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Ask HN: small fish v. big fish - exclusivity contract?
Executive summary: small bootstrapped startup, approaching potential B2B clients about the product we want to build. One established company wants to help us build it, in return for an exclusivity deal. What are the gotchas? How do we avoid getting screwed?
Long version:
My partner and I want to bring a new technology (mobile devices) to an existing industry which currently isn't using it, but we believe definitely will be using it in a few years' time. We've spent the last month knocking on doors, trying to gauge interest, and to define what shape a solution might take - basically, doing Customer Discovery. There is definitely interest, the industry feels that the times are changing, but isn't exactly sure how that change will happen, and enthusiasm has varied wildly between different companies.
My partner and I are both tech people, and we have very limited domain knowledge - we're learning and making contacts as we go, but we started from zero a couple months ago. We're also trying to bootstrap as far as possible.
I had a meeting today with the first company that was truly enthusiastic about what we're proposing. They "got it" right away, and proposed a partnership to build the solution we have in mind. They are willing to bring their expertise and domain knowledge to the table (they've been around for 15 years), but in return, they want some form of (time-limited) exclusivity. They are basically seeing the same opportunity we are seeing, and want to use it to grow and position themselves as a leader - and are happy to work with us as partners, but (naturally) not as competitors.
Depending on the terms of the agreement (we'd want a good lawyer on our side, of course), there could be significant upsides. They would effectively become our first (large) client. We could use their expertise to build a product that makes sense, and their reputation and sales channels to push it into the market - these are certainly not our strengths. Our interests would be aligned in the sense that they would want to push as many sales as possible - thus growing both our businesses.
The part I'm nervous about is: we're a two-person startup with no funding, they're an established midsize company. How do we make sure we don't get screwed?
What are the downsides and hidden gotchas to something like this?
- Travis 17y agoGet a good lawyer. Really it boils down to this: can you build and market the product without their assistance? Will you find angel / seed / VC funding on your own? Can you bootstrap? If those answers are yes, I'd say do it on your own. If they are no, your "decision" is already made for you, really. Be careful that they know what your intentions are. That can help stay out of troublesome situations. If you intend to be a vendor, then make sure they know that you want to sell this elsewhere. If you're under contract, or a work-for-hire, they probably own the work. And make sure to consult a real lawyer on any contracts.
- alex_c 17y agoThanks - that is a good point, I think communication has been fairly clear up to now, but you can never be too sure. The best-case-scenario outcome definitely seems worth it for us, but as always, the devil is in the details.
- grellas 17y agoMain concerns: Guard your IP - watch out for open-ended "due diligence" requests or anything else that might leave your IP vulnerable to a predatory partner. Guard your funding options - if they invest as part of the deal, don't give them veto rights over future funding. Guard your competitive turf - any "partner," and especially a well-funded one, can easily become your competitor after the relationship is over. See a good lawyer about steps to prevent this. Guard your people - raiding is not unheard of in this context. Include no-hire clauses in your documents. Guard your rights to derivatives from any joint development - unless you want to create a competitor, don't do as a work-for-hire but get joint rights or, better yet, sole rights to derivatives from the SOW. Guard your own distribution opportunities - limit exclusivity strictly as to time and type of channel. Guard your back from the start - use a good lawyer even at the term sheet stage because both structure and fine points are critical in this type of relationship and you will prejudice yourself if you let poor terms define a term sheet only to have to dig out of them in doing the definitive docs. And don't let them snow you with the "we use these standard documents only" approach - every deal like this is highly customizable and should be done that way. Your description is too general to know what other factors might apply but these are some big ones for many of these types of deals. Hope it helps.
- alex_c 17y agoThank you - very helpful. We obviously want a good lawyer on our side (I think I can find someone), but it helps to have some things in mind already. I know I hate it when I get asked this kind of question, but I'll ask anyway - what should we expect in fees for a lawyer to advise us throughout the process and help with the final documents? I know it's hard to estimate, but a ballpark low/high.
- grellas 17y agoHard to say without knowing more about the deal, about the lawyer pricing in your local market, and about whether you will be using a big firm or not. In very rough terms, and assuming a deal that does not have a lot of different elements to it beyond those you generally describe (for example, one that does not include a funding component), $5K to $10K might not be out of line when you include a term sheet, drafting/document markup, meeting time to discuss issues and strategy internally, and possible attorney-to-attorney negotiations over at least some issues. With a big firm, start with $10K as a baseline and assume it can easily climb from there (in more complex deals of this type, fees can easily run $20K-$30K and up - yours would not appear to fall in this category, though). Key points: Negotiate for a fixed fee if possible. Have your lawyer do the first draft if possible. Your lawyer will have a good template to start with, and it tends to be more expensive to have to work backward from a first draft that is heavily slanted against you than it is to have it set out right in the first place. Get detailed early-stage advice from your lawyer in the background but do the preliminary negotiating on business terms and basic legal structure directly with the other principal if you can, before getting your lawyer too heavily involved. If you feel you are too inexperienced for this, then use the lawyer up front but you will pay for this. Don't scrimp on the customized terms needed to get the protections properly woven into the final documentation. Your company will have the most to lose if this is not done right.
- alain94040 17y agoWatch out: exclusivity is a strong word. When you say they may become their first client, you really mean that they are guaranteed to become your only client. What if they don't follow-through and lose interest in your product? What happens to the exclusivity then?
- alex_c 17y agoI would really want the exclusivity to be time limited - let them be first to market with it, let us start selling to other companies after. The length is, of course, extremely important - it is a relatively slow moving industry, but wait too long, and all other companies will find some other solution. I would also want a clause that lets us get out if they're not delivering (roughly, if they're delivering below what we could reasonably expect to accomplish on our own).
- cjg 17y agoSee if you can get them to agree a list of competitors they don't want you to sell to rather than just a blanket exclusivity. Try to add a regular review clause to allow this list to be reduced over time.