STRATEGIC PARTNERSHIPS Session III: April 7, 2001

White & Lee’s White & Lee’s Soup to Nuts 2001Soup to Nuts 2001

Road MapRoad 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– Virtual Alliances – JV without co-locating– Joint Development Agreements – R&D– Distribution and Marketing Agreements– Mergers & Acquisitions

Our Focus: – Licensing/Distribution/Equity– BigCo/SmallCo

Why Enter a Strategic Why Enter a Strategic Partnership?Partnership?

Big Co Access to Technology

and Expertise Competitive Advantage Decrease “Time to

Market” Access to Innovation Prevent Competition

(cheaper acquisition)

Small Co Funding Reputation Distribution Channel Access Market Validation Critical Mass BigCo Plans

– )

Trends in Strategic PartnershipsTrends in Strategic Partnerships Partners key to securing financing

– Reference customers– Partner strategy in business plan

Mutuality requirements (e.g., Sprint)– Both parties must produce and promote to keep

partnership status 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)

BigCo partners judged by quality of their strategic partners

Corporate investment funds continue to be active – 20 to 30% of equity investment ’00 and ‘01– Compaq, HP, Oracle, Intel, Nokia, etc.

Co-petitors– e.g., Palm and Handspring

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

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 Strategy

Other Factors:- Perception

Investors want verification without dominance Public – you are in BigCo’s pocket

- When to seek partnerships Typically better in early rounds

- If Equity: Amount of investment Limit to 10 to 20% Consolidated reporting affects BigCo

The Alliance StrategyThe Alliance Strategy

How to Approach Perspective Partners- Fearlessly

BigCo’s actively seeking partners – all have biz dev officers

Introductions not necessary – like a financing – use email!

People WANT to talk – partnering is the new currency – use it

- Remember, your goal is to get an audience

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 (Pennzoil vs. Texaco)

Definitive AgreementDefinitive Agreement

Dispute Resolution

Exit Strategy

Equity Issues

Distribution Issues

Licensing Issues

Other IP Issues

Dispute ResolutionDispute Resolution

Create incentives to work out issues- 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 deals

CYA – 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

– 10% for pooling and 20% for 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

Equity 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

EU – careful- Exhaustion Doctrine – can’t carve up Europe

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 Issues

Fees- 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

IP IssuesIP Issues

Privacy and Personal Information- Possible liability for partner’s disclosure

- Public relations issues

- Under increasing regulation by government

- International complications – big issue in EU

IP IssuesIP Issues

Ownership- Know who owns jointly developed IP

Ownership can be deceptive- Patents – “inventors”, must be assigned to

company under employment agreement- Assign soon – else separate consideration

required No right exists in patent until grant

- Contract for ownership if partnership breaks up before grant

IP IssuesIP Issues

– Trademark – Careful not to lose itCan’t be split up

– Create separate entity to hold name, license useCan’t assign without goodwill and other

valuable components – “Naked” failsMust register outside USDomain name is not TM

IP IssuesIP Issues

Copyright- Copyright: make, use, distribute, publicly

display/perform work AND derivatives

- Careful with “derivatives” Joint software development – get license for work

AND derivatives Otherwise – derivatives limited by scope of license

IP IssuesIP Issues

Bankruptcy – 365(n)- Licensee can continue or terminate

- Must abide by terms of license

- Right to source code for continued use

- Carve-out for non-solicitation to get key employees from licensor