The Startup's Hunt for Early Adopters
The Ins and Outs of Joint Development Agreements
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It is an exciting time on the life of an entrepreneur when a corporate team shows interest in a startup’s technology. But are they truly an “early adopter”? Have they tried to solve the problem addressed by the startup, spent corporate Dollars on it, or event created a budget? Murray’s on-point guidance on finding Design Partners should be the playbook for any MVP-ready startup dealing with long enterprise sales cycles and complex eco -systems with equally complex stakeholder management.
One example for such industry is the energy industry, and the renewable energy is no different. The common tie-in is via traditional utilities, and grid operators or Independent System Operators (“ISOs”) and their directives from FERC and NERC, ensuring the reliability of our grid. But the following thoughts are not limited to energy at all, and are generally applicable across infrastructure or other capital intensive industries.
Most corporates thrive on using the word innovation, but many shy away from risks or uncertainties deeply associated with practicing it. They also may have different motivations beyond the acquisition of the technology or company, such as learning about new markets, acqui-hiring, or defensively stifling a potential competitive future threat from the outset. One famous example when a corporate relationship goes south was the inventor of the intermittend windshield wiper, turned into the movie “Flash of Genius” here: https://www.imdb.com/title/tt1054588/
One typical framework for such early design partnership is the Joint Development Agreement, or “JDA”, with clearly articulated milestones and each party’s responsibilities and deliverables. It is a legally more complex framework with a Master Services Agreement and usually multiple Statements of Work. Most likely the corporate’s perceived risk of engagement with a startup also requires the startup to structure a deal that offers the corporate partner significant benefits in the use of, or as channel partner for the jointly developed technology. Most apparent is the importance of the definition of Intellectual Property (“IP”) ownership, current and future, including derivatives and continued development from the jointly established IP. But there are more traps and opportunities lurking, which require careful attention of the excited enterpreneur, when the “mouse dances with the elephant”:
Carefully defined exclusions (“carve-outs”), limitations, and “most preferred nation (“MFN”) terms likely come along for the first deal(s). After all, no startup should have all Easter eggs in one egg basket, or limit its future potential. However, such partnership can turn-out to be one-sided, mis-interpreted, and subject to overwrites by your internal corporate champion’s superiors. If your partner is a large publicly traded company, expect their support highly being hinged on quarterly stock performance, alignment with corporate messaging, and initial financial support, purchase commitments, often conditionally, or even investments, that can become undone overnight. Especially in a highly uncertain environment, such as created by the current administration.
Therefore it is equally important on entering such exciting agreement, the careful crafting of how to get out of the agreement. Specifically pay attention to any limited exclusivity that may have been asked for by the design partner. It is time well spend to think of anything that can go wrong ahead of time, and articulate such exit conditions in writing. For example:
- Geographic restrictions
- Use restrictions, specific applications or markets
- Minimum contract performance requirements, which may include access to specific measurable information, resources, or future sales quotas.
- Licensing royalties upon termination, if the technology but not the product or service is continued to be used, or a derivative is being developed on its basis.
- Upfront payment, at least partial, such as a split into 2/3rd upfront, 1/3rd upon final delivery.
- Interest charged for late payment, or a “skonto” discount (a European thing) to incentivize early payments.
Even if accelerated terms such as “due upon”, NET15 or NET30 terms have been agreed upon, many finance department practice payment delays to manage their own cash flow, at the expense of their suppliers. And potentially kill the startup before it had a chance to diversify its client base.
It is good practice that each milestone, or completed Statement of Work, is accompanied with a summary statement of fulfillment, and a table listing the agreed upon tasks and the accomplished deliverables. This avoids later conflicts and misunderstanding, especially when it comes to enforcing payments and proving the time of revenue recognition.