Situation: A company has a long relationship with its initial client, which provides the company with key intellectual property. This client handles all marketing, sales and distribution for the company’s principal products, but only accesses 20% of the market. The client is concerned about having its image associated with expansion into markets that the company wishes to pursue. How do you structure a deal that enables you to access the broader market without offending the client?
Advice from the CEOs:
The issues for the client are public relations and liability. They don’t want to be associated with certain segments of the larger market as it may compromise customer perceptions of their core business. Further, they want to be indemnified should they face damages from your forays into the larger market. It is important that you address their concerns.
Sit down with the key client. Pose a problem that will generate the solution that you seek and let them solve it on their own. Then seek an agreement with the client on carve-outs within the larger target market with which they are agreeable.
Build an external company with different branding to approach the larger market, without jeopardizing the relationship with the key client. If ownership and management of the two entities are the same be aware that this is a thin veil.
You may increase opportunity for success if you build your own successor product – one tailored for the larger market – while your key client is paying you for current business. Once the product is built, ask the client whether they want to be involved and if so, on what terms. This enhances your bargaining position and reduces your downside risk.
Expand your offering, where current products are part of a larger offering. You have two alternatives: go there anyway, or go there with the client. If the client decides that they don’t like what’s happening and opens the market this could be ideal for you.
Situation: The Company is interested in acquiring either the intellectual property (IP) of another company or the company itself. The target is a minor division of a larger parent company. The CEO contacted the parent and confirmed their interest in a deal. What are the key factors to negotiating an IP acquisition?
Advice from the CEOs:
You need to assure your rights to both current IP and future enhancements. This applies whether you or the parent is the final holder of the IP.
Look for clear language as to what constitutes base IP, derivative IP and extensions of the IP. You want to preserve your interest in future derivatives and extensions that you create.
There is a material difference between your position and the parent’s.
If the parent retains the IP, they also gain certain rights to IP extensions based on the current IP. If you own the IP, their potential rights to future IP are lost.
If the parent feels that the IP has strategic value – whether or not they are currently taking advantage of it – this will be one of the more difficult aspects to the negotiation.
What options are there besides acquiring the company?
The parent can grant a fully paid license to the technology, with access to the people and assets, waiving residual rights to future IP extensions, and no restrictions on transfer.
Another option could be a one-time royalty fee that is a perpetual license.
Within your due diligence, try to get a sense of the parent’s motivations and concerns for entertaining your interest in the acquisition. This will help you to frame a deal that works for both parties.
If the parent has been an active licensor or seller of IP, look for lawyers who know the company. Try to secure one of these as counsel for your negotiation.
From a liability standpoint, it is better to buy or license the IP and technology than the company. Liability travels with the company. Part of your negotiation will be who inherits any carry-over liability.
Situation: The Company is moving from a specialty solution to a complete solution. They have identified a partner with intellectual property (IP) that will help them fulfill this vision. How should the CEO approach this company to access their IP?
Advice from the CEOs:
There are two aspects of any deal: technical feasibility that will produce value; and the emotional needs of the principals.
The technical aspects are the most straightforward and easiest to value.
Frequently, a favorable deal hinges not on technical feasibility, but on the desires of the principals and their ability to trust one-another.
If you are convinced of the value, you must convince the other party that their best option is to work with you. Then you can negotiate the specifics.
Sell your vision: the technologies together are much more valuable than they are alone: 1 + 1 = 5!
If control of the technology is an issue, you must negotiate an arrangement where they are comfortable with your control.
Do you and the other party have a trusted advisor in common or is there an individual who is respected by both of you? This person can help communicate your good intentions.
If your best efforts do not produce an appealing arrangement, your fall-back position may be a partnership. If the partnership is backed by modest investment with options for future purchase, this may be another way to for you to eventually gain control of the technology.