Some may think that the art of the handshake is dead; that in this world of lawyers, extensive contracts, and multi-million dollar deals, the old handshake just doesn’t have its place. Certainly, such a case could be made. With so much riding on big business deals today using a century’s old practice to seal a deal may seem quaint. There is also plenty of evidence to suggest that a handshake does not offer either party sufficient protection should things go wrong.
It’s a fast paced world we live in though. Lawyers drawing up contracts don’t always move at that pace. When new ideas spring forth, and investments need to be secured quickly to implement those ideas, it may not always do to wait for the paper work to be drawn up and for the ink to dry. While not always used — indeed, many still opt for the safety and security of the contract — the handshake can offer some real benefits. It’s quick, it’s personal, and it gets things moving with a basic understanding that both parties will do their best.
That last point may be the most important. With the act of a handshake, people are undertaking two inextricably woven things; they are taking part in an age-old tradition and simultaneously agreeing to act according to socially accepted behaviors. If those things sound like the same thing it is because they almost are. A few years ago a column in the Harvard Business Review, titled “In Praise of the Handshake,” pointed out that the act of shaking hands was an agreement between two parties to act according to “social norms.”
To do so avoids the needless tit-for-tat spelled out in lengthy contracts. The agreement then, can take the simple form of, “you work hard for me and I will pay you well.” Viewed from the other side of the transaction the agreement is, “you pay me well and I will work hard for you.”
The handshake, therefore, is a signal of trust and it sets the foundation for a mutually beneficial deal. With a contract in place, that trust need not exist. In fact, the contract is a signal that two parties don’t trust each other; it acts as a surrogate for trust. Put a contract in place, it could be argued, and watch both parties diligently work to meet the bare minimum of that contract’s requirements. With a simple agreement or handshake the parties are agreeing to do their best at all times, avoiding the suspicious eyeing across a conference table while the contract is hammered out.
Is that to say that in the complex deals of today, investors will be willing to risk millions (billions?) of dollars on a simple handshake and an understanding that trust exists between two parties? No, of course not. But getting a deal off the ground with a handshake and an understanding of trust can prove to be a better platform for a more detailed agreement to take shape in the future. Here are five examples where that has been the case.
Verizon And Vodafone
In 2013, decades of negotiation came to an end between the two telecommunications giants, Vodafone and Verizon Communications. The two companies agreed to merge in a $130 billion deal that, at the time, was the third-largest in history.
The deal was announced in the Financial Times in September. The striking part was not the sheer enormity of the deal, but rather that the deal came to a head with two individuals from each of the two companies meeting in a San Francisco hotel lobby to shake hands. That’s right; after years of negotiations, the third-largest deal in history was not carried out in law offices. Proof that the handshake works? According to the two men shaking hands that day, it was.
The Financial Time’s article reported that Verizon’s Lowell McAdams said that his longstanding and close relationship with Vodafone’s Vittorio Colao was a factor that helped seal the deal. With decades of wrangling behind the two companies, McAdams, who had assumed the CEO position at Verizon just two years prior, was able to cut through it all and rely on a history of trust to move the deal forward.
The two companies continue to prosper.
A $130 billion merger is a tough act to follow. But proving that the handshake can reap large rewards is Marcus Lemonis, the CEO of Camping World. Lemonis, who Entrepreneur Magazine says is a self-proclaimed “deal junkie,” built his $3 billion company on handshake deals.
He doesn’t believe that doing so is an art. Instead he believes that the old-fashioned way of doing business keeps the deal simple and allows business to keep moving. He always follows up with paperwork, but the launching point is the handshake.
“If you keep it simple and clear … the only reason you get screwed is because the other person is lacking in character,” he told Entrepreneur.
What defines simple? That’s simple. According to Lemonis, “If I give you a dollar, what do I get for it?” he said. “If you can’t agree on these basic terms, then there’s nothing you can agree on.”
Has he been burned? Yes, many times, and once to the the tune of $125,000, but in a fast paced world of deal making Lemonis, thinks it makes little sense to chase that kind of money down with lawyers. Better, he believes, to have his eyes fixed on success and building that $3 billion brand.
Such a fast and loose way of doing business may not make everyone comfortable. Lemonis says it certainly causes some sleepless nights for his lawyers, but it is hard to argue with his kind of success.
Walking into a meeting with paperwork ready just weighs-down the process, according to this successful handshaker.
The 2011 NBA Lockout
The 161-day NBA lockout ended on December 8, 2011 with, of all things, a handshake deal. While the deal represented many, many handshakes between owners, players, and union leaders, it still represented a return to level-headedness and a spirit of fairness. The deal, which eventually had to be voted on and approved, though, did allow the start date of the 2012 basketball season to be set just 17 days out from the agreement being reached — proving that loose agreements can keep business moving.
Billions of dollars were at stake in this deal. Had an agreement not been reached, it goes without saying that owners would lose money on their investments in the teams and the players would have been out their millions in salaries. In many ways, the fact that initial negotiations broke down, resulting in the lockout, was proof that complex deals can hinder business rather than promote it. The negotiations came down to owners and players quibbling over one to three percent of profits.
What ended the stand-off and got the players playing? Many would say a return to fairness. In the end, the players and owners agreed to a 50/50 split of the profits. Sounds fair, especially to those of us who don’t pull down eight-figure salaries for playing a game.
In the end, fairness and cool-heads prevailed. Details were still hammered out, but once fairness returned to the playing field the handshake deal allowed players to return to training camps the very next day.
When you are worth almost $4 billion, $100,000 probably doesn’t seem like a lot of money. Marcus Lemonis has proven that, and it has been established that he won’t spend months chasing after that kind of money when he has bigger fish to fry. You buy yourself a lot of options with $4 billion and it allows you to take some risks. That kind of risk taking and quick thinking has been important in Silicon Valley for sometime.
No one knows exactly how it went down, but the story is that Andreas von Bechtolsheim made one of the first investments in a little project known as Google on nothing but a handshake. In August of 1998, Bechtolsheim, one of the founders of Sun Microsystems, had some cash lying around. Larry Page and Sergey Brin, two Ph.D. students at Stanford University, approached him with a sketch of a search engine that had begun as a research project. Bechtolsheim liked what he saw and wrote a check for $100,000.
A lot has happened since then, so much that it can’t be summed up with “and the rest is history.” It is unknown whether the three engaged in the medieval act of actually shaking hands, but we do know that prior to that meeting, Google didn’t exist as an entity. In an act of trust Bechtolsheim scribbled out a check to “Google, Inc.” and the two students promptly had to incorporate. They did so, they got more investors, and now Google is a proper noun as well as a verb.
No contracts; no lawyers; heck, not even an actual company; but Google got off the ground because a billionaire liked what he saw and trusted that the venture may go somewhere. For his trouble, Bechtolsheim made a cool $2 billion.
Here’s a sign that the handshake deal is likely going to stick around for awhile, at least in Silicon Valley. Paul Graham, of the startup incubator YCombinator, has attempted to structure a protocol so that deals based on trust can move forward. In a one-year old blog post on the company’s website, Graham asserted that Silicon Valley runs on handshake deals. He stressed the fast-paced nature of the business and the benefit such deals have for investors and for companies seeking funds.
Graham, like others who love the handshake, believes trust is key. Such deals can only happen “wherever trust is sufficiently high and speed is sufficiently important,” he wrote last March.
The protocol he proposed to solidify a deal is more of a virtual handshake. Two individuals can lock hands, if they so desire, but a brief agreement should be exchanged. The exchange should happen while the two parties are in the same room and can take place via text message or email. It would look something like this:
1. The investor says “I’m in for <offer>.”
2. The startup says “Ok, you’re in for <offer>.”
3.The startup sends the investor an email or text message saying “This is to confirm you’re in for <offer>.”
4. The investor replies yes.
That’s it. A handshake for the 21st Century. Some may say that it resembles a contract. But the actual contract would come later. The protocol stresses the simplicity characteristic of the handshake.
Who can argue with Graham? According to him, YCombinator backed startups have a combined value of $13.7 billion. Proof again that staying nimble and trustworthy with simple deals can be be beneficial.