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Ask HN: Advice Needed on a Partnership Proposal

Hello HN Based out of India, we have a security product for web apps. We've been in talks with an experienced US sales executive for several weeks in helping us take the distribution to next level and he seems to have been super interested. Recently, he has come up with a partnership proposal in which he wants us to transfer IP rights of the product (without any money paid) to a California general partnership entity in which his LLC company will have 51% interest and a managing partner status. The product will be further exclusively licensed to his LLC company for sale. His argument is that without major US ownership, no fortune1000 companies and federal government will buy a security product in large quantities (say $100k or more) The original partnership agreement requires us to grant irrevocable, exclusive, royalty free unrestricted worldwide rights to sell/modify/reproduce/rewrite etc. the product and its source code as capital contribution, while from him, the contributions are sales, marketing, accounting, strategy etc. The voluntary withdrawal requires a very large notice period and upon withdrawal, the IP rights of our product will still be there with the partnership. Events resulting in the involuntary withdrawal of a Partner from the Partnership includes death of a Partner; Partner mental incapacity; Partner disability preventing reasonable participation in the Partnership; Partner incompetence; breach of fiduciary duties by a Partner; criminal conviction of a Partner; Expulsion of a Partner; Operation of Law against a Partner; or any act or omission of a Partner that can reasonably be expected to bring the business or societal reputation of the Partnership into disrepute. There are several other conditions including authority to bind partnership into contracts remains with him, equal distribution of profits/losses as per ownership interest (accounting done by his firm), etc. (to be continued in comment)

InSecurityDev 5y ago
(continuing) We've found the agreement really unequal and too much authority in his hands. But he's been insisting on it as the only way giving that same argument of Buy American Act (BA) and Trade Agreement (TA). As per my reading of these two acts, I understand that only the structure (51% ownership) isn't going to satisfy the requirements of these acts, as they require manufacturing (BA) or substantial transformation (TA) to have been done in USA. He says that we'll get 49% of the revenue and R&D/technical support will remain with us. but based on my reading of these provision, if we retain the development of the product, it won't pass BA/TA. We suspect that for such contracts, he can end up removing us from those activities consequently paying very little (if at all) percentage of the revenue from government contracts and we'll not be able to object it because of limited rights. "No Partner may do any act that would make it impossible to carry on the ordinary business of the Partnership." is one of such conditions in the agreement that can easily invoke expulsion of a partner in such a case IMO. Please share your expert thoughts. Is our understanding of BA/TA correct? Are there ways for us to remain independent, and we retain the rights of the product and he can still sell to government/Fortune1000 (though for latter I don't think it should be an issue)? (We’ve even proposed to have a separate contract for government agencies).
__d 5y ago
This sounds like a very bad deal. I would not sign it. I've sold software to medium-sized US corporates without being a US-based company. It was not a problem -- the only thing they cared about was making sure the dispute clauses used US law and a US jurisdiction.
- InSecurityDev 5y ago
  Thanks. We also feel the same. We've mentioned that we can open up a US company (using Stripe Atlas etc.) but he keeps on insisting that no one would buy a security product in large quantity from a US company with foreign ownership. Though he himself had us hired a few years ago for the old version of our product along with security consultancy for a financial platform he conceptualized and supervise building/sale for a custodian company in USA as its C-level executive. He later hhad lawsuit with the company as the owner he says, refused to give him a percentage of the sale amount (the company got sold) promised verbally. ONe of the reasons he gives is that we can do the same to him without stake. But we feel that he can also do the same to us and he should earn his right into the product based on a vesting schedule or buy it out with an upfront payment.
  - __d 5y ago
    Of course I don't really understand the situation, having just casually read what you've posted here, but .. it all seems dubious. I think, despite the possible upside of having a dedicated US sales partner, that it would be safer to cut all ties with him as nicely but definitively as possible, and just move on. Unfortunately, you will have to accept that it's likely he will say bad things about your company and your product when he has the opportunity. But I think that will likely be a small price to pay: nothing you've described sounds like good-faith, transparent, mutual benefit business which is what you should expect from a partner. Best of luck!
gus_massa 5y ago
> he has come up with a partnership proposal in which he wants us to transfer IP rights of the product (without any money paid) to a California general partnership entity in which his LLC company will have 51% interest and a managing partner status. WWWHHHAATT???!!! --- Some parts of an old comment I made: Did you verify that the previous business are real? Are the previous partners happy? Are the previous partners real? Imagine the happy path: He is very good, and in 10 years your business is huge and everyone is happy. Imagine the unhappy path: He is a scammer or a moron, or he has an incompatible vision of the future of the business or whatever. Can you fire him in 3 months? 6 months? Can he fire you? Does he get a fair compensation? Does he get most of your business? Be sure to understand both scenarios, and perhaps a few intermediate versions. As a warning, take a look at "A $5000 chair" http://battlehardened.wordpress.com/2012/02/07/a-5000-chair/ http://battlehardened.wordpress.com/2012/02/07/a-5000-chair/ HN discussion https://news.ycombinator.com/item?id=3564569 https://news.ycombinator.com/item?id=3564569 (217 points | Feb 8, 2012 | 60 comments) --- More parts of an old comment I made, but in your case I'd just run away: Make YOUR lawyer review all the paperwork, and get everything in written. Repeat after me at least three times: "4 years vesting with 1 year cliff"
- InSecurityDev 5y ago
  Thanks for your valuable advice. He hired us as consultant with old version of our product a few years ago to help in building a platform for a financial firm where he joined as CSO. He conceptualized and brought initial customers for the platform but he ended up having litigation with the company because the company owner refused to give him some percentage of the sale of company promised verbally, and fired him out of the company. He thinks we can also do the same to him if he takes us to some good size and his efforts would be wasted. yes, it seems that he has incompatible vision based on big plans for his LLC he has divulged unintentionally over the discussions in last few days. We've rejected in writing multiple times and gave our offer based on originally discussed plan. But he keeps on insisting that we can't sell to federal government/fortune1000 without US ownership, and we'll end up selling 10 copies vs. thousands of copies he can sell. Vesting is something we've decided to offer as an option in addition to reseller/distributer option already made.
codegeek 5y ago
"talks with an experienced US sales executive" Before you discuss partnerships with anyone, how much do you really know about this person ? What makes him an experienced US Sales executive ? Do they actually have a track record ? Has he sold anything similar before in similar domain ? Does he have any contacts who could be prospects already ? I would first worry about all of this and make sure you are not talking to someone who is just talking big or thinks he can sell the product. If you want to sell in the US, setup your own subsidiary in the US and at best, make him a Director there without majority ownership AND pay him handsomely for deals won. Forget 51%. I wouldn't even give him 5% without track record and history. You can work out an equity deal with vesting with a 1 year cliff. Talk to a lawyer if you are serious.
codingdave 5y ago
> transfer IP rights of the product (without any money paid) to a California general partnership entity in which his LLC company will have 51% interest No. Run away. Even if everything else he says is true, the USA is just one market. Don't give away everything you have, for zero money, just so one guy has a chance to see if he can make it work in one market. One crowded, pre-existing market, where there is no guarantee of success.
Jugurtha 5y ago
>he wants us to transfer IP rights of the product (without any money paid) to a California general partnership entity in which his LLC company will have 51% interest and a managing partner status Fuck that shit, and I'm really, really, drunk right now. I stopped reading at that point. Pass. Good night.

InSecurityDev 5y ago

(continuing) We've found the agreement really unequal and too much authority in his hands. But he's been insisting on it as the only way giving that same argument of Buy American Act (BA) and Trade Agreement (TA). As per my reading of these two acts, I understand that only the structure (51% ownership) isn't going to satisfy the requirements of these acts, as they require manufacturing (BA) or substantial transformation (TA) to have been done in USA. He says that we'll get 49% of the revenue and R&D/technical support will remain with us. but based on my reading of these provision, if we retain the development of the product, it won't pass BA/TA. We suspect that for such contracts, he can end up removing us from those activities consequently paying very little (if at all) percentage of the revenue from government contracts and we'll not be able to object it because of limited rights. "No Partner may do any act that would make it impossible to carry on the ordinary business of the Partnership." is one of such conditions in the agreement that can easily invoke expulsion of a partner in such a case IMO. Please share your expert thoughts. Is our understanding of BA/TA correct? Are there ways for us to remain independent, and we retain the rights of the product and he can still sell to government/Fortune1000 (though for latter I don't think it should be an issue)? (We’ve even proposed to have a separate contract for government agencies).

__d 5y ago

This sounds like a very bad deal. I would not sign it. I've sold software to medium-sized US corporates without being a US-based company. It was not a problem -- the only thing they cared about was making sure the dispute clauses used US law and a US jurisdiction.

InSecurityDev 5y ago
Thanks. We also feel the same. We've mentioned that we can open up a US company (using Stripe Atlas etc.) but he keeps on insisting that no one would buy a security product in large quantity from a US company with foreign ownership. Though he himself had us hired a few years ago for the old version of our product along with security consultancy for a financial platform he conceptualized and supervise building/sale for a custodian company in USA as its C-level executive. He later hhad lawsuit with the company as the owner he says, refused to give him a percentage of the sale amount (the company got sold) promised verbally. ONe of the reasons he gives is that we can do the same to him without stake. But we feel that he can also do the same to us and he should earn his right into the product based on a vesting schedule or buy it out with an upfront payment.
- __d 5y ago
  Of course I don't really understand the situation, having just casually read what you've posted here, but .. it all seems dubious. I think, despite the possible upside of having a dedicated US sales partner, that it would be safer to cut all ties with him as nicely but definitively as possible, and just move on. Unfortunately, you will have to accept that it's likely he will say bad things about your company and your product when he has the opportunity. But I think that will likely be a small price to pay: nothing you've described sounds like good-faith, transparent, mutual benefit business which is what you should expect from a partner. Best of luck!

gus_massa 5y ago

> he has come up with a partnership proposal in which he wants us to transfer IP rights of the product (without any money paid) to a California general partnership entity in which his LLC company will have 51% interest and a managing partner status. WWWHHHAATT???!!! --- Some parts of an old comment I made: Did you verify that the previous business are real? Are the previous partners happy? Are the previous partners real? Imagine the happy path: He is very good, and in 10 years your business is huge and everyone is happy. Imagine the unhappy path: He is a scammer or a moron, or he has an incompatible vision of the future of the business or whatever. Can you fire him in 3 months? 6 months? Can he fire you? Does he get a fair compensation? Does he get most of your business? Be sure to understand both scenarios, and perhaps a few intermediate versions. As a warning, take a look at "A $5000 chair" http://battlehardened.wordpress.com/2012/02/07/a-5000-chair/ http://battlehardened.wordpress.com/2012/02/07/a-5000-chair/ HN discussion https://news.ycombinator.com/item?id=3564569 https://news.ycombinator.com/item?id=3564569 (217 points | Feb 8, 2012 | 60 comments) --- More parts of an old comment I made, but in your case I'd just run away: Make YOUR lawyer review all the paperwork, and get everything in written. Repeat after me at least three times: "4 years vesting with 1 year cliff"

InSecurityDev 5y ago
Thanks for your valuable advice. He hired us as consultant with old version of our product a few years ago to help in building a platform for a financial firm where he joined as CSO. He conceptualized and brought initial customers for the platform but he ended up having litigation with the company because the company owner refused to give him some percentage of the sale of company promised verbally, and fired him out of the company. He thinks we can also do the same to him if he takes us to some good size and his efforts would be wasted. yes, it seems that he has incompatible vision based on big plans for his LLC he has divulged unintentionally over the discussions in last few days. We've rejected in writing multiple times and gave our offer based on originally discussed plan. But he keeps on insisting that we can't sell to federal government/fortune1000 without US ownership, and we'll end up selling 10 copies vs. thousands of copies he can sell. Vesting is something we've decided to offer as an option in addition to reseller/distributer option already made.

codegeek 5y ago

"talks with an experienced US sales executive" Before you discuss partnerships with anyone, how much do you really know about this person ? What makes him an experienced US Sales executive ? Do they actually have a track record ? Has he sold anything similar before in similar domain ? Does he have any contacts who could be prospects already ? I would first worry about all of this and make sure you are not talking to someone who is just talking big or thinks he can sell the product. If you want to sell in the US, setup your own subsidiary in the US and at best, make him a Director there without majority ownership AND pay him handsomely for deals won. Forget 51%. I wouldn't even give him 5% without track record and history. You can work out an equity deal with vesting with a 1 year cliff. Talk to a lawyer if you are serious.

codingdave 5y ago

> transfer IP rights of the product (without any money paid) to a California general partnership entity in which his LLC company will have 51% interest No. Run away. Even if everything else he says is true, the USA is just one market. Don't give away everything you have, for zero money, just so one guy has a chance to see if he can make it work in one market. One crowded, pre-existing market, where there is no guarantee of success.

Jugurtha 5y ago

>he wants us to transfer IP rights of the product (without any money paid) to a California general partnership entity in which his LLC company will have 51% interest and a managing partner status Fuck that shit, and I'm really, really, drunk right now. I stopped reading at that point. Pass. Good night.