So your startup has finally landed a deal with a huge customer that could potentially put your company on the map. Now how do you negotiate this deal so that your company (not just theirs) gets the most out of this relationship (and avoids a situation like this one: In a Partnership of Unequals, a Startup Suffers?
1) Term Sheet, Term Sheet, Term Sheet
Did I mention the term sheet? In large companies, the business guys you’re talking to (who are very excited about you and what you’re doing) are far removed from the legal folks who create and negotiate the final contract (which you will have to live by). In order to make sure your contract matches your business goals, be sure that any and all important deal terms and conditions are in your term sheet … otherwise they’re not going to end up into your contract.
Right about now you’re thinking, “Of course!” But here is how startups end up in trouble. Imagine the term sheet includes a 99.999% uptime, although you were upfront with the business guys that you cannot provide more than 99% uptime because that’s what your current cloud provider gives you. The business guy says, “Oh, it’s all right. We don’t expect five nines, it’s just the standard language in all of our deals. Don’t worry about it.” Fast forward to a year from now – and, guess what, that guy has moved to another group, and suddenly you find out that the company is in breach of contract.
Your startup company will never have more leverage in terms of making changes to an initial agreement than you do at the beginning of a relationship. So make sure your important deal points are in your term sheet. Unfortunately you’re not going to be able to add anything into the contract that wasn’t in the term sheet. Large companies know that startups are hungry to get deals closed and use this to great effect; they will make last minute changes to the deal, but you won’t be able to.
2) The Essential “Termination for Convenience” Clause (ie: Your No-Fault Divorce)
Right now it might not seem like you would ever want to terminate this relationship, but believe me when I tell you that there are plenty of reasons you might want to. For example, this company’s competitors may want to do business with you in the future (and pay you more money), or you may want to take the product roadmap in a different direction. Maybe you realise that the amount of time it takes to service this customer is preventing you from pursuing other opportunities or is distracting you from your primary product vision roadmap, or you no longer want to continue the IP rights you agreed to earlier.
Part of being a successful startup is being nimble and opportunistic, and if you have no way to leave this customer if you want to, you could be in trouble (ie: think ball-and-chain). Do include a clause that gives your company an out if you want it. Of course the customer may want it to go both ways and that’s fine. Because, in practicality, they can just walk away from you whenever they want, don’t you agree?
3) Educate your Attorney on the Background of the Deal – an email with “Please Review” Falls Short
Unless you give some context, your attorney is going to err on the side of caution and come up with a laundry list of issues, and that’s not going to get you to the closing table. Instead explain to your attorney what is important in this deal (and what isn’t), as well as what your concerns are. You should have a conversation with your attorney before he or she spends your money talking to the attorney(s) on the other side. Make sure your attorney understands what you’re trying to achieve with this customer, so you can receive useful feedback on the contract, rather than just a red-lined version created in a vacuum.
4) Understand the Pace of a Larger organisation
As a startup, you are all about agility and speed. Larger companies are all about process. Remember that there are a lot of people who need to vet your product, understand your deal terms, and buy off on the relationship. Your large customer will likely want to draft the documentation, which will seem to move at a glacial pace compared to how fast your attorney works.
Set your and your company’s expectations accordingly, since there’s very little you can do to affect their timeline.
5) Keep your Perspective: One Customer is Not Your Entire Market
While deals with large marquee customers can be helpful, they rarely make or break a startup. As you think about really successful companies, including your large marquee customer, the early deals they did with large companies were certainly helpful to their business, but they weren’t their important inflection points.
Your company’s success is really dependent on your ability to apply repeatable business processes to a lot of customers, as opposed to your ability to service a single (and sometimes very demanding) customer — think of the difference as “outsourced labour” versus “stand-alone business.” Creating the right product for a large market is how your business is going to take off and enable you to scale it.
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