Marketing and Distribution Arrangements
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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?
Many Forms
–
–
–
–
–
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?
Big Co
Access to Technology
and Expertise
Competitive
Advantage
Decrease “Time to
Market”
Access to Innovation
Prevent Competition
(cheaper acquisition)
Small Co
Funding
Reputation
Distribution Channel
Access
Market Validation
Critical Mass
BigCo Plans
Trends in Strategic Partnerships
Partners key to securing financing
– Reference customers
– Partner strategy in business plan
Mutuality requirements (e.g., Sprint)
– Both parties must produce and promote to keep
partnership status
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
– Compaq, HP, Oracle, Intel, Nokia, etc.
Co-petitors
– e.g., Palm and Handspring
Keys to Successful Strategic
Partnerships
Pick the right partner
– alliance strategy, rather than strategic alliance
Commitment
– Management Buy-in cited as a top reason for
successful partnerships
Clear roles and goals
The Strategic Partnering
Process
The Alliance Strategy
Initial Discussions – NDA
Next Steps – LOI’s, MOU’s, Heads of
Agreement
Definitive Agreements
– Equity
– Distribution
– Licensing
The Alliance Strategy
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
Carefully define your business
– - Know your core competencies
– - Foresee competitive threats
– - Prioritize related businesses
The Alliance Strategy
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
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
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
Other Factors:
- Perception
Investors want verification without dominance
Public – you are in BigCo’s pocket
- When to seek partnerships
Typically better in early rounds
- If Equity: Amount of investment
Limit to 10 to 20%
Consolidated reporting affects BigCo
The Alliance Strategy
How to Approach Perspective Partners
- Fearlessly
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
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
Carefully outline details of agreements
– Get professional assistance
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
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
Create incentives to work out issues
- Require management involvement, moving up
chain-of-command
- For performance issues, tie to fees or scope
E.g., exclusive to non-exclusive
- Use outside “neutrals” only after internal system
fails to resolve dispute
Exit Strategy
Critical to SmallCo
- Left with people, equipment and facilities can’t support
- Taint of abandonment – difficult to do other deals
CYA – Cover your assets
- Termination for “convenience”
Notice period
Cover salaries and/or other expenses
Buy-out inventory
Exit Strategy
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.
Use of TM on completed, but not shipped products.
Confidentiality.
Exit Strategy
Damage control
- Mutual press release
- Mutual non-disparagement clause
- Equity – take away:
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
•
If partnership
is terminated
Board
Participation
–– Limit
- Asktofor
“call” status;
right exclude during “executive
observer
and/orseeking
conflictasituations
– sessions”
- Risk BigCo
“put” in exchange
– Tie
observer
to %note
ownership
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
Taint ifinvestment
not exercised
opportunity to pursue other partners
Discourages competitors
–– 10%
for pooling
for consolidated
- Better:
Noticeand
and20%
opportunity
to bid reporting
Equity Issues
If partnership is terminated
–
- Ask for “call” right
–
- Risk BigCo seeking a “put” in exchange
Contra: Put under note payable over time
Right of First Refusal
–
–
- Generally not good idea
Taint if not exercised
Discourages competitors
- Better: Notice and opportunity to bid
Distribution Issues
Audit Rights
- Trust, but verify
- Annual are typical
- Check for injunctive relief or other enforcement
rights where distributing
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
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)
Territory: Geography and vertical markets
Strategy: Carve up IP, territory and other
rights to preserve as much as possible
Licensing Issues
Exclusivity
- Generally, not a good idea – limits value
- Negotiating Ideas:
Limited term
Limit to territory or product line
Require minimum sales or convert to non-exclusive
Licensing Issues
Fees
- Typically royalties based on sales volume (units or % of
sales)
- Joint product development – let them pay
- If Licensor:
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
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
Ownership
- Know who owns jointly developed IP
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
IP Issues
Copyright
- Copyright: make, use, distribute, publicly
display/perform work AND derivatives
- Careful with “derivatives”
Joint software development – get license for work
AND derivatives
Otherwise – derivatives limited by scope of license
IP Issues
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