Disclaimer: This document is for information purposes only and does not constitute legal advice.
By Louise Eldridge, Partner, Bristows LLP
In order to keep the main toolkit brief, we have included the outline of terms and example provisions mentioned in the Corporate legal guidelines into this blog:
An outline of the terms you could include in Heads of Terms is provided below:
Transaction: the nature of the commercial arrangement to be entered into between the parties.
Performance Obligations: Who, What, How, Where, When?
Payment: the proposed price to be paid. This provision might also deal with specific details such as the time of payment.
Intellectual Property (“IP”): depending on the nature of the startup’s business and the commercial arrangements it may be relevant to include certain provisions relating to the ownership of IP rights.
Timetable: the timetable for the commercial transaction.
Duration: the amount of time that is to be set aside for negotiations. This provision should also make clear that either party is entitled to withdraw from negotiations.
Exclusivity: if the parties wish to ensure that the other side is not entering into negotiations with a third party on a similar basis, there may be exclusivity provisions in place for the duration of negotiations.
Confidentiality: it should be clear that all matters discussed during negotiations will remain confidential to the disclosing party. This provision is particularly important if you will be discussing anything which is not widely or publicly known at the time of negotiations.
Drafting: which party will be responsible for providing initial drafts of documents. This provision may also include a proposed date for a first draft.
Governing Law and Jurisdiction: if the MOU/Heads of Terms are expressed to be fully or partially binding, the document should set out which country’s laws will govern the agreement and, in the event of a conflict between the parties, which country’s courts will be entitled to hear the matter.
Provisions to note in the contract and / or where there may be “misalignment” include:
Insurance levels: the level of cover required for certain types of insurance, for example public liability, should be appropriate to the commercial arrangement and the amount to be paid under the contract. The startup may be unable to obtain high levels of insurance cover that the corporate may otherwise be accustomed to seeking from more mature counterparties.
IP protection & IP Liability: for many startups, the IP provisions will be key, as the IP they own may be pivotal to their business concept and future success. These provisions should make it very clear where ownership of IP lies.
Performance obligations: the contract should set out what each party is required to do and when they are required to do it by. If appropriate, it may also include specific terms setting out certain performance targets to be reached, KPIs or service levels to be maintained.
Warranties: a warranty is an assurance or promise in a contract, the breach of which may give rise to a claim for damages. The startup will need to carefully consider any warranties they give so as not to leave the company unduly exposed to potential risk, so this term could be the subject of substantial negotiation. Any warranties sought should be reasonable and relevant in the context of the deal and not too widely drafted.
Exclusivity & anti-competition clauses: certain startups may feel that a clause which restricts their ability to provide the same or similar goods or services to other parties is unduly restrictive.
Liability: the level of liability should typically be commensurate to the value of the contract. Startups will also want to ensure they avoid terms which provide for uncapped liability or personal liability for the startup’s founders.
Limitations on Liability: if a startup wishes to limit its exposure to the amount of damages a counterparty could seek to recover, it may seek to include express limitations on liability in the contract. A startup may also wish to exclude certain types of loss and introduce financial caps on liability. Again, the allocation of risk should not be unduly one sided in favour of the corporate so appropriate limitations should be considered.
Remedy and recourse: this provision should set out the steps that each party should take if there is a breach or failure under the agreement. You should ensure that any time limits and notice provisions are reasonable.
Term and Termination: this provision sets out how long the contract will last and how either party can bring the commercial relationship to an end. You may want to build in a break clause by adding a provision which allows for the contract to be terminated early, for example if the contract length is two years allowing for termination after a year.
Governing Law and jurisdiction: the startup may be seeking to ensure the governing law and jurisdiction is that of the country where the startup is located. This provision is likely to be more contentious if the startup is dealing with a corporate which is multinational or based in a different jurisdiction.
Louise is a partner at Bristows LLP
©Bristows LLP 2017