19 Sep Early Stage, Step 14: Strategic partnerships require legal protections
Editor’s note: This is the 14th in a series of articles on developing start-up companies in the technology or biotechnology sectors.
Madison, Wis. – Now it’s time to discuss whether your business, be it high-tech or otherwise, can create so-called “strategic partnerships” to further develop business opportunities.
Let’s try an example. Your business is three years old with a new idea, a new business idea. You do not have the capital or the personnel to exploit it. You are aware of a business with the employees and the capital to take this business idea further than you can.
What can you do?
One answer is to create a “strategic partnership.” Normally, this is not technically a legal partnership. It is an arrangement whereby the two parties seek to maximize their mutual strengths while collaborating.
For your company, which has the business idea but not the capital or the personnel, it is usually a “dealership arrangement.” That is, your business is sharing intellectual property – the knowledge, the trade secrets, whatever it may be that goes along with this business idea – with the third party, which will use its personnel and capital to develop it.
In return, your company may receive compensation, typically in the form of “royalties” or other expense reimbursements to cover your expenses. This is, in some ways, similar to a license arrangement (we will discuss licenses next time). The dealer (your company) seeks both to make money from its idea and to reduce the risk of the third party improperly using and tarnishing its name and reputation.
Dictating the terms
So what are typical terms and conditions of a such a dealership agreement? They include: a description of the intellectual property; royalty payments; expense reimbursements; progress milestones; termination of the agreement should either party fail to live up to its obligations; agreements to protect the intellectual property and defend it from competitors, including non-disclosure and non-compete; and accounting provisions so that the dealer knows it is being properly paid for the revenues generated by the collaborator.
Once this comprehensive document is agreed to, the parties proceed. Both parties should monitor the milestones so that the dealer (your company) is assured that progress is being made. As each milestone is achieved, the parties move closer to a marketable and revenue-generating product or service.
What are the typical milestones? They depend on the business idea. As an example, assume it is a software concept. The milestones might include: completion of initial program; revisions to it; beta testing; revisions after beta tests; marketing to select potential buyers; review/revise marketing plans; general sales efforts; and establishing customer service personnel.
Once the business idea turns into a marketable product or service, the parties begin to share the revenues. At this time, the agreement must permit the dealer (your company) to verify the actual sales to assure it is being properly paid.
Assuming all goes well; the two parties should have a mutually beneficial relationship. If not and there is a default, termination provisions will be followed. These provisions can be tricky depending on the timing of the default. The earlier the default, the easier it is to unwind the business relationship. The later the default, the harder it is to do.
The parties should agree on how to unwind on the front end. If they do not, then it could be difficult to do so later. Each deal is unique. It is hard to specify what termination provisions will work in advance. Some general guidelines include: the return of the business idea to the owner as well as all of the additional work done; damages for time lost and out-of-pocket costs; a non-compete and a non-disclosure agreement after the termination to protect the dealer; and a provision on attorney’s fees.
Next time, we will discuss licensing agreements.
Previous Early-Stage articles by Joe Boucher
• Joe Boucher: Early Stage, Step 13: The advantages of leasing real estate
• Joe Boucher: Early Stage: Step 12 – Alternative forms of business finance
• Joe Boucher: Early Stage: Step 11 – Other forms of finance
• Joe Boucher: Early Stage 10: The nuances of federal laws
• Joe Boucher: Early Stage, Step 9: Raising capital in the securities landscape
• Early Stage, Step 8: Misclassifying workers brings risk
• Joe Boucher and Bonnie Wendorff: Early Stage 7, Part I: Just what is an employee?
• Joe Boucher: Early Stage: Step 6 – Taxes, taxes, taxes!
• Joe Boucher: Early Stage: Step 5 – Forming the entity
• Joe Boucher: Early Stage, Step 4: Cautionary trademark tales
• Joe Boucher: Early Stage, Step 3: Naming the entity
• Joe Boucher: Early Stage Step 2: Choosing a domain name
• Joe Boucher: Starting a tech business? Step 1 is minding the intellectual property
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