white & lee’s soup to nuts 2002
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STRATEGIC PARTNERSHIPS Session III: April 13, 2002. White & Lee’s Soup to Nuts 2002. More than Just 10 Rules for Strategic Partnering – Paul Leboffe, Esq. Leveraging your IP Assets – Dennis Fernandez, Esq. Corporate Partners – What they Want Today - PowerPoint PPT PresentationTRANSCRIPT
STRATEGIC PARTNERSHIPS Session III: April 13, 2002
White & Lee’s White & Lee’s Soup to Nuts 2002Soup to Nuts 2002
Today’s AgendaToday’s Agenda
More than Just 10 Rules for Strategic Partnering – Paul Leboffe, Esq.
Leveraging your IP Assets – Dennis Fernandez, Esq.
Corporate Partners – What they Want Today International Partners - Doing Deals Overseas Entrepreneurs – There’s Nothing like Experience
My Road MapMy Road Map
• What are “Strategic Partnerships”?– Why enter into Strategic Partnerships?– Trends in Technology Strategic Partnerships– Keys to a Successful Partnership– The Strategic Partnering Process – Selected Key Issues in Strategic Partnering
What are Strategic Partnerships?What are Strategic Partnerships?
Many Forms– Joint Ventures (formation of a new company)– Virtual Alliances – JV without co-locating– Joint Development Agreements – R&D– Distribution & Marketing Agreements– Mergers & Acquisitions– Pure Equity Investments
Our Focus: – Licensing/Distribution/Equity– BigCo/SmallCo
Why Enter a Strategic Why Enter a Strategic Partnership?Partnership?
Big Co Competitive Advantage Technology / expertise Decrease “Time to
Market” (make / buy) Access to Innovation Prevent Competition
(cheaper acquisition)
Small Co Funding Reputation Distribution Channel Market Validation Critical Mass BigCo Plans
Trends in Strategic PartnershipsTrends in Strategic Partnerships Less promiscuity; more selectivity
– Longer due diligence– Corporate governance more important than ever
Partners key to securing financing – Reference customers
Expedited path to revenues - key– Partner strategy in business plan
Increase in cross-boarder partnerships Increase in early-stage partnerships (market
consolidation/market share/time to market)
Trends in Strategic PartnershipsTrends in Strategic Partnerships
“Not Invented Here” Less of an Issue
– SmallCo partners “competing” with internal development efforts (build vs. buy
decisions)(particularly Int’l)
BigCo partners judged by quality of their strategic partners
Co-petitors– e.g., Palm and Handspring
Trends in Strategic PartnershipsTrends in Strategic Partnerships Corporate Investment is WAY Down! Corporate investment tracks VC investment
– Overall investment off 60% $121B invested in 2000 and $50B in 2001
– Q4 Investment off 67% Q4-2000 $27B invested in 2,358 companies
– $9B in 570 companies in Q4-2001 Early stage: 22% in Q3 and 16% in Q4-2001
– Avg. 1st round investments decreased from $10m in 2000 to $7m in 2001
Trends in Strategic PartnershipsTrends in Strategic Partnerships
Corporate VCs Reeling from Losses – E.g., in 2001 Microsoft lost $5.7B, Wells Fargo lost
$1.2B, Intel lost $633mCorporations out of venture business; unless
strategic, and . . .ROI now more important than ever
– Must be quantifiable– Short time horizon (e.g., 6 months to 1 year)
Trends in Strategic PartnershipsTrends in Strategic Partnerships
Maturity matters
– Company must be built, with some track record and/or revenues
– BigCo less willing to accept SmallCo as R&D arm
– Crackerjack management team
SmallCo Catch-22 – Solution: pre-sell; network
Keys to Successful Strategic Keys to Successful Strategic Partnerships Partnerships
Pick the right partner – Alliance strategy, rather than strategic alliance
Commitment– Management buy-in cited as a top reason for
successful partnerships
– Implementation more difficult than formation
Clear roles and goals
The Strategic Partnering The Strategic Partnering ProcessProcess
The Alliance StrategyInitial Discussions – NDANext Steps – LOI’s, MOU’s, Heads of
AgreementDefinitive Agreements
– Equity
– Distribution
– Licensing
The Alliance StrategyThe Alliance Strategy
Make a list of strategic objectives and acceptable risks– This should be revisited throughout negotiations– Avoids tendency to “give away the farm” and lose sight of original objectives
Carefully define your business– Know your core competencies– Foresee competitive threats– Prioritize related businesses
The Alliance StrategyThe Alliance Strategy
Profile your Partner– Identify partners who have what you need
– Ask if you fill a niche or a missing link on BigCo’s strategic path
Classic case: missing piece for end-to-end solution
Riskier approach: anticipate need and build to it
– Consider how to approach them
The Alliance StrategyThe Alliance Strategy
How do you know needs of partners?– Industry resources – trade publications, (e.g. Red
Herring, The Industry Standard, Business 2.0), Partner Web Pages, analyst reports
– Speak with attorneys, accountants and other advisors
– If Partner is public, go to EDGAR http://www.sec.gov/edgar.shtml
– Personal contacts
The Alliance StrategyThe Alliance StrategyOther Factors:
– Perception Investors want verification without dominance Public – you are in BigCo’s pocket
– When to seek partnerships Typically better in early rounds, but BigCos want more mature companies Network early, then establish relationship when ready
– If Equity: Amount of investment Limit to 10 to 20% Consolidated reporting affects BigCo
Initial DiscussionsInitial Discussions
Non-Disclosure Agreements– ALWAYS ask partner to sign– Expect mutuality– Open the kimono slowly– Don’t expect complete protection
If violated, enforceability is very expensive and time consuming (proof: define trade secrets, how disclosed, and clearly confidential at time of disclosure)
Build trust first, then disclose information
Next Steps – the LOINext Steps – the LOI
Carefully outline details of agreements– Get professional assistance
Familiarity with other deals. Knows key issues and how to draft them Clear terms means less time on Definitive
Agreement.Not typically binding
– Except confidentiality, and perhaps, feesRisk of binding LOI is incomplete termsCareful: can be “binding,” even if not
– Conduct of parties and reliance
Definitive AgreementDefinitive Agreement
Dispute Resolution
Exit Strategy
Equity Issues
Distribution Issues
Licensing Issues
Dispute ResolutionDispute Resolution
Create incentives to work out issue
– Require management involvement, moving up chain-of-command
– For performance issues, tie to fees or scope e.g., exclusive to non-exclusive
– Use outside “neutrals” only after internal system fails to resolve dispute
Exit StrategyExit Strategy
Critical to SmallCo– Left with people, equipment and facilities can’t support
– Taint of abandonment – difficult to do other dealsCYA – Cover your assets
– Termination for “convenience” Notice period Cover salaries and/or other expenses Buy-out inventory
Exit StrategyExit Strategy
CYA – Agree up front on who can terminate, and under what circumstances (e.g., partial termination)
– Agree on ownership of IP on termination.
– Agree on continuing obligations. Use of TM on completed, but not shipped products. Confidentiality.
Exit StrategyExit Strategy
Damage control
– Mutual press release
– Mutual non-disparagement clause
– Equity – take away: Board observer rights Right of first refusal Information rights
Board Participation– Limit to observer status; exclude during “executive
sessions” and/or conflict situations
– Tie observer rights to % ownership (e.g., 25% of originally-purchased stock)
% Ownership– “Strategic” investment without jeopardizing opportunity to pursue other partners
– Maximum of 20%; otherwise, consolidated reporting
Equity Issues
• Board Participation– Limit to observer status; exclude during “executive
sessions” and/or conflict situations
– Tie observer rights to % ownership (e.g., 25% of originally-purchased stock)
• % Ownership– “strategic” investment without jeopardizing
opportunity to pursue other partners
– 10% for pooling and 20% for consolidated reporting
Equity IssuesEquity IssuesEquity Issues If partnership is terminated
– Ask for “call” right
– Risk BigCo seeking a “put” in exchange Contra: Put under note payable over time
Right of First Refusal– Generally not good idea
Taint if not exercised Discourages competitors
– Better: Notice and opportunity to bid
Distribution IssuesDistribution Issues
Audit Rights
– Trust, but verify
– Annual are typical
– Check for injunctive relief or other enforcement rights where distributing
– International partners are difficult to audit Use local CPAs
Licensing IssuesLicensing Issues
Too many issues to cover – definitely use a skilled attorney (see outline of issues)
Scope– Use, make, distribute, sublicense, reproduce
– Establish with expansion and growth in mind, as well as downside protection if partnership fails
– Field of Use
Licensing IssuesLicensing Issues
IP Ownership– Be clear as to who owns what: original technology, improvements, jointly developed IP
– Upgrades vs. Updates (e.g., 1.X, 2.X vs. X.1, X.2)
Territory: Geography and vertical marketsStrategy: Carve up IP, territory and other
rights to preserve as much as possible
Licensing IssuesLicensing Issues
Exclusivity– Generally, not a good idea – limits value
– Negotiating Ideas: Limited term Limit to territory or product line Require minimum sales or convert to non-exclusive
Licensing IssuesLicensing IssuesFees
– Typically royalties based on sales volume (units or % of sales)– Joint product development – let them pay– If Licensor:
Front-end fees Incremental fees for new products Include “sales” to affiliates and for demo units Request minimum volume commitment Tiered royalties – front end loaded