Transcript Document

Stephen P. Rothman, Esq.
NCET2 Rothman Slides Strategic Partnerships
The University Startup Company Law Firm
California
Massachusetts
Florida
www.rothmanandcompany.com
[email protected]
(310) 993-9664
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Negotiating Process
Strategic partnerships are complex
Take longer to work out than other deals
Relationship often extends over several years, changing circumstances;
contrast one shot purchase; more like a marriage than like a date
Use of “agreements to agree”
Documentation tends to be long; high transactions costs, including
personnel time and legal fees
Takes a longer time to work out a deal with a large company; layers of
decision makers; person you are dealing with probably needs to sell deal
internally; fairly bureaucratic; heavily lawyered.
That can also be used as a negotiating tactic
From inception to final signing papers can easily take a year
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Economics of the Deal I
How will each party make money?
1. Equity appreciation
LargeCo strategic partner may not care too much about the equity value, if
they are primarily motivated by something else
Opportunity to split up fields of use and get significant funding without
giving up significant equity
Need exit strategy
(for the startup) Avoid option to buy / right of first refusal
Notice in advance of sale, to the extent not prohibited by contract, ok
Formula buyout – may not come out right; opportunities to game it
Buyout by LargeCo at appraised value
IPO
Where strategic partner is a customer, avoid them also being an equity holder
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Economics of the Deal II
2. Ways of making money other than equity appreciation
• Selling to other party (purchase of goods or equipment; fee for
services)
• Then how is pricing set? Fixed or variable
• How to deal with change in cost structure
• If it’s a JV operating as a separate business, selling to third party?
• Then how are profits split?
• Are profits distributed or retained for growth?
• Does one party have a preferred return?
• If individual partners are making ongoing contributions to the JV
(supplies, IP, management, cash), how are they compensated for
it?
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Control
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If there is a JVCo, does one party designate a majority
of the directors?
50/50?
Equal representation with an independent third party to
avoid deadlock.
Mutually agreed budget; annually (agreement to agree)
Provisions for modification
Veto over major events – sale, dissolution, merger,
others?
Partners have veto rights over many things, or hire
JVCo management and get out of the way?
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IP
Who is putting it in?
One party will develop as part of the deal
Both parties contributing IP to the venture, and they will be integrated
One party owns background IP, but JVCo will improve
Third party, such as university, owns
Who will own / have rights to / the IP?
SmallCo, LargeCo, JVCo?
Assignment v. license
Duration of license
Co-ownership (usually considered a bad idea)
Divide by field
Startup / Largeco / University deal, where university owns key IP – does startup license
from university and sublicense to Largeco; or JV entity takes direct license from university;
Where does the IP go if the deal fails and is unwound?
Where does the IP go if the startup fails? (software source code escrow)
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Finance
More money needed than expected
One party required to put in money? Both? Neither?
How much equity does a party get for future contributions of cash?
(Dilution) Agreed in advance?
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Diligence
• Problem of one party losing interest - JV may be a small
matter for LargeCo, but the only business SmallCo has
• LargeCo may worry whether SmallCo is capable of
performing
• Milestones
• Remedies if the milestones are not met
• Price penalty
• Pull the plug
• Springing license on other party’s IP if they don’t
perform?
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Exclusivity I
• Exclusive supplier arrangement - customer not
allowed to use other supplier
• If no exclusivity, can purchaser take the
technology developed by other party and put it out
to bid? If so, how is developer fairly
compensated?
• If exclusivity, how does purchaser assure
competitiveness of price, quality?
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Exclusivity II
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Exclusive purchaser arrangement - supplier not allowed to
sell to other customer
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LargeCo, having perhaps paid JVCo or SmallCo for
development, or assisted with it, doesn’t want technology
used by competitors
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JVCo or SmallCo doesn’t want to limit its market size
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Compromises:
Can’t sell to limited list of specified competitors; leaves
rest of market available.
“Head-start” provision - no sales to others for a specific
period of time
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Competition and “Corporate
Opportunities”
• Can an owner compete with JVCo?
• If not, what is the scope of the noncompete?
• LargeCo often wants waiver of corporate
opportunities doctrine
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Documentation
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Can vary based on the structure and particulars of the deal
If a supply relationship, may just be a Supply Agreement
If an entity being set up, then governing documents for the entity
For LLC, Operating Agreement
For corporation, certificate or articles of incorporation,
shareholder agreement, voting agreement, etc.
Often multiple side agreements
Lease of real estate
Employee Secondment
Supply agreement
IP licenses
Others
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Questions?
Stephen P. Rothman, ESQ.
ROTHMAN AND COMPANY, P.A.
www.rothmanandcompany.com
E-MAIL: [email protected]
(310) 993-9664
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