Negotiating Your First Big Tech Software License

One of the critical moments in the life of a start-up tech company can be landing its first big contract with a giant tech company.  That contract is likely to bring much-needed revenue to the start-up.  More importantly, that contract is a symbol — to the start-up company, its investors, and the market in general – that the start-up company is viable and real, and not just a dream in the eyes of its founders.

That first tech deal is also a daunting process.  You’ve spent weeks or months of knocking on doors at the big tech company and developing a rapport with the company’s business team.  You’ve worked out the outline of the deal.  Then BigTech Co.’s legal department sends you a 50+ page draft license agreement, with multiple exhibits.  You read through the draft.  Some portions contain impenetrable legalese.  Other portions seem to impose jaw-dropping obligations on your company.  Are they serious?  Can you negotiate?  Or should you just hold your nose and sign on the spot, because the deal is too important to let go?

Take a deep breath.  You can negotiate these agreements, as long as you negotiate smartly.  Below are five common-sense tips for going forward.

If BigTech Co. Truly Wants What You’re Offering, You Can Negotiate.

I am often asked by clients what negotiating edges are available to smaller companies.  The biggest negotiating leverage by far is having a product or service that BigTech Co. really wants or needs.  As a lawyer, I am not typically brought into negotiations until a draft license has been circulated, but I can usually tell from the first initial conversations how likely the negotiations are to lead to a finished deal.   This is not to say that every initial enthusiastic negotiating session ends up resulting in a deal – problems do arise from time to time that cannot be worked out.   But if BigTech Co. sees it has a real need for your product or services, they will want to work with you and will devote the resources necessary to make the deal happen.

Negotiate from BigTech Co.’s Form Agreement.

As with any new relationship, forming bonds of trust and comfort are essential.  BigTech Co. may not be familiar with your company, especially if you are a start-up or small, privately held company with no proven track record.  BigTech Co. has a number of concerns, including: (1) is your product/service truly compatible with BigTech Co.’s needs (i.e., will software actually work with BigTech Co.’s software or systems),  and (2) if so, how does BigTech Co. protect itself in the event you either stop supporting the software, or are acquired by another company.  BigTech Co.’s form agreement will contain provisions that will provide BigTech Co. sufficient comfort on these and other issues.  It is a form that needs no additional approvals to use, and legal would rather negotiate specific terms than work from a document with which they are not familiar.

Be Prompt and Responsive.

One of the most powerful things you can do to encourage the goodwill of BigTech Co. is to be responsive and prompt in responding to drafts.   Prompt responses show you are taking negotiations seriously, and signal to BigTech Co. that you will be prompt in responding to issues (for example, maintenance and support, issuing new versions and updates) that may come up after the deal is signed.  Also, your prompt responses will encourage BigTech Co. to move faster on its end.  Do not assume just because you are dealing with a big company, that the company will move slowly on negotiations. If BigTech Co. wants your product or services and sees you are working hard to make the deal happen, you can build momentum that will help bring the negotiation to a quick and successful conclusion.

Understand Priorities and Be Prepared to Compromise.

It is unrealistic to expect that you will get everything you want in your negotiations with BigTech Co.  You can, however, reasonably expect to negotiate points that are a top priority for you.  For instance, if you are a software company, perhaps revenue recognition is a top priority.  Or maybe it is limiting BigTech Co.’s access to source code.  Perhaps being able to publicize that you are working with BigTech Co. is important.  Make a list, and focus on those goals.  If they are narrow and clearly defined, BigTech Co. will be more likely to work with you.

Likewise, spend some time considering BigTech Co.’s priorities, and find ways to accommodate them to the extent possible.  BigTech Co. needs to be assured that your product will work as the company intends and that there will be no disruption to BigTech Co.’s ability to use the goods or services.  For example, if your software relies on open source code, BigTech Co. needs to know and may require you to replace the open source portions.  BigTech Co. may also require additional testing and acceptance procedures.  Likewise, BigTech Co. will want to be crystal clear on understanding how much they will be paying.

Finally, there are two areas where BigTech Co. and your company may find themselves at odds.  The first is the right to publicize the business relationship.  The fact that your company landed a contract with BigTech Co. is a great development for your marketing efforts.  BigTech Co., however, will likely not want to keep its business partners private to the extent not required by law in order to maintain an edge against competitors.  Second is the right to assign your company’s obligations as part of a merger of assets sale of your company.  At a minimum, BigTech Co. will insist that you cannot assign rights to competitors of BigTech Co.  Whether you can assign rights to non-competitors, and whether BigTech Co.’s permission will be required in that situation, may be subject to negotiation, but in the end, BigTech Co.’s concern about disruption to its license in the event of an assignment usually results in BigTech Co. being inflexible on this point.

Pay Attention to the Non-Business Portions of the License.

While the business and sales teams are laser-focused on the business points of the deal, it is a grave mistake not to focus on the purely “legal terms” of the contract, including indemnification, limitations and/or caps on liability, and insurance.  These provisions can impose potentially crushing financial risks on you as a small company, particularly if it turns out, for instance, that the software you are licensing to BigTech Co. infringes another’s software copyrights.  I like to describe these risks as “a millimeter wide and a mile deep.”  The risk of liability may be low, but if the risk arises, the amount of financial exposure can be huge.

Conclusion

In conclusion, and with all due apologies to the film Casablanca, your first contract with BigTech Co., if properly negotiated and executed, is the beginning of a beautiful friendship.  Play the long game.  Nothing begets more business opportunities than a satisfied customer.  Earn their trust.  Show them you can deliver what they want.   If you can start that process as early as the negotiations on the first contract, you are already ahead of the game.