October 25, 2014

The Terms of Business: How to Negotiate a Partnership Agreement

Finding a partner who wants to play ball with you seems like a difficult task, but when you take a look at the process, it’s negotiating the terms of a partnership agreement that requires true business savvy. Like Ben Hogan’s legendary golf swing, follow-through is the key, consistent element to make sure the terms of partnership are mutually beneficial.

negotiation

Do yourself a favor – don’t leave it all up to the lawyers. Partnerships are about a shared vision, so make sure business comes first and foremost.

1. Business First

The key to any good business relationship is understanding individual and shared goals. We all want to make money, but when you share the cost of the service provided to customers, there are expectations and split revenues. Leverage what your company can do for their business goals and vice versa.

Before any lawyers get involved make sure you talk about business goals openly. How will revenue be shared? What does the end product look like? Does one company have to significantly customize a service they already provide? Is distribution involved? If the partnership falls through, will one company be compensated for the work its already delivered?

Answering these questions on a business level first will help get the partnership off the ground before legal teams can weigh down the agreement. Don’t get me wrong, lawyers are great, but they focus on the details, which can rabbit hole partnerships quickly. Getting the business goals in writing can help make sure you enter the legal phase of creating a contract with a solid, mutually understood business case.

Since getting a large company to agree to anything in “writing” can be hard, having a summary written in an email is often a good solution – and something that you can get them to agree to prior to getting the lawyers involved.

2. Define Responsibilities

Within any partnership, there are distribution commitments. This might mean physically delivering a product, or it could be distributing a message. Whether on the content or distribution end of a partnership, be very clear about the work that is expected upon delivery and your company’s role in getting it there. Define roles precisely so they have no messy gray area. Make sure the exact product is explained and the infrastructure to support and update that product is part of this definition.

It’s important to be thorough at this stage, so be sure to cover breach of contract and termination agreements. Basically, if doom and gloom takes over, you want to ensure you have leverage and wiggle room. Make sure your company has enough pull written into the contract to enforce a breach of contract, should it happen. Also, define clean terms (and even metrics) that give your company the opportunity leave the partnership without a devastating penalty if it doesn’t work out.

3. Hire Experienced Council

When the drafts of the contracts are going to be exchanged you’ll need an experienced lawyer. Don’t make the mistake of trying to draft a complicated, legally binding agreement between a big company and yours without counsel. Big companies have a sophisticated in-house contracting attorney; you need one too.

I’ve spoken with entrepreneurs who thought they were saving money by not using an attorney on their first partnership contracts, only to later realize they gave away a lot of their intellectual property to the big company!

When considering who to hire, let experience be your guide. Essentially, this means that the larger, the more complex an agreement is, the more experience you will need from your counsel. I’ve had great luck using a quick online search to find startups who have partnerships with the company I’m negotiating with – and then using LinkedIn to ping the startups’ CEOs and ask for recommendations on the counsel they used.

One area where you’ll need your counsel’s advice is negotiating the “protective provisions.” These are designed to protect the larger partner, in the case that the smaller gets sold. Make sure the large partner does not have a chance to either block or disrupt the sale of your company – as unlikely of a move as this might be. Also, make sure these provisions cannot slow or block funding, particularly if your company is venture backed.

Many times the larger company will ask for more than it should. Your lawyer’s job and reputation is based on negotiating for you, knocking the larger partner back in line with an agreement that is more standard.

Your lawyer will also help you out with intellectual property. Sometimes in partnerships, something called IP taint happens – where one partner lays claim to own the IP of the other. Make sure that your company retains full ownership of any IP, even if a customization is involved in the process. Make sure these bases are covered before your partnership officially launches.

Once the hardball is out of the way, it’s time to be a good partner – which brings me back to Ben Hogan’s golf swing. To become known as the best striker in the game, Hogan had his tips, tricks and secrets, but he also had his very obvious follow-through, which basically comes down to routine and effort.

To be a great partner, meet your responsibilities consistently and don’t be afraid to append your agreement if it requires some tweaking.

Negotiation Photo via Shutterstock

5 Comments ▼

Prasad Thammineni


Prasad Thammineni Prasad Thammineni is a serial entrepreneur and CEO of OfficeDrop, a scanner software and document scanning service, cloud filing system, that helps small in paper intensive industries go paperless. OfficeDrop gives companies easy ways digitize paper, organize files and securely collaborate with business documents.

5 Reactions

  1. Excellent advice. It’s if you’re doing business online, or maybe buying or selling a web based business, it’s essential to use a lawyer who is familiar with the internet, intellectual property and all that entails. I have seen so many deals get bogged down because a lawyer just does not ‘get’ the web, ecommerce or online business. You wouldn’t want a Kia trained mechanic working on your Lexus – get a lawyer who has the specialized knowledge you need to protect your best interests but most of all, look for a lawyer who is looking to make the deal happen for you too.

  2. These are very good tips that appear to be directed towards helping a small business partner with a much larger business. However, if two or more people are seeking to create a partnership, then one of his tips becomes paramount, and there are other issues that will need to be fulfilled to generate a successful partnership. His tip to: “Define roles precisely so they have no messy gray area,” is even more vital for partnerships with people, and deciding and clearly defining who has control at the outset is also critical.

  3. 1) Business First is key. If you both want to work together then you can talk frankly about all the steps. However you both must be in complete understanding and don’t assume anything.

  4. Partnerships are tricky. As a famous man once said “Choose your biz partners twice as carefully as you choose a spouse, you spouse can only take half of what you have.”

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