Navigating Exclusive Relationships with Strategic Partners
It finally happened. You’ve been trying to get the attention of a huge prospective strategic partner, and finally they gave you a chance to explain the value you can bring them. Not only do they now understand the value you can offer them, but after a few subsequent meetings, they mention requiring exclusivity. You’ve heard from your advisers and read in books to avoid exclusive relationships, if at all possible. But you don’t want to bring the positive momentum to a grinding halt by immediately saying no. Where do you go from here?
Is Exclusivity Good or Bad?
Getting a request for an exclusive relationship can be more of a blessing than a curse, as long as you play your cards right. In fact, your strategic partner might have just shown you their cards. They possibly see so much value from the joint relationship that they don’t want their competitors to enjoy the same benefit.
On the other hand, it is also possible they are playing a small game with you and are only asking for exclusivity because they’re really big and you’re really small. They predict you’ll do whatever they request to secure a partnership with them.
Start with a Litmus Test for Seriousness
Before you can derive the best negotiating strategy, you must determine how seriously interested your prospective partner is. How much is this partner willing to put into the relationship? Find out.
Will they allow the partnership to be announced to the public via website, press release, social media? If so, will they participate in this announcement, or will they simply allow you to do it?
Will they engage in co-marketing activities to help generate awareness and market demand for whatever it is the two of you are doing together? Who would be responsible for this? Request a meeting with them. What types of activities would they be willing to undertake? How much would they budget for the activities? A high-level estimate is sufficient for this purpose.
If a joint solution or technical integration project is at the heart of the partnership, what sort of effort will they put in? How many resources and of what type would they put on the project? Who is providing the project management resources? It could be really helpful if your big partner devoted some program and project management resources because they have badass ninjas who know how to do this.
Will anyone on their side be compensated (i.e., bonus) based on the success of your joint program? When there’s a program or partnership manager on the other side with money riding on the success of the program, they have an interest in its success.
If their sales team has any role in selling what you’re building together, will they give you access to them—webinars, presentations at regional sales kickoff meetings, a blurb in the next sales newsletter, etc.?
The types of questions you ask will vary depending on the type of solution you offer and the type of partnership into which you would be entering. But what should be clear is that you deserve to know how much energy your prospective partner is willing to devote to ensuring success if you agree to exclusivity.
It is mandatory to at least explore these issues before moving forward in the negotiation. It is unlikely that you’ll get them to agree to everything mentioned above, but even one or two of them can be significant to a startup.
With this knowledge in hand, try to get your prospective partner to commit to some of the things on your wish list before they ever utter the word “exclusivity.” Your negotiating position will be considerably stronger.
If you determine your partner is committed to the relationship and you’re willing to entertain an exclusive one, you should still try to protect yourself. After all, price and terms are negotiated hand-in-hand. Consider the following ideas for shaping the exclusivity.
1. Make the exclusivity parameters based on business-specific results or important milestone accomplishments. You can’t afford to give up something as important as exclusivity if the end result of the partnership isn’t equally significant. If the targets for extending exclusivity are annual, they probably should increase each year. Maybe you only give such targets for the first two years, which means allowing exclusivity to extend into a third year if the second-year target is met.
2. Limit the exclusivity to a specific list of competitive companies, rather than everyone. The fewer companies, the better. Typically, big companies often care most about a small number of key competitors.
3. Put a time limit on the exclusivity. You can always extend it if things are going well. This is intended to be a courtesy to give that first partner a “running start” against their competitors.
4. Limit the exclusivity to a specific geography. Even big companies are usually dominant in a particular country or region, which means their influence isn’t as great in other geographic areas.
5. Limit the exclusivity to a specific application use. This works well if your solution applies to multiple uses and your prospective partner primarily cares about just one of
them. It can be helpful if there are limitations implemented in your product to help enforce this use restriction. If not, you’ll want good legal protection from the way the agreement is written.
6. Ask for exclusivity in the opposite direction: Your partner can’t strike similar deals with your chief competitor(s).
You should make an attempt to combine several of these protection mechanisms, rather than just select the best one.
The initial shaping of the exclusivity might start between you and your business counterpart, but once a legal agreement enters the picture, it is important to have an experienced commercial contracts attorney at your side. The field of commercial contracts is a subspecialty within the greater field of law.
Purposefully Tying Your Hands
If you anticipate that one of the leaders in your industry might want to partner with you and is also likely to ask for exclusivity, you could make an attempt to tie your hands ahead of time. Do this by securing partnerships with other companies in the same industry. These can be small or mid-sized companies, and you don’t need a lot of them.
Imagine being able to tell the dominant player in the industry, “Sorry, we can’t do an exclusive deal because we already have business relationships with ABC and XYZ.” If ABC and XYZ are number five and number eight on the market share list respectively, they won’t be a huge threat to the dominant player. Yet they are big enough for you to be able to say that neither you, your investors, nor your board of directors would be supportive of terminating those relationships. Doing so would require some serious performance commitments by the dominant player.
Even if you are able to negotiate some of the items in the protection list above, agreeing to exclusivity can also come with more favorable commercial terms for you. Most commonly, this means a higher price to you. Remember, when you grant exclusivity, you are giving up opportunity, and because of that, you should be compensated.
Another tool to consider is convincing your partner to prepay for a certain amount of your product. For example, if the exclusivity is tied to a $350,000-milestone target for the first year, see if they will prepay that amount and then draw down against the credit balance over the first year. It will feel like nondilutive funding to you and will further demonstrate your partner’s commitment to the relationship.
A third commercial term to consider involves getting your partner to cover unique costs you will incur because of the partnership. This often relates to engineering efforts for special features and capabilities you must build that you otherwise wouldn’t, or perhaps wouldn’t pursue for a year or more. It’s referred to as nonrecurring engineering (NRE).
Protecting Your Future Acquisition
Offering broad exclusivity could present an issue to a future acquirer, specifically if they compete with your new strategic partner. Rather than kill some of your future acquisition alternatives, negotiate an option to dissolve the exclusivity.
Your partner might only get to enjoy continued exclusivity for a certain amount of time following an acquisition. Or perhaps your acquirer will need to buy out the exclusivity for a certain dollar amount. A commercial contracts attorney can guide you on this.
The Benefits of Starting with a Letter of Intent
Some founders go straight from a verbal agreement to lawyers papering things up for signature. That approach leaves missed opportunities and adds risk of misunderstandings. Remember that attorneys charge by the hour. So, you want them to be as focused and efficient as possible.
A letter of intent (LOI) is not legally binding and is created by the business counterparts before the lawyers get involved. It outlines all the key attributes of the relationship and could include mention of anything you’re able to get your business counterpart to agree on in relation to exclusivity. The existence of an LOI doesn’t tie the lawyers’ hands, but it at least gives you a leg to stand on when negotiating the legal details with them.
If your partner isn’t willing to leverage their size and scale to the benefit of the relationship and if they aren’t willing to let you have any protections, you might want to run away from an exclusivity request. That doesn’t mean running away from the partnership as a whole. It just means not agreeing to exclusivity. If they further say they will only enter a partnership if there’s exclusivity, you might need to call their bluff and diplomatically walk away.