Last January, I decided to increase the quality and frequency of my blog entries, with the hope that I would generate a corresponding increase in readership. I was not disappointed.

If you haven't already subscribed yet, subscribe now for
free weekly Infochachkie articles!

With the exception of the week of Thanksgiving, I published two entries every week during 2011. Correspondingly, my traffic increased nearly 3 times over the prior year, page views increased approximately 2.5 times and my email newsletter subscribers more than doubled.

Multimedia And Syndication

Another way I attempted to increase the value readers can derive from my blog was to incorporate video interviews. I published 21-Skype interviews during 2011. Of these discussions, my conversations with Guy Kawasaki and Naval Ravikant entered the top ten list shown below.

In addition, I was honored to speak with such notable entrepreneurs as: Kevin O’Connor (Founder DoubleClick and FindTheBest), Brad Feld (Founder TechStars, Partner The Foundry Group), Marten Mickos (Former CEO of MySQL and CEO of Eucalyptus Systems) and Len Short (CMO, (Product) RED, AOL and Charles Schwab). You can subscribe to my YouTube channel HERE by clicking the subscribe button above the video.

After a very kind introduction from Mark Suster, both Technorati and BusinessInsider agreed to syndicate my content. Although it is difficult to directly track the impact of these sites, the expanded exposure from these sites has certainly augmented my overall traffic.

Top Ten infoChachkie Entries Of 2011

The following entries generated the most page views during 2011. Of these entries, four of them are also in my “all time” Top Ten. Surprisingly, not all of these entries were published in 2011. For instance, What Are My Options Worth? was published in 2009 and Time Wounds All Heels was written in 2008. Google likes these entries, as evidenced by the significant organic traffic it consistently drives to them. The traffic generated by the remaining entries was sparked by a particular exogenous factor, as described below.

2012 And Beyond

I have lots of fun plans for my blog in the coming year. For instance, I was recently asked by Inc.com to write a weekly column. I will also increase the amount of video content, including snippets from talks given by my UC Santa Barbara classroom guest speakers.

I am very thankful for your readership and support. The kind words I receive in comments, Tweets and emails are highly motivational and most appreciated.

If you have not already signed up to receive my email newsletter, you can do so HERE. If you feel my content is worthwhile, a great free holiday gift is a recommendation of my site to a friend or colleague. If you think my content sucks, recommend it to an enemy or competitor.

I will begin publishing new entries the first week in January. Until then, have a safe and fun holiday with those you love the most.

All the best in 2012 and beyond…

John

Each generation, a few magnetic personalities emerge and generate a mania of public interest. Before Elvis, there was Sinatra. Before Sinatra, there was Bing. Before Bing, there was Caruso and before Caruso, there was Blondin.

Jean Francois Gravelot, who wisely abandoned his given name and dubbed himself The Great Blondin, was a true rock star of the 19th Century. On June 30, 1859, at the height of his fame, he stood before a crowd of tens of thousands of people at Niagara Falls.

If you haven’t already subscribed yet, subscribe now for free weekly Infochachkie articles!

We Believe Blondin, We Believe

The Great Blondin began his Niagara show by crossing the Falls on a tightrope three inches in diameter. Although the cable spanned 1,100-foot and was 160 feet above the raging waters, the trek was fairly pedestrian for a man of his skills. Always the showman, he nonetheless choreographed a few wobbles and slips in his initial crossing in order to heighten the drama.

He then addressed the crowd, asking them if they believed he could cross the Falls blindfolded. The crowd predictably cheered, "Yes, yes. We believe, we believe, we believe!" Much to their delight, Blondin donned a blindfold and made a roundtrip across the tightrope.

He then asked the crowd, "Do you believe I can cross pushing a wheelbarrow?"  Again the crowd riotously chanted, "We believe, we believe, we believe!"

Blondin successfully crossed the Falls pushing a wheelbarrow. Blondin then whipped the crowed into a frenzy before shouting, “Do you believe that I can cross with a man on my back?” Again the crowd hysterically shouted back, “We believe, we believe, we believe!"

Blondin smiled broadly and shouted back to the cheering throng, “It is great that you believe in me. Now who wants to get on my back?"  

Silence…

Talk about a buzz kill.

No one in the entire crowd of revelers, which had moments before shouted, “We believe, we believe” volunteered to join Blondin on his trip across the rope. They clearly did not really believe.

You will meet Blondin’s crowd over and over as you plan and execute your adVenture. Friends, family and disinterested parties will emphatically tell you, “We believe!” whenever you tell them about your wacky entrepreneurial plans. With friends and family, this sort of superficial support is to be expected. However, when it comes to building a team of stakeholders, you cannot afford such placation.

When a potential stakeholder, such as a future employee, investor or supplier tells you that they believe, pull the Blondin Test. Make them prove their belief by getting on your back as you step onto the proverbial entrepreneurial tightrope.

One way for a supplier or strategic partner to prove their belief is to accept equity in lieu of cash, as described in Free Advice and Beware The Consultant. With early employees, you might ask them to defer receipt of a portion of their cash compensation until your adVenture attains certain milestones, such as closing a suitable round of funding.

If the potential stakeholders really believe in you, your team and your startup’s prospects, they will get on your back and trust that you will collectively make it to the other side unscathed.

Blondin Revisited

What happened after Blondin silenced the crowd by challenging their belief? Did a drunken fool stumble from the throngs and take Blondin up on his offer of a free ride over the Falls?

No such fool, drunk or otherwise, emerged from the crowd. Instead, Blondin’s manager, Harry Colcord, climbed aboard Blondin’s back and the two men successfully made the journey without a mishap.

Why did Colcord make the perilous trip on Blondin’s back? Clearly it was not a contractual obligation nor was it likely driven by an insatiable desire to see Niagara Falls from such a precarious vantage point.

Colcord climbed onto Blondin’s back because he really believed. However, this was not a case of blind faith. Colcord was confident in Blondin’s capabilities because he was privy to Blodin’s rigorous practice regime. Through his actions, not his words, Blondin had earned Colcord’s trust.

Keep this important distinction in mind when you deploy the Blondin Test. If someone jumps on your back without just cause, they may just as quickly jump off with the first wobble. You owe all your stakeholders proof that their belief is justified. Informed faith, based upon mutual respect, is the solid foundation upon which should establish your stakeholder relationships.

Deploy the Blondin Test judiciously. Only ask those who should be on your back to make the journey with you. In most instances, Donors, as described Personal Pitch, can help your adVenture succeed without jumping on your back and taking on significant risks.

Entrepreneurial leaders must instill an absolute belief in their adVenture among all their stakeholders. The Blondin Test is a great way to assess whether or not someone truly believes, and thus whether or not you can count on them to lend you meaningful support when the startup tightrope starts to shimmy and shake. In such cases, do not hesitate to ask them to get on your back and prove their belief in you.

Note: This is Part I in the Startup Team Building series.

Marketers have long known that people are drawn to exclusivity. As discussed in Jedi Mind Tricks, scarcity and fear of loss are powerful principles of persuasion. Students expend small fortunes of their parents’ money to attend exclusive, private colleges. Hipster-wannabes routinely wait in line for hours for the opportunity to buy exorbitantly priced drinks in an exclusive nightclub.

As noted in Contract Traps Entrepreneurs Should Avoid, exclusivity can kill a small company. Unfortunately, many Big Dumb Companies (BDCs) assume they must unfairly skew the market in their favor by precluding you from freely working with anyone you choose. Exclusivity excludes your startup from taking full advantage of future customer, partner and market opportunities. As such, deals are not exclusive, they are excludesive.

If you haven’t already subscribed yet, subscribe now for free weekly Infochachkie articles!

An Alliance Of Two

As noted in Alliances, startups with compelling technologies can often form an alliance of partners around their unique solutions. Such coalitions are impossible to devise if you grant exclusivity to your initial partner. An alliance of two parties will seldom be as impactful as one comprised of your industry’s leading competitors.

Fortunately, you can usually establish meaningful relationships with BDCs without agreeing to excludesive provisions. However, even the most skillful negotiator will occasionally be forced to agree to some level of excludesivity. When left with no alternatives, minimize the degree to which such exclusions limit your adVenture’s future flexibility by applying one or more of the tactics described below.

An Initial Non-exclusive Deal Precludes Future Exclusivity

Excludesivity is most salient when you are crafting an initial relationship within a particular market or product segment. Once you establish a non-exclusive partnership, you can reference it when other BDCs ask for excludesivity. An initial, non-excludesive deal will effectively take the issue off the table.

In fact, once you publicly announce your new partnership (and you will be free to do so because you applied the negotiation principles described in ConTraps), your newly announced partner’s competitors will be motivated to work with you. The extent to which rival BDCs will seek to strike a similar deal, will be predicated on the impact of your initial BDC partnership. If you are excluded from establishing such additional BDC relationships, you will encourage direct competition, as the rebuffed BDCs will proactively establish similar partnerships with someone (often with anyone) as a means of countering what they view as a competitive threat. Thus, in order to avoid creating competitors, craft your first BDC deal in a particular market, without excluding other potential partners.

De Facto Competitor Avoidance

In a few instances, I was able to drive a non-excludesive deal to closure by making it clear to my future BDC partner that being the first to enter into a relationship with my company would grant them “de facto” exclusivity during the integration and launch stages. Being the first partner may also allow the BDC to influence your technological development and conform it more closely matches its technology roadmap. Irrespective of any potential technological advantages, being first guarantees the initial BDC a degree of exclusivity, as there will be a period of time in which their offering will be the only one in the market which includes your technology. 

Most startups cannot effectively implement multiple BDC partnerships in parallel. Even if you could launch several concurrent partnerships, it is prudent to learn from your initial implementation in order to optimize the success of your future partnerships. Thus, you are not sacrificing anything by giving your initial partner a go-to-market lead over their competitors. Clearly, the duration of this de facto status is dependent on a variety of factors, but in some instances, simply being first might be a satisfactory alternative to formal excludesivity.

Trick Ear

I seldom acquiesced when it came to excludesivity. If my Bro Foe proposed excludesivity, I would joke and say, “I am sorry, that is my trick ear. It does not hear the ‘e’ word.” I would then make it clear, all joking aside, that excludesivity was simply not acceptable.

Even so, there a few instances in which my Bro Foe had an edict from his BDC brethren that he or she “had” to get exclusivity. In these rare instances, we negotiated deals in which my Bros could claim they had obtained “exclusivity” and my adVenture’s flexibility was not unduly compromised.

After I made it clear that excludesivity was not something we were prepared to do, I would suggest that we table the issue and negotiate the remainder of the deal points. In this way, I put my Bro Foe on alert early in our discussions that the overall deal must be highly advantageous in order for my company to accept any form of excludesivity.

Fortunately, when the other party insists on excludesivity, there are various antidotes that entrepreneurs can deploy to mitigate the negative impact of an excludesive relationship, including:

• Minimum Commitments – Force the BDC to cover your opportunity costs

• Limited Scope – Conscribe the exclusions as narrowly as possible

• Non-compete List – Clearly define the universe of who and what is excluded

Minimum Commitments

There are real and often significant opportunity costs associated with excludesivity. If you agree to unfettered excludesivity, you are essentially precluding your adVenture from working with every other company on the planet. The opportunity cost of such a broad exclusion is tremendous and thus should only be considered if you are adequately compensated.

In addition to the opportunity costs associated with unbridled excludesivity, there exists an additional and potentially more hazardous risk. Once the BDC realizes that none of their competitors can establish a partnership with your firm, it will no longer be pressured to devote the resources necessary to make your partnership successful.

If the BDC has no competitive incentive to market your solution, there is a real risk that it will put your technology “on the shelf” and move on to the next entrepreneur whose technology must be kept out of reach of the BDC’s competitors.

The best way to ensure that the BDC will remain focused on promoting your technology is to require it to commit to a minimum amount of sales in order to retain excludesivity. However, do not attempt to structure the minimum commitments as financial obligations that must be paid to your firm irrespective of the BDC’s actual sales. Even if you are successful in negotiating such a potentially contentious arrangement, the likelihood that your adVenture will be paid if the deal is a dud is very low.  Instead, define the sales commitments as a minimum threshold by which excludesivity remains in place. If the BDC fails to attain a particular threshold, your relationship continues, but in a non-excludesive fashion. This will incentivize the BDC to promote your solution, to the extent maintaining excludesivity is important to them.

As noted above, you should ideally negotiate all the other significant deal points before tackling excludesivity. Your Bro Foe may find that excludesivity is not as important as they had thought at the outset, due to the particular structure of the deal, the markets being pursued, etc.

Another advantage to waiting is that you can encourage the BDC to hype the ultimate size of their minimum commitment by asking, “If we were to agree to an excludesive arrangement, how many units could your company sell in the first year?” In this context, your Bro Foe is inclined to communicate a very large number. Write this number down. It will come in handy if you later are forced to establish minimum commitments. Using your Bro Foe’s words against them is a powerful and effective negotiating technique. They key is to define a commitment to a large minimum in a casual dialog, before you have an explicit discussion regarding minimum commitments.

Limited Scope

Excludesivity comes in a variety of flavors. You can constrain the degree to which a relationship is excludesive by including one or more of the following factors in the definition of excludesivity:

• Time – ideally less than one year. Be sure that you are not precluded from speaking with competitors during this time period. For instance, if your agreement calls for a year of excludesivity, you should be able to negotiate agreements with competitors during that year, with the understanding that you cannot enter the market with any new partners during the excludesive time period.

• Geography – there may be markets which you cannot effectively service in the near term. If this is the case, the impact of establishing a limited excludesive relationship in such secondary markets is less onerous.

• Market segments – like certain geographies, there may be groups of customers that are outside your primary target market(s).  If so, offering excludesivity with respect to such customers may have little near-term impact on your business. However, beware, as this approach can be difficult to police, depending on the manner in which you are reaching these “excluded” market segments. If you anticipate that it may be difficult to effectively segregate the excluded market segments, attempt to denude the excludesivity via an alternative approach.

• Product lines / features – if you sell a line of products, consider limiting excludesivity to a particular product or even a product feature. I once negotiated an agreement with a BDC that included exclusivity with respect to an insignificant feature in order to satisfy the BDC’s desire to “have some level of exclusivity.” We were precluded from offering this particular feature to other partners as long as the BDC met its minimum sales commitments. This approach also gave my Bro Foe an excludesivity alibi as he was able to tell his BDC Boss, “We got excludesivity,” without sharing the details.

• Distribution channels – in certain instances, you may be comfortable excluding your adVenture from secondary distribution channels. For instance, if your primary distribution channel is online sales, retail distribution might be an area you can comfortably grant excludesivity, as long as target sales are consistently attained. 

The Short List

Another way to limit the scope of your exclusions is to list a small number of companies with which you cannot enter into a similar deal. At first blush, the BDC will likely tell you that they compete “with everyone.” Just because two companies compete at a macro level, such as Oracle and Siebel or Apple and Google, does not mean they are true competitors in every sub-market in which they are engaged. However, every BDC has one or two nemeses which they consider to be their true competitors in a particular market or product line. Force the BDC to limit this list to a few named competitors and include it as an exhibit to your partnership agreement.

MFN Alert

As more fully discussed in ConTraps, Most Favored Nations (MFN) provisions are a disguised form of excludesivity. By precluding your firm from entering into subsequent agreements with “more favorable” terms than those entered into with a MFN BDC, you are significantly limiting your future negotiating flexibility. Fortunately, the ConTraps article includes a few simple tricks you can deploy in those rare instances when you are unable to keep this pernicious provision out of a partnership agreement.

Exclude The Handcuffs

The only exclusivity you want associated with your startup is the kind described in Peace & War Corps – when your employees feel that your adVenture only hires, “the few, the proud.”  You might avoid excludesivity outright by simply stating at the outset of your negotiations, “It is against our company policy to grant exclusivity.” You may be surprised by the number of ATM Operators who relate to such arbitrary rules and will respect that there are some things “you just cannot do.”

It is simply not rational for an entrepreneur to limit his or her ability to follow their most lucrative paths to success, especially at the outset of an adVenture. Startup years are like dog years; seven years at a BDC is equivalent to one year at a startup. This lively pace makes relationship prognostication nearly impossible. Deals that appear vital today often morph into inconsequential former relationships overnight. In contrast, relationships which seemed tangential at the outset can become company-changing partnerships as markets and competitive landscapes shift over time. By placing handcuffs on your startup, in the form of excludesive relationships, you are reducing the probability that you will maximize your adVenture’s value creation and thus potentially limiting the ultimate size of your adVenture’s Exit.

As noted in parts I and II of this series, agreements with Big Dumb Companies (BDCs) can be alluring and potentially fatal. In many cases, agreements contain the promise of future riches, much like a piece of cheese in a mousetrap.

This series describes how entrepreneurs can craft company-changing agreements with BDCs, while avoiding Kiss of Death contract provisions.

If you haven’t already subscribed yet, subscribe now for free weekly Infochachkie articles!

Get The Cheese With Your Neck Intact

In Part II of this series, I suggest that entrepreneurs seek agreements in which “what is good for the goose is good for the gander.” In other words, if the BDC insists on including a specific provision in your agreement, it should apply equally to both parties. This egalitarian mindset will result in agreements in which both parties benefit directly from the results of their relationship, either in the form of revenue or cost savings. In Sharing Means Caring, I describe specific tactics that foster and extend the longevity of such mutually advantageous relationships.

When creating such sharing relationships with a BDC, ensure that you never agree to any of the following Kiss of Death Provisions, no matter how lucrative the potential relationship may seem at the outset.

Part I

• Allow the Other Side to Draft the Agreement
• Deploy a Free Pilot
• Cut a Multi-year Agreement
• Lock Down the Escape Hatches

Part II

• Give up Branding
• Relinquish Press Release Capabilities
• Approve Unilateral Provisions
• Surrender Arbitration
• Accept Unlimited Liability
• Forgo Change of Control or Agree to a ROFO or ROFR

Part III

• Serve up World-wide Distribution
• Relinquish Joint Intellectual Property Rights
• Execute an Ambiguous Statement of Work
• Agree to Bundling Without a Minimum Price
• Grant Most Favored Nations Status

Part IV

• Issue Unmitigated Exclusivity

Do Not Grant World-wide Distribution

Value-Added Resellers (VARs) will often seek to obtain the largest geographic territories possible. However, only grant distribution in areas in which the VARs have a proven footprint. As they expand their business, you can expand the scope of their territory.

In the early stages of your adVenture, it may be difficult to obtain tier-one distribution partners. Thus, you may initially be forced to establish relationships with smaller VARs with limited, regional coverage.

Although necessary, “stepping stone” approach of initially utilizing smaller VARs to enter new geographic markets can become problematic as your business grows, because large VARs often demand uncontested, broad, multi-country coverage. Avoid this potential conflict by reserving the right to terminate regional distribution agreements in the event that you subsequently enter into a pan-country distribution agreement. In some instances, it will be appropriate to grandfather ongoing payments due regional distributors for their past performance. Rewarding the small VARs for working with you when the larger distributers would not is the Bro thing to do.

Do Not Relinquish Joint Intellectual Property Rights

Intellectual Property (IP) provisions should ensure that both parties maintain the IP rights that they respectively own at the outset of the relationship. This is generally a straightforward and uncontested provision.

A more complicated negotiating point involves IP that is created in the course of the parties’ collaboration. Any such “joint IP” should be equally and severely co-owned and each party should retain the rights to utilize the joint IP in any fashion they deem appropriate. The BDC will generally agree to such a provision, even though there is typically little they can do with such incremental inventions in isolation, as they will likely be based upon your underlying IP.

Guard against a preclusion that would deny you from utilizing the IP developed during the course of executing the agreement. Craft terms which ensure you will not beholden to the BDC with respect to your ability to subsequently deploy and profit from jointly developed technology.

Once your development team begins working with the BDC, do not allow the BDC to unilaterally create any meaningful IP without your team’s involvement. If the BDC iterates on your technology and devises novel IP without your involvement, you risk your IP becoming subsumed by the BDC’s technological advances. Such unilateral development should be explicitly precluded in the agreement if you anticipate that this is a material risk.

Do Not Execute an Ambiguous Statement of Work

The Statement of Work defines the specific actions and responsibilities to be carried out by each party in the fulfillment of their responsibilities covered by the agreement. It should be codified as part of the definitive agreement in the form of an Exhibit.

In most cases, your tech team (not the BDC’s) will do most of the heavy lifting and will bring the majority of the technological value to the relationship. In order to optimally manage your limited resources, clearly specify the work to be performed, who will perform it and when each significant task must be completed.

The Statement of Work should include a Non-Recurring Engineering (NRE) budget that estimates the resources required to complete each major milestone. If the NRE budget is exceeded and the reason for such overages are due to the actions or inactions of the BDC, the agreement should stipulate the scope of your compensation (e.g., $250 per hour, plus materials and associated out-of-pocket expenses).

As articulated in Corporate Venturing, a risk in jointly developing and/or integrating technology with a BDC is that your company’s primary mission can be inadvertently hijacked. To ensure that the BDC judiciously uses your resources, assign a relatively high cost to your engineering personnel’s time. By establishing an NRE budget upfront, the BDC will know how many “free” NRE hours are included per the agreement and what it will cost them when they invariably ask you to expand the scope of the project.

You will generally be pleased to expand the scope of BDC partnerships. However, contractually ensure that any such expansions are at your sole discretion. If you allow the BDC to unilaterally expand the scope of your involvement, you have effectively abdicated control over your technological resources. A detailed NRE budget will help you avoid becoming the BDC’s adjunct, outsourced engineering team.

If you do not assign a price tag to your engineers’ time, an aggressive BDC could quickly consume all of your technical resources, precluding you from executing other technical initiatives. You cannot afford to consolidate your development efforts on a single relationship, no matter how lucrative it may appear at the outset. The risk and associated opportunity cost of a single relationship failing is too high and could potentially lead to the demise of your adVenture. Underestimate this risk at your peril.

Do Not Agree to Bundling Without a Minimum Price

Bundling deals can be attractive, as your product and/or technology can potentially reach a large audience by piggybacking on the reputation and market share of the BDC’s established brand. To ensure that such bundling is financially worthwhile, negotiate a de facto minimum per unit price.

A BDC will often encourage you to accept a percentage of the price they charge the end-user for your technology. If you fail to negotiate a minimum price, the BDC may prove that they are not so dumb after all and give your product away as a loss-leader to induce sales of their product(s). Without a minimum price, you could be paid a percentage of nothing, or next to nothing, depending on the price the BDC charges its end-users. Since you cannot control your partner’s end-user pricing, you must specify the minimum amount that you will be paid (per unit, per month, whatever is most appropriate to the relationship).

Do Not Grant Most Favored Nations Status

Many BDCs relish this onerous provision. A Most-Favored Nations (MFN) clause essentially states that, “Mr. Little Company can never do a similar deal with anyone, under any circumstances that is better than the deal cut with the BDC.” Clearly, this is the sort of provision that a savvy entrepreneur will never fall prey.

The path of your adVenture is far too unpredictable to anticipate the nature and scope of every future opportunity, as made clear by the examples cited in Optimistically Pessimistic. As such, your goal when negotiating a MFN clause is to maximize your flexibility and keep as many future options open as possible.

The MFN provision is a slippery slope and often a tripwire to a lawsuit. Do everything you can to avoid granting it. I have crafted hundreds of agreements and I have only agreed to this provision, in a highly-watered down form, in a handful of instances. Although it may require tenacity, you can generally negotiate this provision away, even if the BDC tells you, “We always get this provision.” My response to such BDC nonsense is, “Great, I love doing things differently. This poses an interesting challenge, but I am confident we can devise a reasonable alternative that addresses your underlying concerns.”

One way to denude this provision is to wrap caveats around the term “similar” and to liberally use the word “substantially.” For instance, you might propose something to the effect of, “Startup X agrees to not enter into an agreement, with a like-sized partner, which grants substantially lower pricing, given that such partner agrees to substantially similar volume commitments.”

Do Not Issue Unmitigated Exclusivity

Unmitigated exclusivity can be the death knell of a small company. It is often alluring, as it is generally granted in exchange for upfront cash and/or the promise of a significant, future relationship. However, if given the chance, the BDC may put your technology on the shelf, either as a competitive reaction to remove your technology from the market or, more commonly, because they become distracted and lose focus once they realize your technology cannot be deployed by their competitors. For this reason, exclusivity at a startup is more aptly termed Excludesivity, as it guarantees your adVenture will be excluded from leveraging future opportunities.

See Part IV of this series - for an in-depth discussion regarding how you can effectively negotiate this most heinous ConTraptual provision.

If you abide by the suggestions outlined in this ConTraptual series, the resulting mutually advantageous agreements will ensure that you can eat your fill of cheese without having to perpetually fear that an unforeseen trap will suddenly break your company’s back.

As noted in part I of this series, agreements with Big Dumb Companies (BDCs) can be alluring and potentially fatal. In many cases, agreements crafted by BDC lawyers resemble ConTraps rather than mutually beneficial contracts.

This series describes how entrepreneurs can craft company-changing agreements with BDCs, while avoiding Kiss of Death contract provisions.

If you haven’t already subscribed yet, subscribe now for free weekly Infochachkie articles!

Kiss of Death ConTraps

Entrepreneurs should never agree to the following provisions when negotiating with a BDC, no matter how lucrative the potential relationship. Part I makes it clear that in order to avoid these potential legal tripwires, entrepreneurs must draft the initial iteration of all their key agreements. As you do so, be sure to cover your tracks and do not leave behind tell-tell clues as to your underlying negotiating strategy, as described in Backmasking.

Part I

• Allow the Other Side to Draft the Agreement
• Deploy a Free Pilot
• Cut a Multi-year Agreement
• Lock Down the Escape Hatches

Part II

• Give up Branding
• Relinquish Press Release Capabilities
• Approve Unilateral Provisions
• Surrender Arbitration
• Accept Unlimited Liability
• Forgo Change of Control or Agree to a ROFO or ROFR

Part III

• Serve up World-wide Distribution
• Relinquish Joint Intellectual Property Rights
• Execute an Ambiguous Statement of Work
• Agree to Bundling Without a Minimum Price
• Grant Most Favored Nations Status
• Issue Unmitigated Exclusivity

Part IV addresses:

• Issue Unmitigated Exclusivity

Do Not Give up Branding

BDCs often ask to “private label” or “white label” a smaller company’s technology.  This generally involves the BDC selling the startup’s technology under the BDC’s brand. Do not allow your adVenture’s technology to be buried in the bowels of another company’s product, without reasonable attribution.

As shown at left, Google’s initial go-to-market strategy included syndication of its search capabilities to third-party sites, including Yahoo and AOL. In each instance, it was noted that the search was “Powered By Google” – even though many people at the time were not aware of Google’s brand. This brand exposure helped Google establish “www.google.com” as a leading destination site.

As described in PR Passion, your adVenture should maximize any and all third-party points of validation. Thus, demand “Powered By” branding status to ensure that end-users will be exposed to your brand and alerted to the fact that your technology is a significant component of the BDC’s solution. The resulting credibility will help you establish future business development and customer relationships.

Your pitch will be far more compelling to prospective customers and business partners when you have physical evidence of your partnership with a BDC. When establishing GoToMyPC partnerships, I was able to direct a potential partner to an existing partner’s website and show them our “Powered By” branding status. If I had been forced to say, “I know you cannot see it, but our technology is the engine behind Gateway’s support solution,” my ability to establish new partnerships would have been hampered.

To control the specific amount of brand exposure you will derive from “Powered By” relationships, create graphical examples of how your “Powered By” status will be communicated on the partner’s site, products, brochures, point-of-sale displays, etc. You should also specify the minimum font size in each medium your brand will be displayed. In order to ensure that these specifications are honored, include the “Powered By” samples in an exhibit to the partnership agreement.

I never lost a deal by remaining steadfast on this issue, although some BDCs blustered considerably. If your Bro Foe believes that your technology represents a compelling value to their customers, they will grant you “Powered By” branding status.

Do Not Relinquish Press Release Capabilities

Every BDC has been burned at one time or another by a jackball entrepreneur who publicly misrepresented the nature and scope of his or her relationship with the BDC. Such misrepresentations embarrass the BDC executives and confuse the market.

Due to their aversion to being publicly humiliated, most BDC partners will attempt to preclude you from issuing any unilateral press releases. Some will even try to prohibit you from issuing any public statements related to your relationship. With this in mind, in your initial draft of the agreement, request the right to issue a unilateral press release, as long as it is first reviewed and approved by the partner. If the BDC has a chance to review and approve the language in advance, it will be more difficult for them to make a reasonable argument that you should be precluded from issuing such a release.

A unilateral press release is less threatening to the partner, as it is solely issued by your firm and not publicly sanctioned by the BDC. As such, it will not be viewed by the market as an explicit validation of your technology. It will also receive limited media coverage, thereby further reducing the BDC’s risk. See Thrill The Messenger for tips regarding how to maximize the impact of Partner press releases.

In some cases, the credibility generated by your association with a BDC is the most valuable aspect of the relationship. This is especially true when the BDC grinds you down on the financial terms. In such instances, the level of public relations autonomy you negotiate might dictate the ultimate value derived from the relationship.

To maximize the value of such financially neutral partnerships, make it clear at the outset that you expect to have reasonable autonomy with regard to your press releases. If you wait too long to communicate the importance of obtaining public validation, you may negotiate a deal with marginally acceptable financial terms and be unable to leverage your association with the BDC.

I have been successful in obtaining some level of public relations exposure in the large majority of my BDC partnerships. However, despite the limited risk poised by a unilateral press release, some BDCs will not budge on this issue. If you find yourself dealing with such an organization, omit all references to press releases in the agreement. As every entrepreneur knows, it is easier to beg for forgiveness than it is to ask permission.

Do Not Approve Unilateral Provisions

What is good for the goose is good for the gander. Often, a BDC will attempt to force your startup to accept language that is not quid pro quo. This is almost never a reasonable request. For instance, the BDC may ask you to indemnify everyone under the sun on their side (e.g., employees, officers, shareholders, etc.) for every eventuality, while they will refuse to offer you indemnification for anything other than fraud or gross negligence. Such a concession essentially offers you nothing, as common law protects you against such illegal acts.

If there is not a valid business reason for granting one-sided terms, reject the language on the grounds that it is patently unfair. It is healthy for both parties to maintain symmetry in as many of the non-deal specific terms as possible, as it reduces potential confusion and establishes a collaborative tone to your relationship.

As noted in part I of this series, if you allow the BDC to prepare the initial draft of the agreement, it will likely be fraught with one-sided language that you will be forced to negotiate and thus needlessly spend your negotiation capital to simply return to a reasonable starting position. If the BDC demands the inclusion of one-sided terms, either reject them out-of-hand or accept them in bi-lateral form. If you accept unilateral terms, you risk becoming a Corporate Beyotch.

Do Not Surrender Arbitration

BDCs have legions of lawyers who trudge into work each day, whether they have something to do or not. Avoid giving them something to do, as the less involvement you have with BDC lawyers, the better.
One way to reduce your risk of litigation is to require that all disputes must first be addressed via a cure period in which the party that is “wronged” must notify the other party, who then has a prescribed time period to rectify the issue.

If the cure period is unsuccessful in satisfying the “wronged” party, the issue should then be addressed via a mutually agreed upon member in good standing of the American Arbitration Association. In addition, specify that the loser of such arbitration proceedings must pay all of the associated costs, including reasonable legal fees. Arbitration procedures are less time consuming and far less costly than arguing your case in court.

Do Not Accept Unlimited Liability

Another common unilateral provision is one in which a BDC proposes to limit the scope of its damages with a de facto financial cap while leaving your liability open-ended. This request arises from the BDC’s desire to mitigate the risk that you will request compensation associated with lost profits if the deal falls apart. This a valid concern because the courts often side with the smaller company when damages result from a failed relationship. Thus, most BDCs attempt to explicitly preclude any such open-ended damages.

Your goal is to maximize your upside – their goal is to minimize their downside. With this knowledge, craft a deal that allows both parties to attain their respective goals. In the Indemnification Section of the agreement, place a de facto limit on the amount of expenses to be paid by both parties in the event damages arise.

Trade this concession for a reasonable cap related to your damages. Do not accept language that limits damages to “total fees paid by the BDC during the term of the agreement.” If a deal unravels before substantial fees are generated, you may end up in the disadvantageous position of being unable to recoup your opportunity costs.

As such, opt for a provision that specifies a cap equal to, “(i) the greater of $__________ (a de facto minimum amount which covers your costs) or, (ii) the total fees paid by the BDC.”

Do Not Forgo Change of Control or Agree to a ROFO or FOFR

Your adVenture’s future is less certain than the future of the typical BDC, especially with respect to the timing and nature of your adVenture’s eventual exit. As such, craft your agreements to ensure your adVenture has maximum flexibility with regard to the scope and nature of future partnership and acquisition activities.

One tactic is to include a Change of Control provision in all of your agreements. Although the text can vary, the spirit of such provisions is the same: either party can terminate the agreement without recourse (i.e., without being liable for damages or other ongoing costs) in the event that a majority of their assets are purchased, transferred or otherwise merged with a third party. Happily grant this provision on a bilateral basis, as the risk of the BDC being acquired is usually relatively low and seldom would such an acquisition result in an adverse impact to a startup.

Neither party should be forced to terminate the agreement upon a change of control. Change of Control provisions will enhance your company’s attractiveness to a potential suitor. Thus, this provision gives you, and the BDC which may eventually acquire you, the option to maintain those agreements which remain advantageous to you post-exit and terminate those which might be problematic (e.g., a relationship with one of the BDC’s competitors, markets the BDC does not want to pursue, etc.).

Another way to maintain flexibility with respect to your exit is to reject Right of First Refusal (ROFR) and Right of First Offer (ROFO) provisions. Such provisions require you to notify the BDC whenever you are approached by a potential acquirer. BDCs cherish such provisions because they enable the BDC to dramatically influence the nature, scope and timing of your exit. As discussed more fully in Corporate Venturing, such terms are most commonly tied to corporate investments, as opposed to those made by institutional investors. Rather than trying to water down a ROFR and ROFO, your response should be, “No thank you,” whenever these terms are proposed.
———————————

Part I of this series discusses the following contract traps:

• Drafting the Agreement
• Free Pilots
• Multi-year Agreements
• Termination Without Cause

Part III addresses these contract traps:

• World-wide Distribution
• Joint Intellectual Property Rights
• Statements of Work
• Product Bundling
• Most Favored Nations Status
• Exclusivity

Part IV addresses these contract traps:

• Issue Unmitigated Exclusivity

Agreements with Big Dumb Companies (BDCs) are like DC Comic’s evil villainess, Poison Ivy. Both are seductive and alluring and both are potentially fatal.

A startup’s most meaningful agreements are often struck with BDCs. You will no doubt craft agreements with companies of similar or even smaller size to your own. However, your greatest risks and greatest opportunities will arise from the deals you cut with larger entities.

Fortunately, it is possible to craft lucrative deals with BDCs that do not limit your adVenture’s ability to charter its own destiny. Just as Batman repeatedly avoids Poison Ivy’s kiss of death, so too must entrepreneurs avoid the Kiss of Death provisions which BDCs attempt to include in their agreements.

If you haven’t already subscribed yet, subscribe now for free weekly Infochachkie articles!

Kiss of Death Provisions

“Ever negotiate with lawyers at a huge company? If they saw you drowning 100 feet from the shore, they’d through you a 51-foot rope and say they went more than halfway.”
Paul Somerson, Author

The allure of a company-changing deal with a BDC is strong. Big companies make seductive promises, including access to large markets, significant financial resources and vital public validation (see Pulp Facts for tips on how to maximize such validation). However, resist the urge to close such enticing deals on the BDC’s terms. Stand your ground and negotiate a mutually advantageousagreement, even if it requires you to expend more time and energy than you would otherwise prefer.

To this end, never agree to any of the following Kiss of Death Provisions when negotiating with a BDC, no matter how lucrative the potential relationship:

• Allow the Other Side to Draft the Agreement
• Deploy a Free Pilot
• Cut a Multi-year Agreement
• Lock Down the Escape Hatches
• Give up Branding
• Relinquish Press Release Capabilities
• Approve Unilateral Provisions
• Surrender Arbitration
• Accept Unlimited Liability
• Forgo Change of Control or Agree to a ROFO or ROFR
• Grant World-wide Distribution
• Relinquish Joint Intellectual Property Rights
• Execute an Ambiguous Statement of Work
• Agree to Bundling Without a Minimum Price
• Grant Most Favored Nations Status
• Issue Unmitigated Exclusivity

Do Not Allow the Other Side to Draft the Agreement

As discussed in The Bro Factor, you can greatly enhance the effectiveness of your negotiations by establishing a strong rapport with the folks on the other side of the table. If you do your job well, the BDC negotiators will consider you to be a “Bro” – a colleague with whom they have a strong, personal relationship. However, despite your attempts to ingratiate yourself and gain their trust and respect, never forget that your Bros are also your Bro Foes.

Insist on creating the initial draft of the Agreement in order to gain the following important advantages:

• Control the tempo of the discussions – if you rely on the other side’s lawyers to create the agreement, the deal may lose momentum as it sits in the lawyer’s In-box

• Establish fair, bilateral covenants –  agreements from large companies generally come with numerous unilateral covenants that can cost you valuable negotiation currency to unwind

• Ensure the spirit and integrity of the business terms are not hijacked. A BDC lawyer who is not closely involved in the negotiations may, inadvertently or otherwise, craft an agreement that modifies some of the negotiated deal points.

• Shade minor aspects of the deal in your favor, such as: payment terms (i.e., 30-days vs. 45-days), percentage of irregularities which dictate who pays for an audit (i.e., 3% vs. 7%) the manner and venue in which disputes will be resolved (i.e., arbitration vs. litigation), etc.

As you draft the agreement, include specific examples, especially when numeric formulas and calculations are involved. For instance, if you are describing the terms of a licensing fee, add one or more real-world examples which utilize real numbers. This ensures that everyone understands the key formulas, and thereby avoids a common point of contention in deals that go awry.

Do Not Deploy a Free Pilot

A “Pilot” is BDC speak for a test of your solution. If you allow your prospective partner or customer to milk the cow for free, they will resist paying for it. As noted in Frugal Is As Frugal Does, after cash, an entrepreneur’s most valuable asset is time. You cannot afford the opportunity cost of a project that does not generate revenue. Thus, if your adVenture must expend resources in conjunction with a Pilot, insist on being compensated for the use of such resources.

• If your Bro Foe does not have skin in the game, it is highly likely that your Pilot will become derailed and overtaken by other priorities. The best way to ensure that your potential partner has sufficient incentive to guarantee the Pilot’s success is to require them to invest cash upfront. Ideally, this cash should find its way into your pocket in the form of a Pilot Implementation Fee.

• Forcing the other side to pay a meaningful upfront fee requires them to determine the merit of a potential relationship with your firm at the outset – before you invest either your time or money. If you enter into a development or trial partnership for free, you are allowing the BDC to forestall its ultimate determination of the value of the partnership.

• Clearly communicate that you are not attempting to get rich on the Pilot Fee. Rather, you are simply assigning a cost to your company’s time, in order to mitigate your downside risk and to ensure that both parties properly evaluate the economic viability of the deal upfront. It may be necessary to apply a portion of the Pilot Fee toward the ultimate license / purchase price, in order to obtain an up-front fee.

• Insisting to be compensated for your time will also help elicit the necessary respect from the BDC. By demanding a payment that is meaningful to you yet nominal to the BDC, you are conveying that your company is in demand and that you do not have to give away your time or technology in order to entice BCDs to partner with you. As noted in Private Means Private, in order to ensure a healthy partnership, avoid becoming the BDC’s Corporate Beyotch.

Oh, but you scoff. I have negotiated deals with numerous high-profile BDCs that included significant Pilot fees. In one instance, we were paid $50,000 and the Pilot was never implemented due to the fact that the BDC was acquired after the Pilot Agreement was finalized.

Do Not Cut a Multi-year Agreement

In the life of a typical adVenture, a year is an eternity. Thus, it is imprudent to limit your future prospects by entering into a multi-year deal. BDCs generally prefer long-term agreements because such deals reduce their uncertainty and thus lower their risk. Conversely, multi-year deals reduce your flexibility and potentially increase your opportunity costs.

Some BDCs may attempt to force you to agree to an evergreen termination provision. Such covenants require written notice of termination within a specified period of time, prior to the end of the term, in order for a party to terminate the agreement. If such written notice is not made, the agreement is automatically extended, usually for an additional year.

Never agree to such a provision. BDCs can afford to hire large staffs to adequately track all of the evergreen provisions in their contracts. You will not have that luxury. The chances of your company missing a termination deadline are high, which could result in your adVenture being locked into a disadvantageous deal for an additional year.

Rather than agreeing to an evergreen provision, suggest that both parties mutually agree upon additional one-year increments in writing, at the end of each term. If the other party insists on an evergreen term, negotiate a reasonably conscribed no cause termination clause. This will significantly reduce the risk associated with inadvertently rolling into an additional year, as you can simply exercise the “out” clause and terminate the agreement.

Do Not Lock Down the Escape Hatches

Agreements are obviously intended to bind both parties. However, avoid writing contracts that may contractually hold the other party to an economically infeasible deal. If the relationship is not advantageous for the other party, there are many legal ways a BDC can undercut and effectively terminate the deal.

As noted in Roping in the Legal Eagles, successful entrepreneurs are generally not litigious. Even if you are a mean cuss, your startup will likely not have the financial resources to hold a BDC to disadvantageous deal terms. Thus, you gain nothing by crafting an agreement that contractually forces the other party to work with you, irrespective of the financial outcome of the relationship.

Ideally, either party should be free to terminate the agreement, after a reasonable notice period. By allowing either party to walk away, you force both parties to continually strive to maintain a mutually beneficial relationship.

One exception to this easy-out philosophy is with respect to recouping any substantial investments you make on behalf of the partnership. Irrespective of the easy-out clause, ensure that your costs are reimbursed in the event of early termination by the BDC. Such reimbursement might be in the form of a walk-away fee to be paid by the party who terminates the relationship. If the walk-away fee is unreasonably large, it is possible that the BDC will breach the agreement and refuse to pay the fee. As such, keep any such fees reasonable.

Part II of this series discusses the following contract traps:

• Powered-by Branding
• Press Release Rights
• Unilateral Provisions
• Arbitration
• Unlimited Liability
• Change of Control

Part III addresses:

• World-wide Distribution
• Joint Intellectual Property Rights
• Statements of Work
• Product Bundling
• Most Favored Nations Status
• Exclusivity

Part IV addresses:

• Issue Unmitigated Exclusivity

Contractual Antidotes

Batman thwarted Poison Ivy’s deadly kiss by coating his lips with an antidote before taking her up on her seductive offer of romance. By effectively structuring your agreements, you too can enjoy a relationship with a BDC without suffering the potential deadly consequences.
]]> http://infochachkie.com/contract-traps/feed/ 0