Nov 20 2017

But Does it Work in the Real World? Second Order Thinking and the Perfect Legal Structure

I recently attended a continuing legal education seminar concerning some very complex organizational structures for healthcare venture development.

Slide after slide flashed on the screen, each looking even more like a dish of spaghetti topped with Froot Loops and Cheez-Its than the one before it.

This entity and that. Physicians here. Investors there. Money flowing this way. Control over here and ownership over there.

From a purely legal standpoint, the models made sense.

However, from the practical standpoint, one apparently lost on the presenter, the structures were unfinanceable.

And, even assuming that the owners could finance the deals completely out of pocket, the structures would likely cause payors either to balk at paying you in the first place, or worse, to pay you now but later wake up to what’s really going on. Then, they’d demand their money back and claim that you defrauded them, or worse.

This is an example of the necessity of second order thinking.

The first order in our example is simply to ask whether the structure works from a legal standpoint. (“Yes, it does, so let’s proceed to document it.”)

The second order is consideration of the impact of your decision made at the initial level. (“Can we finance that type of deal?” “Is the legal structure ‘too cute by half?'”)

The dive goes deeper from there, to the third level (e.g., “What’s the impact of an unfinanceable structure on our relationship with . . . “”) and beyond, bounded only by the time and money you’re willing to invest in the process and the question of whether it makes sense to do so.

How deeply are you thinking?

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss


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