceptance period has expired or passed or they give you you know an explicit acceptance of we accept this um this this product right um it's a little different in like computer hardware or actual you know actual deliverables where you might have a set of specifications and if you can prove that the product you delivered is in line with those specifications even if the customer you know has this right to accept in line with those specifications and you can you can prove that they're in line then maybe you can recognize revenue and make a case for yourself there but if they have you know the ability to unilaterally tell you i do not accept this you might not be able to recognize revenue until they do give you that acceptance for services it could be a little different so you might put an extra section in that clause that says you know if you don't accept the services that we provided we have the right to rework that at our own cost we can come back and and provide those services again and make it you know conform to the the contract itself um if that's the sole uh remedy for the acceptance or non-acceptance by the customer um then it might not cause a rev rack issue so it's kind of a gray area that you would have to assess as an accountant you know do i think there's a probability that the customer will not accept and that we won't be able to get the fees and we won't be able to recognize revenue so to make a terrible analogy when i buy something from amazon and then want to return it there was revenue received we can say okay you made the money and then you know they paid back where in this situation that ability to refuse there's some ambiguity around like when did money get made which screws up the math guys and nobody wants that so similarly uh let's jump over to the guide spark agreement i'm gonna jump down to six three termination for convenience um i just love the word convenience in a contract uh andrew tell me about this section yeah so termination for convenience or sometimes called termination at will is basically the mother of all termination clauses right it gives the customer or both parties in some cases the ability to just wake up one day and say i don't want to be a part of this anymore um and just terminate the contract right um some have a period of termination right so in this case like it actually says 60 days um so it's not like the contract will terminate you know if i wake up and uh today and decide to terminate it's not going to terminate today still going to be 60 days but i can just feel like it like there's no reason that i have to give and um that's really non-standard um in bigger agreements like this one um it's quite common in you know ndas and and you know very very simple agreements that actually don't involve an exchange of money um but um for for actual kind of like product related or services related agreements this is pretty severe right and so like think about being the customer here um you have all the power in this relationship pretty much um and then you know conversely as the as the the one providing the product in this case uh like you're waking up in uh cold sweats every morning and just like checking your email is like did they terminate did they terminate they terminate um and so it's it's that kind of a relationship and that's super super super non-standard that's company ownership anyway well and it says nick in here uh companies shall be responsible for payment of any amounts due through the end of the then current subscription term what are you seeing here in terms of there's a bit of talk about prepaid and unused fees where's the money part that's bugging you here yeah so um there are definitely nuances to a termination for convenience so you know the concept uh just from an accounting perspective is that this is going to impact the uh the length of the contract right so if the customer has 60 day you know termination for convenience with 60 days notice and they can recoup all the fees that are related to anything after those 60 days then that might be considered or would be considered a 60-day contract from the entity's perspective so they can't put any of the remaining fees on their books at all right so it's a 60-day contract short term which is very impactful when you're reporting you know how mad revenue is going to look over the next year or two years or three years um if there is a significant penalty which there is in this contract indicating you will not get a refund for any of the prepaid fees that you've already given that you know wouldn't cause this to be a short-term contract you can actually say this is a one-year contract even if they cancel and stop using the product after 60 days or halfway through the term we can still recognize the revenue because you know they can't get a get a refund on that and there's a few different types of nuances on that significant penalty it could be a stated fee it could be the remaining fees in the contract the the main important uh factor for a termination for convenience for like a sas company for example is that at least none of the fees that are related to services provided through the termination date can be recouped right so i i'm recognizing revenue on a daily basis or a monthly basis as long as i recognize revenue correctly for those months i don't have to do any retroactive uh accounting then that's okay although i'm not you know putting the rest of the contract on the books so that's very impactful too from a perception perspective for for for companies and uh andrew jump into the workday contract the third one this one's got all kinds of legal speak you're gonna have to translate for me uh this section is number five uh the right to reduce fse or skus uh it's an option talk to me about this explain the legal piece to this yeah totally so um option if you look at option it's basically um just a unit unilateral right of the customer in this case um to decrease how much product are they buying um from you until a certain date so option basically always needs to um say you know there needs to be a date until which you can exercise it um it needs to be always unilateral um it can only rest upon the decision of the of the customer in this case um and then there needs to be some kind of a description of what's happening with with with the price um or with the with the volume that has an impact on the price and so what we're basically looking at here is that the customer um can based on you know the changes in their business can basically decide that they will be buying less product from um at some point and so um this is a fairly again like an extreme fairly like non-standard way of handling a situation where the customer for example comes to you and says we really want to buy this product from you but we just don't know how much of the product we need to buy um right and so what you're saying is you know let's say that today um you might be buying one million dollars worth of product but then you have the option to decide you know in the next six months for example to say yeah i actually feel like buying only 750 000 worth of the product um and so again like the the interesting kind of commonality here is like the the dynamic um is that the the customer is in the in the driver's seat yeah nick i i feel like from my contracts class in law school if i was to say what's the purpose in a contract it's who's paying how much and what are they getting like this seems like it would really screw up your world tell me what you're seeing on the money and why this these sort of options are messing up your math yeah absolutely um so every revenue accountant when a contract comes in has to assess you know what is the the length of this contract and how how much uh what are we going to deliver right what are our responsibilities as the entity and what is the customer's responsibility what are they going to pay and that could vary right it could be variable and and hopefully that's stated in the contract and you can actually do an assessment up front so i would say you know here's exactly what's in the contract here's the options that are provided to the customer um i have to make a judgment call and say do i think they're going to exercise this downturn clause do i think they're not going to i can use history of other customers or history with that customer to make that determination but eventually i'm going to have to come up with an assessment and say here's what i think the contract will be for the term of the contract and that could be one year two years five years and i have to assess that up front and recognize revenue in line with that now every once in a while i have to do an additional assessment right so whether it's when the option expires or on a quarterly basis or on an annual basis and that would be up to your your accounting policy and you know again like many things in ac606 there's some subjectivity here but as long as you can explain yourself to the auditors and they think that it applies to the standard correctly then then you should be good to go but um you know periodically i'm going to reassess this and say have you know have things changed do i think that the contract will change in any way based on new information that i've i've received over this time so you know if there is a downturn clause i think it's likely that they're going to exercise that option then i might account for the contract at a lower value for the entire contract until that option exercises or until um or excuse me expires or uh you know until they exercise that option well andrew i'm i'm stepping back for sort of big principles and i feel like we're having a lot of conversation about how to make the accountants happy and like the bosses probably like the accountants more than they like the lawyers but let's not act like we're all going to the company party and we're the cool kids right why from your perspective in the complex environment of a company and of a deal like this why is it so important to make the accountants happy to get this kind of clarity for the accountants to do their work yeah i mean if you think about it like contract is just basically a way to record rights and obligations of two or more parties um with respect to some kind of a business transaction that they want to carry um right and so like in this case the company wants to sell whatever they're selling um for a certain amount of money and because they're better at you know building whatever they're selling or providing it um they're gonna make a profit right um and making the profit is really important um especially with relation to your cash flow right so you want to get the cash in the company you want to start recognizing the revenue as soon as possible after signature of the contract in the kind of fullest possible um uh a scope um and so the commonality that basically we're talking about here with all these three clauses is that they sometimes somehow like reduce the scope of the contract either from a time perspective or from a value monetary value perspective um and so if you're a lawyer that's just negotiating the contract to get that contract done and kind of like you don't look left or right like what are the implicat what are the actual tangible implications um for um for the business um that's actually pretty hurtful for the company because you're actually not achieving the main objective of getting like of getting to a contract that that will allow the company to sell what they're selling and getting the revenue in the maximum um possible um state and so from that perspective it's really important to understand what are the downstream implications of these actions right those those implications um you kind of like need to think about it in the negotiations process because once you get once you get to a signed contract um the accounting team will operationalize it somehow um but it might actually be hurting the company yeah as we've talked about on the show before if you're gonna turn contracting into a strategic advantage for for the company you're working with you got to think about the supply chain all the people who are involved in turning that advantage into something that turns into profit so nick let's say we've got an attorney who's in-house who's drafting and who wants to be mindful of that supply chain and make the accountant's habit nick how do we make the accountants happy i mean they just complain we just want you to smile nick right yeah i mean you know at the end of the day the accountant's job is to get the accounting right um you know no matter how the contract was negotiated or what's in the signed contract that's going to be the source of truth that's how you're going to apply the accounting standard and your and your policy however an accountant a revenue account specifically can be very influential over that negotiation process because they can take that information that they have in sign contracts and go back to you know the the legal department and the sales group and say hey you know we're really negotiating these terms that are impactful to our business and it's impacting how investors look at us or how you know management executive management is is assessing the company as a whole so it it really has a macro impact and i think uh open lines of communication between these groups which is sometimes very difficult uh depending on the the nature of the company um uh is super important right you you have to be able to have that relationship to go back and say you know this is this is how this is going to impact uh what we're doing from a a company goals perspective and um and yeah i think you know again an accountant can do the accounting no matter how you do it but um you want to make sure you're you're achieving what you want to as a company well i respect this noble effort to become the cool kids at the party thank you andrew thank you nick uh andrea if people want to reach out to you and learn more about your work and uh how to make the accountants happy from your perspective what's the best way to get in touch with you yeah um please um either reach out through our website uh which is uh try claridae.com uh clarity with a k um so try clarity.com um or um you can just contact uh uh myself or nick um on linkedin um i'm andrew antos and nick tiscornia we respond to every single linkedin message that we get so um you know please reach out there and nick any uh other info on how to connect with you and maybe invite you to all the parties i think uh andrew summarizes it well um i can always be reached at nick claritylaw.com as well awesome well i appreciate you guys joining us and i appreciate all of you watching remember how important it is to make your accountant happy you got to make everybody happy on the supply chain we will see you guys on the next episode of the contract tear down show and information for this episode including links to the contracts will be over at law insider.com resources we'll see you guys next time thank you thanks so much [Music] [Applause] [Music] [Applause] [Music]