Transcript Marketing and Distribution Arrangements

White & Lee’s
Soup to Nuts 2001
STRATEGIC
PARTNERSHIPS
Session III: April 7, 2001
Road Map
– What are “Strategic Partnerships”?
– Why enter into Strategic Partnerships?
– Trends in Technology Strategic Partnerships
– Keys to a Successful Partnership
– The Strategic Partnering Process
– Selected Key Issues in Strategic Partnering
What are Strategic Partnerships?
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Many Forms
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Joint Ventures
Virtual Alliances – JV without co-locating
Joint Development Agreements – R&D
Distribution and Marketing Agreements
Mergers & Acquisitions
Our Focus:
– Licensing/Distribution/Equity
– BigCo/SmallCo
Why Enter a Strategic
Partnership?
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Big Co
Access to Technology
and Expertise
Competitive
Advantage
Decrease “Time to
Market”
Access to Innovation
Prevent Competition
(cheaper acquisition)
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Small Co
Funding
Reputation
Distribution Channel
Access
Market Validation
Critical Mass
BigCo Plans
Trends in Strategic Partnerships
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Partners key to securing financing
– Reference customers
– Partner strategy in business plan
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Mutuality requirements (e.g., Sprint)
– Both parties must produce and promote to keep
partnership status
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Increase in cross-boarder partnerships
 Increase in early-stage partnerships (market
consolidation/market share/time to market)
Trends in Strategic Partnerships
“Not Invented Here” Less of an Issue
– SmallCo partners “competing” with internal
development efforts (build vs. buy decisions)
 BigCo partners judged by quality of their strategic
partners
 Corporate investment funds continue to be active
– 20 to 30% of equity investment ’00 and ‘01
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– Compaq, HP, Oracle, Intel, Nokia, etc.
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Co-petitors
– e.g., Palm and Handspring
Keys to Successful Strategic
Partnerships
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Pick the right partner
– alliance strategy, rather than strategic alliance
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Commitment
– Management Buy-in cited as a top reason for
successful partnerships
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Clear roles and goals
The Strategic Partnering
Process
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The Alliance Strategy
 Initial Discussions – NDA
 Next Steps – LOI’s, MOU’s, Heads of
Agreement
 Definitive Agreements
– Equity
– Distribution
– Licensing
The Alliance Strategy
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Make a list of strategic objectives and
acceptable risks
– This should be revisited throughout negotiations
– Avoids tendency to “give away the farm” and lose sight
of original objectives
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Carefully define your business
– - Know your core competencies
– - Foresee competitive threats
– - Prioritize related businesses
The Alliance Strategy
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Profile your Partner
- Identify partners who have what you need
- Ask if you fill a niche or a missing link on
BigCo’s strategic path
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Classic case: missing piece for end-to-end solution
Riskier approach: anticipate need and build to it
- Consider how to approach them
The Alliance Strategy
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How do you know needs of partners?
- Industry resources – trade publications, (e.g.
Red Herring, The Industry Standard, Business
2.0), Partner Web Pages, analyst reports.
- Speak with attorneys, accountants and other
advisors
- If Partner is public, go to EDGAR
http://www.sec.gov/edgar.shtml
- Personal contacts
The Alliance Strategy
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Other Factors:
- Perception
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Investors want verification without dominance
Public – you are in BigCo’s pocket
- When to seek partnerships
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Typically better in early rounds
- If Equity: Amount of investment
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Limit to 10 to 20%
Consolidated reporting affects BigCo
The Alliance Strategy
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How to Approach Perspective Partners
- Fearlessly
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BigCo’s actively seeking partners – all have biz dev
officers
Introductions not necessary – like a financing – use
email!
People WANT to talk – partnering is the new
currency – use it
- Remember, your goal is to get an audience
Initial Discussions
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Non-Disclosure Agreements
- ALWAYS ask partner to sign
- Expect Mutuality
- Open the Kimono slowly
- Don’t Expect complete protection
 If violated, enforceability is very expensive and time
consuming (proof: define trade secrets, how
disclosed, and clearly confidential at time of
disclosure)
 Build trust first, then disclose information
Next Steps – the LOI
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Carefully outline details of agreements
– Get professional assistance
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Familiarity with other deals.
Knows key issues and how to draft them
Clear terms means less time on Definitive
Agreement.
Not typically binding
– Except confidentiality, and perhaps, fees
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Risk of binding LOI is incomplete terms
Careful: Can be “binding,” even if not
– conduct of parties and reliance (Pennzoil vs. Texaco)
Definitive Agreement
Dispute Resolution
Exit Strategy
Equity Issues
Distribution Issues
Licensing Issues
Other IP Issues
Dispute Resolution
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Create incentives to work out issues
- Require management involvement, moving up
chain-of-command
- For performance issues, tie to fees or scope
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E.g., exclusive to non-exclusive
- Use outside “neutrals” only after internal system
fails to resolve dispute
Exit Strategy
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Critical to SmallCo
- Left with people, equipment and facilities can’t support
- Taint of abandonment – difficult to do other deals
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CYA – Cover your assets
- Termination for “convenience”
 Notice period
 Cover salaries and/or other expenses
 Buy-out inventory
Exit Strategy
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CYA
- Agree up front on who can terminate, and
under what circumstances (e.g., partial
termination)
- Agree on ownership of IP on termination.
- Agree on continuing obligations.
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Use of TM on completed, but not shipped products.
Confidentiality.
Exit Strategy
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Damage control
- Mutual press release
- Mutual non-disparagement clause
- Equity – take away:
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Board observer rights
Right of first refusal
Information rights
Equity Issues
• Board Participation
– Limit to observer status; exclude during “executive
sessions” and/or conflict situations
– Tie observer rights to % ownership (e.g., 25% of
originally-purchased stock)
• % Ownership
– “strategic” investment without jeopardizing
opportunity to pursue other partners
– 10% for pooling and 20% for consolidated reporting
Equity
Equity Issues
Issues
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•
If partnership
is terminated
Board
Participation
–– Limit
- Asktofor
“call” status;
right exclude during “executive
observer
and/orseeking
conflictasituations
– sessions”
- Risk BigCo
“put” in exchange
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– Tie
observer
to %note
ownership
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Contra: rights
Put under
payable(e.g.,
over 25%
time of
originally-purchased stock)
Right of First Refusal
• %
Ownership
– - Generally not good idea
– “strategic”
without jeopardizing
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Taint ifinvestment
not exercised
opportunity to pursue other partners
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Discourages competitors
–– 10%
for pooling
for consolidated
- Better:
Noticeand
and20%
opportunity
to bid reporting
Equity Issues
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If partnership is terminated
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- Ask for “call” right
–
- Risk BigCo seeking a “put” in exchange
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Contra: Put under note payable over time
Right of First Refusal
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- Generally not good idea
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Taint if not exercised
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Discourages competitors
- Better: Notice and opportunity to bid
Distribution Issues
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Audit Rights
- Trust, but verify
- Annual are typical
- Check for injunctive relief or other enforcement
rights where distributing
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EU – careful
- Exhaustion Doctrine – can’t carve up Europe
Licensing Issues
many issues to cover – definitely
use a skilled attorney (see outline of
issues)
 Scope
 Too
- Use, make, distribute, sublicense, reproduce
- Establish with expansion and growth in mind, as
well as downside protection if partnership fails
- Field of Use
Licensing Issues
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IP Ownership
- Be clear as to who owns what: original technology,
improvements, jointly developed IP
- Upgrades vs. Updates (e.g., 1.X, 2.X vs. X.1, X.2)
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Territory: Geography and vertical markets
 Strategy: Carve up IP, territory and other
rights to preserve as much as possible
Licensing Issues
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Exclusivity
- Generally, not a good idea – limits value
- Negotiating Ideas:
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Limited term
Limit to territory or product line
Require minimum sales or convert to non-exclusive
Licensing Issues
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Fees
- Typically royalties based on sales volume (units or % of
sales)
- Joint product development – let them pay
- If Licensor:
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front-end fees,
incremental fees for new products
Include “sales” to affiliates and for demo units
Request minimum volume commitment
Tiered royalties – front end loaded
IP Issues
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Privacy and Personal Information
- Possible liability for partner’s disclosure
- Public relations issues
- Under increasing regulation by government
- International complications – big issue in EU
IP Issues
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Ownership
- Know who owns jointly developed IP
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Ownership can be deceptive
- Patents – “inventors”, must be assigned to
company under employment agreement
- Assign soon – else separate consideration
required
No right exists in patent until grant
- Contract for ownership if partnership breaks up
before grant
IP Issues
– Trademark – Careful not to lose it
 Can’t be split up
– Create separate entity to hold name, license use
Can’t assign without goodwill and other
valuable components – “Naked” fails
 Must register outside US
 Domain name is not TM
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IP Issues
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Copyright
- Copyright: make, use, distribute, publicly
display/perform work AND derivatives
- Careful with “derivatives”
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Joint software development – get license for work
AND derivatives
Otherwise – derivatives limited by scope of license
IP Issues
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Bankruptcy – 365(n)
- Licensee can continue or terminate
- Must abide by terms of license
- Right to source code for continued use
- Carve-out for non-solicitation to get key
employees from licensor