Startups have few advantages. One of the most significant is the ability to keep your cards close to your vest. A major disadvantage of a public Big Dumb Company (BDC), as well as one that works closely with governmental agencies, is the degree to which they are forced to publicly disclose otherwise confidential information.

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“Dropping trou,” short for “dropping your trousers,” is the process of exposing your company’s confidential information, usually at the request of a BDC. When engaging in a dialog with a BDC, they routinely make gratuitous requests for information. They may request your financial statements, ostensibly to assess your financial wherewithal. However, the actual use of such data is often so they can file it away, only to retrieve it in the event they need to cover their derriere. Every time you provide confidential information to a BDC, you risk the data finding its way into the hands of a competitor.

Confidential information tends to grow legs and you cannot afford to take a chance that your financial information will slip into enemy hands. Sensitive data, especially in electronic form, can make its way around the Internet in seconds. The more sensitive the data and potentially damaging to your company, the more likely it will end up in the hands of someone who can use it against you.

Requests For Proposal (RFPs) are notorious sources of data leakage. Although the BDC initiating the RFP usually indicates that all submissions will be kept confidential, it is appalling how often such information is shared with the winners of the RFP. As noted in RIP RFPs, entrepreneurs should generally avoid RFPs because they cannot afford to expend the time and resources required to participate in such regimented and lengthy sales processes. Data leakage to potential competitors is another great reason to run hard and fast in the opposite direction whenever you are asked to complete an RFP.

As such, simply refuse any and all requests for confidential information (especially financial data) from prospective customers, partners, suppliers, etc. Once you provide confidential information to ONE such entity, it is a slippery slope. Thus, by never giving it out, you can honestly say, “Look, it’s not personal. We simply do not disclose that information outside of our organization.” BDCs’ employees generally appreciate arbitrary and bureaucratic rules, so this approach is often an effective means of dealing with such inappropriate requests.

Dealing With The Real Objections

In the event you are unable to deflect requests for confidential information, seek to understand the real objective behind the information request. In nearly all cases, you will be able to address the other party’s underlying concerns without serving up your confidential crown jewels.

For instance, if the other party is concerned about your financial viability, the most important component is not the amount of cash you have in the bank. On the contrary, the question the BDC should ask is, “Does your startup have a sustainable business that will afford you access to additional capitalization and ultimately self-sustaining profitability?”

Chances are the BDC guy on the other end of the conversation has never run a business and the probability that he will realize what he really needs to know is slight. Thus, you may have to deferentially educate him as you assuage his objections.

You can validate your startup’s long-term prospects by introducing the BDC to satisfied customers, Board members, your core team and one or more of your investors (assuming they are willing to speak positively about your business). Third party validation regarding your personal credibility and the viability of your adVenture’s business model are worth more than the figures on your balance sheet.

Explain your business model to the BDC and provide tangible proof regarding your ability to execute your business plan. A BDC does not need to know how much money you have in the bank to be satisfied that you are running a viable business with a bright future. As noted in Competitive Sleuthing, some partners routinely share information about the companies with whom they are working. 

Go To The Meeting – But Do Not Take The Materials

When I was an operational executive, I limited access to the information contained in my PowerPoint presentations. You can effectively do so by utilizing an online meeting product, such as GoToMeeting or LogMeIn. These solutions allow you to share data, without it leaving your building in electronic form. If the other party asks you to send them your slides, find out why they need them. If it is to inform others in their organization, set up a subsequent meeting in which you present the slides and lead the discussion. No one can tell your story better than you. Retain the role of storyteller and you will avoid your story being diluted by someone at the BDC who cannot do it justice.

If you are speaking to prospective investors, you have to be even more careful. Most sophisticated investors (with good reason) will not sign a non-disclosure agreement (NDA), which can put your sensitive data at risk. Without NDA protection, you should assume it will be shared with any company in the Venture firm’s portfolio. Whenever you share proprietary information, take reasonable steps to minimize the ease with which such data can be distributed – such as posting PDFs in a secure data room.

Corporate Beyotch

Another positive outcome of holding your cards close to your vest is that you will engender respect from the other party. Most big companies are used to getting whatever they want from a small company, even when their informational requests are out of line. Be the one company that tells them “No.” It may shock them at first, but if you handle the communication in a professional manner and explain why you are refusing to provide the requested information, you will ensure that the ongoing tenor of your relationship is one based on ‘equality’ and not one in which you are the big company’s startup ”beyotch.”

Shocking HP

Several years ago, I was pitching a software license to a middle-level executive at HP, within their Printer Group. It was clear that he was a corporate zero and was simply sleepwalking through the process. At the end of the call, he requested that we, “send him the slides and a proposal.”

I shocked him (and my salesperson who was also on the call) by telling the HP zombie, “No, we are not going to send you the slides and we are not going to pull together a proposal that is just going to be filed away. If you are ready to move forward, then we are prepared to apply one-hundred percent of our resources to make you successful. However, if you just want something to throw in a file so you can later document that you spoke with us, we are not interested.”

After a long pause, the HP guy came out of his corporate coma and acknowledged the validity of my comments. He agreed that simply sending over a proposal was not the most impactful next step. We continued our dialog over the next several months and we eventually closed a significant, multi-year deal with HP.

There are so many disadvantages to being a small company that you must use your private status to your advantage any time you can. One way to do so is to keep your pants firmly in place and respectfully, firmly and frequently say, “No.”

Note: This is Part I in the Startup Advantages series.

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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.

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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.

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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.

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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

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“Good Lord Boyet, my beauty, though but mean,
Needs not the painted flourish of your praise:
Beauty is bought by judgment of the eye,
Not uttered by base sale of chapmen’s tongues”

Intellectual Property (IP) is an ugly thing at a startup. It requires you to expend your two most valuable resources, your time and your money. Yet, it does nothing to help you execute your business model.
However, to a Big Dumb Company (BDC), a startup’s IP is a thing of beauty. Although BDCs often act irrationally, in this instance, their perception of beauty is highly rational.

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How can IP be worthless to a startup yet very worthwhile to a BDC? Because IP has intrinsic value, but only in the right hands.

Patents held by startups generally have a limited ability to reduce competition. The average time required to obtain a patent is 36-to-40 months, during which there is no guarantee your adVenture will ultimately receive patent protection. Even if you are granted a patent, the scope of your claims may be significantly denuded.

Three years is a lifetime at a startup. Given that the average lifespan from startup to exit is five to seven years, the first half of a startup’s life is lived without explicit patent protection. Thus, if a startup team asks, “What is this patent worth to us?”, the answer is likely, “Not much.”

However, this is the wrong question. A more appropriate question is, “What is this patent worth to a BDC?” When answering this question, consider the following:

Wherewithal To Defend and Prosecute – IP litigation is immensely expensive. Most startups do not have the financial means to either defend the veracity of their IP or prosecute potential infringements by others. According to a 2003 survey conducted by the American Intellectual Property Lawyers Association, the average cost of patent litigation was $2 million, while trademark litigation averaged $600,000.

BDCs Are Risk Adverse – In general, BDCs are often more concerned with loss aversion than with pursuing potential gains. As such, they are hesitant to acquire a company which has not sought formal protection of their IP for two reasons. One is obvious, without protection, such IP might prove to be of little worth, as other companies can mimic the technology without recourse.

The second reason is more subtle. The very nature of formal IP approval process ensures that some level of vetting has been performed to assess whether the IP is infringing on another company’s technology. Although patents can, and are, granted which explicitly infringe on the rights of others, there is some comfort in the knowledge that a particular piece of IP has been approved for a patent or registered as a trademark. Even though such official sanction by the PTO does not guarantee that the protected IP does not infringe another party’s IP, it does provide a convenient excuse by which BDC executives can cover their butts, thereby reducing their perceived downside risk.

Complimentary And Derivative IP – In many instances, the IP created by a startup is a subset of a larger solution. It is often a feature or set of features which enhances the overall efficacy and value of a more comprehensive technology. As such, formally protected IP can have significant value in the hands of a BDC which may own or otherwise have access to complimentary IP.

In addition, a BDC may have developed derivative IP that on a standalone basis infringes on the startup’s IP. In such instances, acquiring the startup may be the shortest path to unmitigated IP ownership. This was the case when Intuitive Surgical purchased Computer Motion. This acquisition resolved the surgical robotic IP landscape and allowed Intuitive to dominate the market.

Even if your company is not acquired and you elect to access the public capital markets via an IPO, the above tenets remain valid. Once the IPO proceeds are in your bank account, your adVenture will have the ability to leverage and defend your IP and thus its intrinsic value will increase, just as it would in the hands of a BDC.

Not All Patent Types Are Created Equal

Another factor that impacts a patent’s value is its type, of which there are essentially two: utility patents and design patents. Note that I am ignoring other, far less common patent types, such as plant patents.

Utility patents represent 90% of all patents granted. They remain in effect twenty years following the filing date and, according to the Patent and Trademark Office (PTO), they protect: “the invention of a new and useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof.”

Utility patents generally offer more protection than design patents and are thus usually more valuable. They also often take longer to secure and are more expensive to obtain and prosecute.

An emerging subset of utility patents is business method patents. Such patents were especially popular when the Internet spawned new ways to solve old problems during the late 1990’s and the first decade of the 21st century. However, in most cases, the courts have not upheld business method patents and thus startups should not expend resources pursuing such broad and pervasive patents.

Design patents make up the majority of non-utility patents. They remain in effect fourteen years from the filing date. Per the PTO, such patents protect: “A new, original, and ornamental design for an article of manufacture.”

An example of design patent is shown at left. It would not be difficult to emulate the design of these sunglasses without violating the patent. As such, the protection afforded design patents is generally limited and difficult to defend. However, they are usually easier and less costly to obtain, as compared to utility patents.

As seen in the patent at left, you can obtain a patent on virtually anything. PTO examiners consider a very narrow set of criteria which does not include the commercial efficacy of an idea.

Thus, the answer to the question “Can we get a patent on that is generally “Yes”, assuming the invention is remotely novel. However, a more appropriate question is “Should we get a patent on that?”

Return To Sender, IP Unknown

There is a common misconception that an idea can be protected by documenting it, placing it in an envelope and then mailing it to yourself. Underlying this presumption is the belief that if the envelop is unopened, the postmark will “prove” the date the idea was conceived (or at least when it was documented).

Although such a letter might make an interesting plot point in a movie, in the real world, it provides you with absolutely no protection of your idea. Unlike an unregistered copyright, which you gain automatically by expressing an idea in written form, you cannot gain intellectual property protection by simply being the first person to describe an idea in writing.

For instance, if you document a novel, commercially viable idea and never file a patent to protect it, the only thing you will own is an unregistered and worthless copyright on the text describing the idea. However, anyone and everyone is free to exploit your idea and to even obtain a patent on it, if they are the first to file for such protection.

Provisional Approach

Most US high-tech companies begin the utility patent process by filing a provisional patent application. The PTO allows one year to elapse after filing a provisional application before you must submit a formal patent application. This approach makes sense for the following reasons:

• You gain a year to write a thoughtful, defensible patent without delaying your filing date. The filing date is often the deciding arbiter in IP disputes

• It is relatively inexpensive, thereby minimizing your sunk costs if you later decide to not pursue a formal patent filing

• You can describe your technology as “patent pending”, which may or may not be worthwhile, depending on your product and target customers

• Your solution will likely evolve as you gain market feedback and validation. As such, the additional time will help ensure that your patent claims accurately reflect the technology underlying your solution.

Know Thou Prior Art

As noted in Roping In The Legal Eagles, you have the responsibility to write the layman’s description of your patent claims. In order to do this effectively, you must understand the prior art germane to your application. Patentcafe defines Prior Art as: “the total body of knowledge, which teaches or otherwise relates directly to an invention. This is the primary criteria in determining the patentability of a new invention.” If you do not fully understand the prior art associated with your intellectual property, your patent request may be denied. 

Just as you should anoint someone within your adVenture to be Watson and monitor your competitors’ activities, you should also explicitly assign someone to manage your adVenture’s IP portfolio. If you leave this to a committee, you risk your IP becoming a priority which no one person has adequate time to address.

It Ain’t The Number Of Patents, It’s The Number Of Defensible Claims That Matter

Some companies take pride in the number of patents they own. However, there is no direct correlation between a patent portfolio’s value and the number of patents which comprise the portfolio. A single patent with a number of comprehensive yet defensible claims can easily be worth far more than a legion of vague and narrowly defined patents. As such, focus on creating a manageable number of patents, each with multiple clear and defensible claims.

Patent examiners generally ask for clarification during the review process. The multiple claim approach provides you with greater flexibility to augment your claims when you address the PTO examiner’s objections and questions. Any accepted changes are subsumed within the original filing date of your provisional patent. This is especially important when your patent addresses an emerging technology that significantly changes during the course of the typical, multi-year review.  

No Patents, No Interest

In addition to witnessing BDCs overvalue patents, I have also been a party to transactions in which the lack of formal IP protection caused BDCs to shy away from a potential acquisition. In one instance, I was on the Board of a small software company that declined to file any patents as the Founders felt they could not afford to take the time required to craft a meaningful application. This proved tragically shortsighted, as the company developed valuable augmentations to various open source technologies that likely qualified for patent protection.

After an extensive period, we eventually sold the company. However, the acquirer was a relatively small company that essentially purchased our install base of customers so they could sell them additional products. We received almost no value for our technology, even though it was effective and held in high regard by our customers. Little explicit value was affixed to it, because we did not have formal protection over it.

Mind Thine Eye of The BDC

As Shakespeare aptly notes, the beauty of a startup’s IP is bought by the judgment of the BDC’s eye. As such, when managing your IP portfolio, base your decisions on the understanding that the ultimate value of your IP will be determined by an acquisitive BDC or the public capital markets, not its worth in the hands of a capital-challenged startup.

Legal Caveat: I am NOT a lawyer. This advice is from a layman and it may be inappropriate and/or in conflict with the local laws of your county/state/province/country, etc. You should always seek local, qualified, legal counsel when addressing intellectual property issues.

______________________
John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.
______________________

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Copyright © 2007-10 by J. Meredith Publishing. All rights reserved.

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“The emperor holds a stick in his hands, both ends parallel to the horizon, while the candidates advancing, one by one, sometimes leap over the stick, sometimes creep under it, backward and forward, several times, according as the stick is advanced or depressed. 

Whoever performs his part with most agility, and holds out the longest in leaping and creeping, is rewarded with the blue-coloured silk… and you see few great persons about this court who are not adorned with one of these girdles.”
Jonathan Swift – Gulliver’s Travels

Jonathan Swift was satirizing the manner in which court appointments were made in 18th-century England. However, his description could be aptly applied to the process by which some Big Dumb Companies (BDCs) and even Bigger Dumber Government agencies (BDGs) execute their procurement decisions.

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Bite The Hand That Is Not Feeding You

“Decision is a sharp knife that cuts…never to turn back or to stop until the thing intended was clean and straight; indecision, a dull one that hacks and tears and leaves ragged edges behind it.” Gordon Graham, Author and Philosopher

A BDC’s indecision often manifests itself in the form of a Request For Proposal (RFP). Such documents are generally a checklist of potential features and product characteristics which the BDC thinks it needs. In many instances, the document actually serves as an RFE or Request For Education, rather than a legitimate precursor to a purchase. Such education is understandable, especially with respect to an emerging technology. However, your startup should not play the role of BDC tutor, as you simply cannot afford the associated opportunity costs.

Speed of particle flow is a determinate of success for explosions, proton accelerators and sales teams. As noted in Personal Pitch, encourage your sales to team to “Go For The No,” rather than settling for an interminable “Maybe.”  It is better to extract a “Not now” response than to expend significant resources on a living-dead prospect who is not ready to buy.

Even if you are eventually able to close a slow-moving customer, the delayed “Yes” will prevent your team from prospecting other deals with shorter sales cycles. Sales is a numbers game. The more leads your team identifies, qualifies and prospects, the more revenue your adVenture will generate. For this reason, startups should never comply with an RFP, except as noted in the caveat below

By refusing to enter into an RFP, you clearly communicate that your technology is “in demand” and you are focusing your limited resources on fulfilling the needs of customers who do not require you to enter into a laborious proposal process. If a BDC perceives sufficient value in your solution, it will exclude your adVenture from the RFP process. If it does not consider your solution adequately differentiated, you are better served to focus your sales team on customers who more readily understand and appreciate your value proposition.

As described in Private Means Private, it is important to understand the reasons underlying a BDC’s request before you commit your startup’s limited resources to fulfilling it. An RFP is no exception. In some cases, the vendor of choice may already be selected and the proposal process is entirely perfunctory. In other instances, as noted above, the RFP is really an RFE.

While I was at Expertcity (now Citrix), several large call centers invited us to participate in comprehensive customer relationship management RFPs. One small aspect of these proposal requests addressed remote access technology, which was our core competency. In these instances, our technology was sufficiently unique and added enough value to the call centers’ efforts that they purchased our solution without requiring us to participate in Lilliputian RFP stick-jumping escapades.

The only RFPs which I complied with were those in which we helped the BDC write the specifications. In this way, we ensured that our solutions were entirely compatible with the BDC’s minimum requirements. It also allowed us to include product specifications that were incongruent with our competitors’ capabilities. In such cases, it is worthwhile to invest your time tutoring the BDC, as you can do so to your distinct advantage.

Customer Of Last Resort

BDGs are alluring to startups, for the same reason BDCs are attractive – both organizations have tremendous buying capacity. Unfortunately, the only organization more indecisive than a BDC is a governmental agency. BDGs rely heavily upon RFPs and similarly time-consuming procedures to ensure compliance with complex public-sector purchasing regulations and to cover their bureaucratic butts.

In addition to the laborious and resource-intense nature of the BDG sales process, additional reasons startups should avoid selling to BDGs include:

Price Emphasis – As described in Frugal Is As Frugal Does, an entrepreneur’s two most valuable assets are time and money. BDGs often acquire solutions solely based on the lowest bid. As a startup with unique, compelling solutions, you cannot afford to expend your precious time chasing marginally profitable revenue.

Transparency – In certain situations, the deal terms negotiated by BDGs become a matter of public record. As noted in Private Means Private, you may not want such confidential information to publicly accessible, especially if you are forced to grant the BDG aggressively low pricing.

Cash Flow – BDGs are generally credit-worthy, resulting in a very low bad debt default rate. Unfortunately, BDGs are also notoriously slow in paying their obligations, with 90- to 120-day payment terms being the norm. Many a small business has gone bankrupt selling to BDGs, due to the adverse impact government sales can have on a startup’s cash flows.

Overhead – In some instances, when a startup sells to a BDG, they lose their legal designation as a “small business” and become obligated to conform to certain arbitrary and costly regulations that they could otherwise avoid (e.g., certain OSHA and Department of Labor standards). The costs associated with such regulatory burdens often exceed the incremental revenue generated by low-margin BDG sales.

If your solution is ideally suited to the BDG market, consider utilizing a government sector reseller. In many cases, a reseller will shield your adVenture from regulatory and privacy concerns while allowing you to leverage its Government Service Administration contacts and certifications. A reseller will share in your already-compressed BDG margins, but its involvement will allow you to minimize the amount of time you must invest to access the BDG’s wallets.

“In a minute there is time for decisions and revisions which a minute will reverse.”
T. S. Eliot, Poet and Critic

Many BDCs and BDGs exemplify T. S. Eliot’s poetic description. Just as Lilliputian government officials are chosen based on their skill at stick-jumping, BDC and BDG vendors are often asked to invest unreasonable amounts of their scarce resources to close an RFP-mandated sale.

Startups simply cannot afford to enter stick-jumping competitions. Impressing a BDC or BDG “Emperor” with your startup’s ability to jump over arbitrarily positioned sticks will impair your adVenture’s ability to close near-term, higher-margin business.

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Select the description below that describes an actual software product.

A. Assimilated, zero-administration, standard database-queuing schema

B. Open-architected, workforce-neutral, productivity assimilator

C. Modularly reduced Graphical User Interface heuristic

D. Profit-focused, fault-tolerant encoding interface

If you can select the legitimate product from the list above, you are well on your way to buzz-cutting through the forest of buzzword BS.

Buzz Off

As Mr. O’Connor points out, “Your prospects are busy people and they don’t care about the innards of your product. They care about finding solutions to their problems.” In the same vein, most people will not care enough about your adVenture to take the time to decipher your corporate communications code. Most customers place zero value on the elegance or depth of your technology and they have no desire to read an academic whitepaper.

Effective corporate communications require you to place yourself in the shoes of your largely uniformed, indifferent audience. As noted in Pulp Facts, your primary corporate communications goal is to generate revenue. The best way to accomplish this is to educate your prospective customers regarding how your solution will resolve their problems, and not bore them with the inner workings of your technology. People care about salving their pain, not the origin, design and composition of the salve itself.

In describing effective writing, the best-selling author Stephen King once said, “Any word you have to hunt for in a thesaurus is the wrong word.” The natural extension of this adage to the business world is that any word in your corporate messaging that causes your audience to access an online dictionary is the wrong word. To avoid diminishing the impact of your messaging, couch your corporate communications in conventional terms that an intelligent Grandmother would readily understand. If your audience focuses on your words, instead of your message, you are using the wrong words.

Worried that short, simple words will sound condescending? Don’t be.

According to Common Sense Technology, most newspapers are written at a third-grade reading level, White House press releases average a fourth-grade reading level and the New York Times is easily digestible by the average fifth grader.

Still not convinced? In his book Fiction Writer’s Brainstormer, James V. Smith applied the Flesch-Kincaid Readability Test to the writing of ten best-selling novelists. Smith determined that the average grade level of their collective prose was 4.4 (i.e., the fourth month of the fourth grade) and that the average number of characters per word was 4.15.

If you are unsure how your corporate communications stack up against these mass-market benchmarks, run your text through the Flesch-Kincaid Readability Test (see the formulas at the end of this entry). If your corporate communications are written at an elevated reading level, then you may alienate potential Stakeholders, including paying customers.

I assessed a few random paragraphs from this entry via the Flesch-Kincaid test and it rated the text at a grade 14 reading level! I clearly have some work to do if I am to obtain parity with the New York Times.

Buzz Index

Overuse of buzzwords is often an indication of the author’s relative lack of understanding of the subject at hand. Although startups are also often guilty of buzzword abuse, Big Dumb Companies (BDCs) are world-class offenders.

You can also utilize the Flesch-Kincaid test to evaluate a BDC’s verbosity. However, a less time-consuming approach to determine the veracity of an organization’s messaging is to simply count the number of buzzwords in its written communications. If you locate more than 10-buzzwords per paragraph, it is highly unlikely the BDC understands the issue being discussed and highly likely the BDC should fire all of its MBAs.

Buzzword BS

“The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.”
- George Orwell

BDCs often abuse buzzwords in an attempt to disguise the fact that its underlying message is not compelling. When entrepreneurs overuse buzzwords, particularly when describing their adVenture, they are potentially involved in one of the three activities described below.

Value Confusion – The entrepreneurial team does not adequately understand their value proposition or the market opportunity. In such instances, buzzwords are used as placeholders to vaguely describe an opportunity that is vaguely understood.

Faux Gravitas – The entrepreneurial team naively believes that the frequent use of buzzwords and industry jargon will add gravitas to their messaging and will enhance its sophistication. In actuality, buzzword overindulgence highlights the team’s lack of maturity and judgment.

Operation Obfuscation – The entrepreneurial team utilizes buzzwords to purposely distract from the inadequacies of their opportunity. This generally occurs when an ongoing venture is unable to execute its initial operating plan and is forced to reposition itself and raise additional funds. This insidious use of buzzwords to hide the ball and disguise the true nature of an opportunity is clearly unethical and potentially fraudulent.

Irrespective of the reason for such buzzword abuses, they are detrimental to an entrepreneur’s ability to effectively communicate his or her message. If you do not clearly communicate your message, you may forgo an opportunity to Thrill The Messenger gatekeepers, who are capable of broadcasting your message to audiences that would otherwise be inaccessible.

Buzz Lightyear Hyperbole

Mark Twain once said, “I never write metropolis for seven cents when I can write city and get paid the same.” The payoff for avoiding buzzword purgatory is significant, because use of clear, concise messaging will ensure that your employees, potential investors, customers and other Stakeholders will understand your adVenture’s mission and thus the specific manner in which they can help your company achieve its goals.

Avoiding buzzword BS might just empower your adVenture to live up to Buzz Lightyear’s hyperbole and propel it, “to infinity and beyond.”

Quiz Answer

If you do not have an answer in mind, go back and take a second look at the quiz at the outset of this entry.

And the answer is…

…none of the above. All of these “products” were created with a few clicks of a buzzword generator. There are a number of them available online. A few include:

www.1728.com/buzzword.htm

http://www.outofservice.com/buzzword/

http://locofonic.alphalink.com.au/buzz.htm

http://38i.biz/buzzword/

Flesch-Kincaid Formulas

Readability Test

Grade Level Test

—

Copyright © 2008 by J. Meredith Publishing. All rights reserved.

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Hint: It is not a mouse.

The fact that you likely cannot name this creature confirms the reality that ideas are cheap.

All too often, inexperienced entrepreneurs struggle with sharing their ideas with potential investors, Donors and others who might be in a position to help them. The next time you wonder if it is safe to share your ideas, recall the fate of this long-eared, anonymous cartoon character.

Oswald The Unlucky Rabbit

After struggling for over five years, Walt Disney and his brother Roy scored their first hit with Oswald the Lucky Rabbit. Unfortunately for Oswald and Walt, Universal Studios, which owned Oswald’s intellectual property rights, assumed that Oswald’s initial success was formulaic and could be readily replicated.

Universal severed its relationship with Walt Disney, hired the majority of Disney’s creative team and began creating Oswald cartoons. Although an additional 140 Oswald episodes were produced over the next 14 years, none of them was nearly as successful as the first 26 installments, which were developed under Walt Disney’s tutelage.

Meanwhile, Walt tweaked Oswald, morphed him into Mickey Mouse, and parlayed the highly derivative mouse’s success into the $50 Billion Walt Disney Company.

Ideas Are Worthless

What was the inherent value of Walt Disney’s idea to draw an anthropomorphic rabbit?

Zero.

What was the inherent value of Walt Disney’s idea to draw an anthropomorphic mouse?

Zero squared.

Outside of adVentures based on hard science, most entrepreneurial ideas have a similar inherent value – zero.

The value of Walt’s ideas laid in their execution: the storylines’ humor, which appealed to both children and adults, the quality and believability of the animation and the intangible degree to which audiences could relate to and empathize with the on-screen characters.

Conversational Foundation

Some entrepreneurs confuse the identification of a market to be served or a customer pain to be assuaged with valuable ideas. Institutional investors are seldom presented with unique inspirations. Most businesses are based on variations of established themes, such as new ways of solving old problems and old ways of solving new problems. A potential or even partially implemented solution generally does not warrant rabid protection.

As noted in Your Personal Pitch, entrepreneurs must take chances and judiciously discuss their ideas, plans and dreams in order to bring their adVentures to life. If an entrepreneur does not share her thoughts, it will be impossible to marshal the necessary resources, recruit investors and inspire employees to join her adVenture.

Simply talking about your idea is seldom risky. As long no propriety information is disclosed, such discussions will almost never result in adverse consequences. However, as noted in the discussion of Big Bad VC, below, you must consider the capability of your audience (and their surrogates) to take advantage of your idea when deciding with whom to speak and how much detail to include in each discussion.

Parlay, Protect, Promote

Although it is true that businesses are built upon a foundation of conversations, there are a number of judicious things you should do to protect your idea while you are sharing it.

One inexpensive way to protect your idea is a provisional patent. The U.S. Patent Office allows one year from the date of a provisional filing before a formal patent application must be filed. A provisional filing allows you to publicly discuss your idea with potential Donors and Stakeholders. Such feedback will help you craft your definitive patent application.

Another simple means of protection is a Non-Disclosure Agreement (NDA). This agreement precludes the party that receives the confidential information from sharing it with others and, in some cases, from using the information for his or her own gain.

If you attempt to protect an idea too early, you risk expending energy and resources protecting an unworthy, ill-formed idea. Thus, it is important to exclusively discuss your ideas with trusted parties before you spend the time, money and effort to protect them.

Walt Disney learned the importance of owning his ideas the hard way. Despite the urban myth that Oswald was stolen from Walt Disney, the reality is that Walt never owned Oswald. This lack of ownership was a mistake that Walt Disney did not repeat. He never again allowed another party to control the destiny of his cartoon characters or his adVenture. As noted in (Non)Sense Of Entitlement, successful entrepreneurs uncompromisingly control their own destiny. To this end, properly protect your intellectual property before you promote it.

Who’s Afraid Of The Big Bad VC?

When attempting to raise money, reticence to share your idea will be perceived as amateurish and will cause most sophisticated investors to assume you lack the maturity and judgment required to lead a successful adVenture.

However, a bit of trepidation when dealing with Venture Capitalists (VCs) is wise. De facto protection in such discussions is difficult to secure, as most VCs will not sign an NDA during the initial stages of your discussions. There are pragmatic reasons for their reluctance, so do not argue the point.

If your dialog progresses to the point that it is necessary for you to communicate sensitive, proprietary information in order for the VC to fully evaluate your opportunity, entering into an NDA might be appropriate. However, during the early stages of your discussions, you will sound naive if you ask a VC to sign an NDA.

No reputable VC will steal your ideas. Note the operative word: reputable. As with any professional interaction, do your homework and know with whom you are speaking. You must have an adequate depth of knowledge of your target market(s) and where your idea or technology fits into the respective market ecosystems in order to determine how much information you can safely disclose.

Reputable VCs militantly protect their reputations. The cost of compromising their ethical standing is far greater than any gains they might achieve by co-opting your ideas. However, if you seek funding from a VC that has a potentially competitive company in its portfolio, you are placing your adVenture at risk. With no malicious intent, it is quite possible that a VC might communicate your business plan to a portfolio company which has the necessary knowledge, resources and inclination to transform your ideas into a business.

This unfortunate sequence of events occurred at a Voice-over IP company that I (many years later) tangentially helped go public. During the company’s initial stages, management made the mistake of communicating its plans (to create an Internet fax service) to a VC that had a telecom startup in its portfolio.

The portfolio company was struggling with its initial go-to-market strategy when the VC suggested that they consider the viability of the Internet fax market. The portfolio company subsequently refocused its product development efforts and entered the electronic fax market before the unfunded startup.

In this instance, did the VC steal the idea of delivering faxes over the Internet?

No. I would not characterize their actions as “theft.” The idea of Internet faxes was not unique; PC-initiated, phone-based faxes had been introduced nearly a decade previously. However, the fact that the technological infrastructure had evolved adequately to enable an Internet-based product was not readily apparent to the struggling portfolio company. Once the VC alerted them to the opportunity, the portfolio company applied significant resources, at great risk, to exploit the idea. As such, simply alerting the portfolio company to the Internet fax opportunity was worth little – the value was derived from the hard work that was required to turn the idea into a profitable venture.

Lesson learned? Before disclosing the basic premise of your idea, determine whether or not your audience is in a position to leverage your idea, either directly or via their affiliations.

Oswald Comes Home

Nearly 80 years after its creation, the Walt Disney Company purchased the rights to Oswald the Lucky Rabbit. Now Oswald stands side-by-side his heralded cousin Mickey, as an infamous example of an idea’s relative lack of value in the absence of unyielding execution.

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As a startup, your most meaningful agreements will likely be struck with BDCs. You will no doubt craft agreements with companies of similar or even smaller size compared to your own, but the risk associated with such agreements will be tempered by the fact that you will negotiate such agreements as a relative peer. As such, your greatest risk and greatest opportunity 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 must avoid Poison Ivy’s kiss of death, so too must entrepreneurs avoid the Kiss of Death provisions which BDCs often attempt to include in their agreements.

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Kiss of Death Provisions

The allure to of a company-changing deal with a BDC is strong. Big companies make a number of seductive promises, including access to large markets, significant financial resources and vital public validation of your solution (see Pulp Facts). However, fight the urge to close such enticing deals on the BDC’s terms. Stand your ground and negotiate a fair agreement, even if it takes longer and forces you to expend more energy than you would 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
• Accept Unlimited Liability
• Forgo Change of Control or Agree to a ROFO or ROFR
• 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

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

If you allow your prospective partner or customer to milk the cow for free, why would they ever pay for it? As noted in Frugal Is As Frugal Does, after cash, your most valuable asset is time. You cannot afford the opportunity cost of a deal 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.

• If necessary, apply a portion of the Pilot Fee toward the ultimate license / purchase price. Clearly communicate that you are not attempting to get rich on the Pilot Fee. On the contrary, you are simply assigning a cost to your time in order to mitigate your downside risk and to ensure that both parties properly evaluate the economic viability of the deal upfront.

• Insisting to be compensated for your time will also help elicit the necessary respect from the BDC. Convey 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 your adVenture, a year is an eternity. You cannot afford to limit your future prospects by entering into a multi-year deal. BDCs generally prefer multi-year agreements because long-term deals reduce the BDC’s uncertainty and thus lower its risk. Conversely, long-term 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.

Do Not Give up Branding

BDCs will often ask you to “private label” or “white label” your technology.  This generally involves the BDC selling your technology in a form that allows them to market it under their brand. Do not allow your adVenture’s technology to be buried in the bowels of another company’s product, without obtaining proper recognition. For instance, in its early days, Google syndicated 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 most 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. Such validation 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. In many partnership discussions, I was able to direct a potential partner to an existing partner’s website and show them our “Powered By” branding status. This approach was very effective. If I had been forced to say, “I know you cannot see it, but our technology is the engine behind Company XYZ’s product,” 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 embarrassed, most BDC partners attempt to preclude you from issuing any unilateral press releases. Some will even try to keep 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 is 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 also likely it will not receive wide media coverage, even by the financial and industry analysts who follow the BDC, 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 in instances when the BDC grinds you down on the financial terms. In such instances, the level of public relations autonomy you negotiate can 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 business terms as possible, as it reduces potential confusion and establishes a collaborative tone to the relationship. As noted previously, 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 on just to get you back 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. What is goose is good for the gander.  If you accept unilateral terms, you risk becoming a Corporate Beyotch.

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 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, you can craft a deal that allows both parties to attain their respective goals. You can do this in the Indemnification Section of the agreement by placing a de facto cap on the amount of expenses 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 that 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 into all 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.

Do Not Serve up 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. This will prove problematic as your business grows, because it will be difficult later to sign up larger VARs, unless you are able to offer them uncontested, broad geographic coverage. As such, always reserve the right to terminate regional distribution agreements in the event that you subsequently enter into a pan-country distribution agreement.

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 working together. 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 being precluded from marketing and otherwise utilizing novel, joint IP developed during the course of carrying out the agreement. Craft terms which ensure you will not be obligated to the BDC with respect to the terms by which it can 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, it is in your best interest to clearly specify the work to be performed, who will perform it and when each significant task is scheduled to 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.

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 engineering team.

If you do not assign a price tag to your engineering team’s 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.

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 do not 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 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. This sounds like an interesting challenge for us to devise a reasonable alternative because I love being different.”

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 substantially lower pricing based upon 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.

See Excludesivity – for tips regarding how to negotiate this most heinous contractual provision.

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.
—

Copyright © 2008 by J. Meredith Publishing. All rights reserved.

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Anger at receiving bad news is a natural human reaction. Sophocles, Shakespeare and the Bible all reference the killing of the bearer of bad news. When someone is critical of your adVenture, it is natural to dismiss the detractor and even demonize them to undercut the validity of their message. Fortunately for your competitors and detractors, you do not have a license to kill. However, as an entrepreneur, you do have a license to thrill.

Every successful entrepreneur must eventually learn to delegate. An even more challenging skill is learning what to delegate. As noted in PR Passion, shaping your adVenture’s messaging is not something you should leave to others. Control your messaging by crafting it yourself and exciting your messengers to the point that they willingly deliver your company’s message on your behalf.

Energize your messengers and encourage them to tell your story in a spirited, fervent and accurate manner.

There are a variety of ways to control the messaging delivered by a trusted third party. The most direct manner is to create your messages in the form of third-party quotes, articles and product reviews. In many cases, once you gain the trust and respect of your messenger, they will welcome your help crafting the messages.

Validation Proclamations

Sometimes finding a powerful messenger is a matter of timing and luck. For instance, during the early stages of one of my adVentures, I Bro’d up with a Vice President at a large Internet Publisher. During a casual conversation, he said something to the effect of, “Your product is great, our users would be nuts to not try it.” I asked him if I could quote him on that, to which he agreed.

We added his company’s logo next to the quote to enhance its impact and proceeded to use it for the next several years, displaying it on millions of banners, landing pages and promotional emails. We preformed extensive “A/B” marketing tests with and without the quote and the ads that included the quote consistently outperformed their non-quote counterparts.

Lesson learned? Do not underestimate the influence that such seemingly innocuous endorsements can have on your adVenture, especially during its early stages.

At the outset of your adVenture, you may be forced to rely on endorsements from friends and family. However, over time, your growing credibility will allow you to obtain validation proclamations from progressively more and more influential messengers, as shown in the following table.  Such validation proclamations often begin with a simple endorsement quote and may eventually evolve into more powerful and collaborative messaging, such as a joint press release, if you properly cultivate your relationship with the messenger.

Progressively Increase The Number of Validation Proclamations Delivered By Your Messengers

I Will Quote You On That – Write Stakeholders’ Quotes

I have written hundreds press releases in which I drafted the quote attributed to the other party associated with the release, (i.e., the partner, customer, distributor, etc.).  In nearly every case, the Stakeholder accepted my suggested quote with no changes. When changes were made, they were generally immaterial. In fact, it was more common for a company to refuse to include any quotes from their employees, as opposed to heavily editing a quote drafted on their behalf.

Take advantage of this rare opportunity to put words in someone else’s mouth. In order to ensure that the other party will approve your quote, compliment the Stakeholder, while making a strategically important statement about your company. For instance, you might put the following words in a Partner’s mouth, “As the market leader, we are always looking for best-of-breed solutions to incorporate into our award-winning products.” Identify your Partner as a “leader” while they tell the market your solution is “best of breed.”

Most people are busy, some are lazy and a few are both. As noted in Your Personal Pitch, do all the heavy lifting for your Stakeholders, including drafting their quote. I wrote the two sample quotes shown below. Both were attributed to senior Fortune 500 executives and both were virtually unchanged from my initial draft:

First Example

“Small Company’s fast, easy interface and high levels of security present an ideal solution for the large and growing number of Big Dumb Company (BDC) customers who need to access and work on their office PCs from remote locations,” says Executive X, BDC’s Communications Group President.  “This alliance reinforces our commitment to offer both our narrowband and broadband subscribers the highest-quality services for enhancing their experience on the Internet.”

In this case, it was important to communicate that our product was secure and that it worked in both narrowband and high-bandwidth environments. By directing an executive from a notable company to parrot this positioning on our behalf, we were able to gain significant market validation.

Second Example

“We are committed to providing BDC members and Web users with the very best in online tools, content and convenience,” states BDC Executive X. “By leveraging Small Company’s products, users have greater flexibility to be productive on their desktops from any online location. Small Company’s product is a great application for making the BDC Service and the BDC brands an even more central and valuable part of our members’ daily lives.”

In this example, we wanted to sign up additional Internet Service Providers (ISPs), so I referenced the value that we brought to our ISP partners. I also reinforced our end-user value proposition (i.e., a work productivity solution that enabled users to seamlessly work remotely).

As previously noted, most of the quotes I wrote for partners were published verbatim. However, in some instances, the BDC did make some modifications. Even when changes were made, the final quote usually retained the key aspects of our desired validation proclamation.

Below is an example of an initial quote, followed by the final version that was included in a joint press release with a BDC. The salient points, which were carried over from the initial quote I drafted, are shown in bold.

Initial Quote Submitted To Partner

“The ability to quickly and seamlessly share a remote desktop within our chat solution, even via a dial-up connection, is a feature that many of our customers are demanding. This feature greatly expands the utility of our CRM solutions, as customer support agents can escalate a chat session to a shared desktop session and address an issue directly on a customer’s PC. This functionality will decrease the length of customer support sessions and increase their effectiveness. Our extensive investigation of the remote control market led us to conclude that Small Company’s solution is the best-of-breed remote control solution.”

Final Quote Released By Partner

“The technology integration stemming from this partnership will make the <BDC’s Product> even more appealing to companies seeking ways to optimize customer satisfaction through rapid resolution of inquiries while at the same time keeping operational costs down and simplifying the ways in which employees work with customers. The ability to quickly and seamlessly share a remote desktop through <BDC’s Product>, even via a dial-up connection, is a feature that many of our clients are demanding,” said Executive X, BDC’s senior vice president of worldwide alliances, business and market development. “Our extensive investigation of the remote-control market led us to conclude that Small Company’s solution is a high-quality solution offering clear value to our clients.”

No Comment – Avoid Too Many Quotes

At BDCs, press coverage often serves a branding function. As noted in Pulp Facts, a startup’s press coverage should stimulate revenue. One way to facilitate revenue creation is to quote the member of your team who is primarily responsible for the particular issue addressed in the release.

For instance, a partnership announcement should reference the VP of Business Development, while a product-oriented release should include a quote from the appropriate product executive. This approach makes it easier for third parties, such as industry analysts and potential partners to contact the appropriate member of your team. If you only quote the CEO in each release, you are increasing the friction associated with getting a third party in front of the right person in your organization.

When drafting your quotes, avoid PR clichés like, “pleased, delighted, excited.” If you cannot think of anything more creative than, “We are delighted to partner with XYZ” than consider excluding quotes in your release. These words are so overused that they have lost all meaning in a PR context.

Avoid an excessive number of quotes. For partner-oriented releases, two is usually adequate (one from each partner), unless it is germane to include a quote from a customer or Industry Analyst. Irrespective of the release type, in most instances, a single quote from a member of your team should be adequate. At one startup I was associated with, both the Chairman and the Founder insisted on being quoted in nearly every release (see Founderitis for more background regarding this particular adVenture). This sort of ego indulgence can cause your company to appear unsophisticated and amateur.

Partner Piggyback – Leverage Your Partners’ PR Channels

Bilateral releases that include a quote from both parties are the most impactful type of Partner release. Bilateral releases are issued both by your firm and the BDC and thus garner significantly more attention than a release distributed solely by your company.

A bilateral release with a quote from your company, but not from the BDC, is the next most effective type of Partner release. In such instances, consider adding a customer or Industry Analyst quote to bolster the third-party validation of your message.

An even less-desirable Partner release is one in which the parties independently issue unilateral releases. The obvious downside of this approach is that you cannot control the content of the BDC’s release and thus it is likely that the manner in which your company is depicted in such a release will be diminished. In fact, it is possible that your company may not even be mentioned in the BDC’s version of a unilateral release.

Last in the Partner-release pecking order is a unilateral release that does not include a quote from the BDC. If the BDC will not even allow you to specify them by name, do your best to describe them in such a way that even the most casual dolt can figure out which company you are referencing.

A Joint Release With A BDC Quote Is The Most Desirable Type Of Partner Release

Ultimately, the least desirable form of Partner release is the one that is never issued. As noted in Kiss Of Death, maintain control of your public relations strategy when negotiating agreements with BDCs. In some BDC partnerships, the public validation you derive from your association with the BDC will be the most valuable aspect of the relationship. As such, do not relinquish your ability to control your PR destiny when partnering with a BDC.

All The News That Fits Your Message – Video News Releases

A Video News Release (VNR) is a brief, two- to three-minute video that your company creates and distributes to local news affiliates across the country. TV stations have the option to show it intact with your narration, or they can localize the piece by overdubbing the script using one of their on-air personalities. Larger, more enterprising stations will occasionally edit the video and rewrite your script. However, in most instances, just as most press release quotes are published by BDCs unaltered, most TV stations run VNRs with no changes. VNRs can be very powerful, as they couch your messaging in the context of news.

As noted in Kiss Of Death, incentivize the VNR distributor with a performance-based bonus, predicated upon the number of TV stations that pick up your release. This will encourage them to promote your VNR more heavily and to leave it in rotation for a longer period of time than they otherwise would.

VNRs can be produced economically. You can spend as little as a few thousand dollars per release. One way to reduce the cost of your VNRs is to shoot footage for several concurrently. In this way, you can interview your Industry Expert on several subjects in one sitting, changing their wardrobe at the start of each interview, in order to give the appearance of multiple, disparate interviews. You can stretch your production dollars even further by utilizing B-roll footage shot in one sitting in multiple VNRs (e.g., screen shots of your website, people using your solution, etc.).

If your VNR is an overt sales pitch, it will not gain wide exposure. Care should be taken to discuss the “problem” and list various “solutions,” one of which includes your product. Include in your script phrases such as, “Products like, <your product> have proven effective” or “There are a number of solutions on the market, including <your product>.”

For instance, at one of my adVentures, we devised a VNR that focused on what to do during a natural disaster or significant weather event. Included in the preparation tips was the suggestion to “subscribe to a remote access solution” in order to work from home when weather or any other uncontrollable circumstance made it impossible for the viewer to commute to their office.

One technique we used to camouflage our sales pitch was to direct the Industry Expert to reference our product rather than include our product’s name in the narrator’s script. In addition, rather than saying our company’s name, we displayed a screen shot of our website, emblazoned with our corporate logo while the voice-over narration generically described the various solutions to whatever problem the VNR was addressing.

The Danger Of Improv

In addition to their status as “news,” VNRs are highly effective because they are delivered by TV – a costly and powerful advertising medium that is otherwise not available to most startups. The power of TV was made clear to me during the late 1990s, when I was introducing one of my adVenture’s medical robots to the world’s top cardiac surgeons. A top-rated TV show, “ER,” incorporated our robots into several episodes.  I was a bit appalled by the extent that our robots became more real, to these highly intelligent people, by their inclusion in a fictional, high-brow soap opera. Value judgments aside, Hollywood’s use of our robots as props significantly helped us in our missionary sales efforts.

Although we were delighted with the validation our robots gained from their use as TV props, it was a dangerous dance with potential disaster. We did not have any direct influence on the scripts and thus we could not control this powerful messenger.

For instance, one of the proposed plot lines was for our robot to lose control and injure a patient. This was clearly detrimental to our claim that our robots were always under the surgeon’s direct control and thus could not become “rogue” killers. After we threatened to remove our robots from the set, the scriptwriters rewrote the script and made the robot a source of conflict between two of the surgeons. One surgeon feared that the introduction of robotics into the operating room would result in patient injury and another was depicted as a visionary who believed that robots represented the future gold standard of medical care. We were pleased, as the visionary surgeon was one of the show’s attractive protagonists, while the other surgeon was a bald curmudgeon. This storyline was carried through several episodes, viewed by tens of millions of people and fortunately no fictional characters were killed by our robotic props.

Ghosting For Journalists – Generating Article Content

Although journalists and editors will not relax their editorial standards to the point of shilling for your company, they are often willing to utilize text written by companies and incorporate it into their articles and reviews. As noted in Pulp Facts, an effective way to work with media gatekeepers is in the guise of an industry opinion leader.

By creating verbiage to be used by a journalists, you can guide the manner in which journalists describe your industry, the users’ pain points, etc., such that it is congruent with your company’s messaging.

One way to have your language accepted by editors and journalists is to submit it in the form of an article. Often, the byline for such articles is the company’s CEO. This approach can work for trade publications, but most popular press publishers will not print articles written by CEOs. However, if you give the publisher the latitude to reference such “CEO text” in an article or product review, you may be surprised by the extent to which such text is repurposed verbatim.

Antiparalysis Analysis – Spoon Feed Product Reviewers

Setting the proper expectations of Product Reviewers is one of the most important determinants of whether or not you will be skewered or obtain a positive review. For instance, at one of my companies, we released a minimally viable product that could not compete with the more established products on a feature-by-feature basis. Our value proposition was in our solution’s simplicity and ease of use. However, to the uninitiated, there was a risk that our product would seem thin and not suitable for our target market of prosumers.

Fortunately, we effectively managed the messaging surrounding our product by clearly defining our positioning vis-à-vis the existing offerings. We invested considerable time with journalists, discussing our product’s proper place in the market in order to ensure that any comparisons with competitive solutions would be done in the proper context.  A significant portion of the text we created and provided to journalists found its way into a number of articles, analyst reports and product reviews.

License To Thrill

Extra! Extra! Read all about it! You have a license to thrill and you are not afraid to use it.

Reducing all aspects of uncertainty associated with your adVenture is something you should do whenever possible. You can reduce the uncertainly of what others will say about your adVenture by thrilling your messengers and exciting them to tell your story off of your script.
—

Copyright © 2008 by J. Meredith Publishing. All rights reserved.

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As noted in Kiss Of Death, exclusivity can kill a small company. Unfortunately, many Big Dumb Companies (BDCs) believe that the only way they can effectively compete is to skew the market in their favor by precluding you from freely working with anyone you choose. Exclusivity excludes the BDC from competing in the free market while excluding the startup from taking full advantage of future customer, partner and market opportunities. Such deals are not exclusive, they are excludesive.

The only exclusivity you want associated with your startup is the kind described in Peace & War Corps – your employees should feel that being part of your adVenture is a privileged opportunity.

In most instances, you will be successful in establishing 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. Under such circumstances, you can minimize the degree to which such exclusions limit your adVenture’s future flexibility by applying one or more of the following suggestions.

Not in my Job Description

One way to avoid excludesivity is to simply state, “It is against our company policy to grant exclusivity…” or “my Board simply will not allow it.” True ATM Operators will relate to such arbitrary rules and respect that there are some things “you just cannot do.”

De Facto Competitor Avoidance

Excludesivity is usually an important issue when you are trying to strike 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 Kiss of Death), your initial partner’s competitors will be motivated to work with you. The extent to which rival BDCs will seek you out, in the hopes of striking a similar deal, will be predicated on the impact your initial BDC partnership has on the market. 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 without excluding other potential partners.

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. Most startups cannot effectively implement multiple BDC partnerships in parallel. As such, make it clear to your potential partners that the first BDC to ink a deal will have your company’s sole focus through the development and implementation of the partnership. This will ensure the initial BDC a de facto lead on their competitors. It may also provide the BDC with an opportunity to influence your technological development and conform it more closely matches its technology roadmap.

Irrespective of any potential technological advantages, being the first partner 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 paired with your technology. 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

• The Short 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 cost of such a decision is tremendous and you must be compensated for it.

In addition to the opportunity costs associated with unfettered 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 is under no pressure 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 revenue 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, use 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 do you think your company could 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 get them to commit to a large minimum figure outside the explicit discussion of 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 markets. If so, offering excludesivity with respect to such customers may have little 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 carry a line of products, consider limiting excludesivity to a particular product or even a product feature. I 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, your primary distribution channel may be online sales, which you want to have the freedom to manage with no exclusions. However, retail distribution might be an area you are comfortable establishing an excludesive distribution agreement, given that target sales are reached.

Such limitations are helpful in making excludesivity more palatable. However, to ensure their effectiveness, define these limiting parameters in a manner consistent with the BDC’s ability to impact your business.

For instance, a digital imaging company in which I am an investor signed an excludesive deal with a BDC in which they carved out the endoscopic market. On the surface, this seems like a reasonable limitation. Unfortunately, the BDC has no presence in a number of endoscopic markets, including flexible endoscope procedures and laproscopic procedures. The startup is now effectively barred from establishing partnerships within these two very large markets, unless they renegotiate their deal with the BDC. Given that the BDC is holding all the negotiating cards, the startup will probably have to pay a significant price to free itself from these detrimental exclusions.

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” However, every BDC has one or two nemeses which they consider to be their true competitors in a particular market or product line. Just because two companies compete at a macro level, such as Oracle and Siebel or Yahoo and Google, does not mean they are true competitors in every sub-market in which they are engaged.

Force the BDC to create a short list of these named competitors and include it as an exhibit to your partnership agreement. The list should be no more than two or three names, not a phone book of potential and fantastical competitors.

MFN Alert

As more fully discussed in Kiss of Death, 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, Kiss of Death 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

It is simply not rational for an entrepreneur to limit his or her ability to follow the most lucrative path to success, especially at the outset of the 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.
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Copyright © 2008 by J. Meredith Publishing. All rights reserved.

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