This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought according to your circumstances.
When you’re entering into a commercial arrangement with a corporate organisation, you’re likely to require legal representation. By engaging a legal expert who understands not only your business and sector, but also the stage your business is at, you will be ensuring your advisors are well-positioned to represent your interests. They will also understand that a pragmatic approach to negotiations is important.
Before entering into potentially lengthy legal negotiations with a corporate, you might agree on a number of the key commercial terms. These can be set out in a Memorandum of Understanding (MOU) or Heads of Terms agreement. Even more simply, they could be summarised in an email, although in this instance it’s important that both sides are agreed on the implications of any agreed terms.
An MOU or Heads of Terms is useful for outlining the main terms of the deal, as agreed between the parties. It may cover the duration of the agreement, set out payment terms and clarify ownership of any IP produced.
Some Heads of Terms are non-binding, while others are partially or fully binding. It is important that you know whether any such agreements will be binding on you. Generally, MOUs or Heads of Terms are partially binding with regard to any terms relating to exclusivity, confidentiality, costs, duration of negotiations and rights to withdraw. Liability and governing law and jurisdiction will be binding. Ensure that you have full clarity on these terms.
“Seek legal advice before signing contracts and ensure that you fully understand your rights. More importantly, be certain that you understand your obligations and liability under the contract.”
You may choose to present a first draft of a contract to the corporate for their consideration and amendment, rather than relying on them to make the first contractual move. That said, larger corporates are often known to wield their relative commercial power and insist on providing the first draft.
Large corporates typically have their own in house ‘standard-form’ contracts for entering into commercial arrangements. Often, these are more tailored to an agreement between large corporates, with a high level of detail and complexity. Some of the terms included might not be relevant in your circumstances or take account of where the company is in its lifecycle. In these cases, such provisions either need to be simplified or removed altogether. Amending contracts can be expensive for an early stage company, both in terms of management time and legal representation—especially if the negotiation becomes protracted. That said, cutting corners on legal aspects of the deal could prove to be even more costly in the longer term.
It is vital that the startup’s founder and/or management team and their advisors all share a common pragmatic approach to negotiating the terms of a commercial deal with a corporate. By negotiating the terms of a contract, a startup can ensure it will be able to comply with the provisions of the contract from Day One. For example, a provision which requires the startup to have insurance policy coverage in place to the value of, say, £100 million, may be commercially unviable for a startup as well as being disproportionate to the commercial arrangement in question. Similarly, a provision which places uncapped liability on a business or its founders is unreasonable, and would result in dire consequences if the the other party were to enforce it.
If a contract is one which you are likely to be able to use as a template with a number of different customers, you could work with your legal team to create a bespoke legal contract of your own. So long as it is reasonable, balanced and well drafted, whilst providing an appropriate level of risk protection, it may well be accepted as the starting point by a larger corporate. This could save time and money in the long-term.
Irrespective of the subject matter of any commercial arrangement, the following areas are important when negotiating legal contracts:
● Payment terms
● Intellectual Property
Also consider areas such as data protection, commercial arrangements and specific regulations within regulated sectors.
A successful negotiation process relies on clear communication between relevant stakeholders, timely involvement of the legal team and alignment on key contractual terms. This helps ensure that any agreement reached adequately reflects the commercial terms and has the approval of the corporate external or in-house legal team. It will also help to prevent unnecessary delays.
You can help the process by making sure that fundamental commercial terms are agreed before legal documents are put into play. They then form the basis of the contract, leading to a smoother legal process. Start to work with your legal advisor early on and document any agreed terms in a summary email or, if a more formal approach is required, a Heads of Terms or Memorandum of Understanding document.
Sometimes, it may be more efficient to go straight to negotiating the detailed contract itself. There is no hard and fast rule; the appropriate route will depend on your particular circumstances.
Whilst there will always be a need for individual contract elements in open innovation, there are a number of areas that differ to regular contracts and could be standardised to create a fit-for-purpose open innovation contract. Standardised contracts should be optimised to protect against an appropriate level of risk for the transaction type and therefore speed up the legal process and the whole transaction.