Oh, but you scoff. I have negotiated deals with numerous high-profile BDCs that included significant Pilot fees. In one instance, we were paid $50,000 and the Pilot was never implemented due to the fact that the BDC was acquired after the Pilot Agreement was finalized.

Do Not Cut a Multi-year Agreement

In the life of your venture, a year is an eternity. You cannot afford to limit your future prospects by entering into a multi-year deal. BDCs generally prefer multi-year agreements because long-term deals reduce the BDC’s uncertainty and thus lower its risk. Conversely, long-term deals reduce your flexibility and potentially increase your opportunity costs.

Some BDCs may attempt to force you to agree to an evergreen termination provision. Such covenants require written notice of termination within a specified period of time prior to the end of the term in order for a party to terminate the agreement. If such written notice is not made, the agreement is automatically extended, usually for an additional year.

Never agree to such a provision. BDCs can afford to hire large staffs to adequately track all of the evergreen provisions in their contracts. You will not have that luxury. The chances of your company missing a termination deadline are high, which could result in your venture being locked into a disadvantageous deal for an additional year.

Rather than agreeing to an evergreen provision, suggest that both parties mutually agree upon additional one-year increments in writing, at the end of each term. If the other party insists on an evergreen term, negotiate a reasonably conscribed no cause termination clause. This will significantly reduce the risk associated with inadvertently rolling into an additional year, as you can simply exercise the “out” clause and terminate the agreement.

Do Not Lock Down the Escape Hatches

Agreements are obviously intended to bind both parties. However, avoid writing contracts that may contractually hold the other party to an economically infeasible deal. If the relationship is not advantageous for the other party, there are many legal ways a BDC can undercut and effectively terminate the deal.

As noted in Roping in the Legal Eagles, successful entrepreneurs are generally not litigious. Even if you are a mean cuss, your startup will likely not have the financial resources to hold a BDC to disadvantageous deal terms. Thus, you gain nothing by crafting an agreement that contractually forces the other party to work with you, irrespective of he financial outcome of the relationship.

Ideally, either party should be free to terminate the agreement, after a reasonable notice period. By allowing either party to walk away, you force both parties to continually strive to maintain a mutually beneficial relationship.

One exception to this easy-out philosophy is with respect to recouping any substantial investments you make on behalf of the partnership. Irrespective of the easy-out clause, ensure that your costs are reimbursed in the event of early termination by the BDC. Such reimbursement might be in the form of a walk-away fee to be paid by the party who terminates the relationship. If the walk-away fee is unreasonably large, it is possible that the BDC will breach the agreement and refuse to pay the fee. As such, keep any such fees reasonable.

Do Not Give up Branding

BDCs will often ask you to “private label” or “white label” your technology. This generally involves the BDC selling your technology in a form that allows them to market it under their brand. Do not allow your venture’s technology to be buried in the bowels of another company’s product, without obtaining proper recognition. For instance, in its early days, Google syndicated its search capabilities to third-party sites, including Yahoo and AOL. In each instance, it was noted that the search was “Powered By Google” – even though most people at the time were not aware of Google’s brand. This brand exposure helped Google establish “www.google.com” as a leading destination site.

In some cases, the credibility generated by your association with a BDC is the most valuable aspect of the relationship. This is especially true in instances when the BDC grinds you down on the financial terms. In such instances, the level of public relations autonomy you negotiate can dictate the ultimate value derived from the relationship.

To maximize the value of such financially neutral partnerships, make it clear at the outset that you expect to have reasonable autonomy with regard to your press releases. If you wait too long to communicate the importance of obtaining public validation, you may negotiate a deal with marginally acceptable financial terms and be unable to leverage your association with the BDC.

I have been successful in obtaining some level of public relations exposure in the large majority of my BDC partnerships. However, despite the limited risk poised by a unilateral press release, some BDCs will not budge on this issue. If you find yourself dealing with such an organization, omit all references to press releases in the agreement. As every entrepreneur knows, it is easier to beg for forgiveness than it is to ask permission.

Do Not Approve Unilateral Provisions

What is good for the goose is good for the gander. Often, a BDC will attempt to force your startup to accept language that is not quid pro quo. This is almost never a reasonable request. For instance, the BDC may ask you to indemnify everyone under the sun on their side (e.g., employees, officers, shareholders, etc.) for every eventuality, while they will refuse to offer you indemnification for anything other than fraud or gross negligence. Such a concession essentially offers you nothing, as common law protects you against such illegal acts.

If there is not a valid business reason for granting one-sided terms, reject the language on the grounds that it is patently unfair. It is healthy for both parties to maintain symmetry in as many of the business terms as possible, as it reduces potential confusion and establishes a collaborative tone to the relationship. As noted previously, if you allow the BDC to prepare the initial draft of the agreement, it will likely be fraught with one-sided language that you will be forced to negotiate and thus needlessly spend your negotiation capital on just to get you back to a reasonable starting position. If the BDC demands the inclusion of one-sided terms, either reject them out-of-hand or accept them in bi-lateral form. What is goose is good for the gander. If you accept unilateral terms, you risk becoming a Corporate Beyotch.

Do Not Accept Unlimited Liability

Another common unilateral provision is one in which a BDC proposes to limit the scope of its damages with a de facto cap while leaving your liability open-ended. This request arises from the BDC’s desire to mitigate the risk that you will request compensation associated with lost profits if the deal falls apart. This a valid concern because the courts often side with the smaller company when damages result from a failed relationship. Thus, most BDCs attempt to explicitly preclude any such open-ended damages.

Your goal is to maximize your upside – their goal is to minimize their downside. With this knowledge, you can craft a deal that allows both parties to attain their respective goals. You can do this in the Indemnification Section of the agreement by placing a de facto cap on the amount of expenses paid by both parties in the event damages arise.

Trade this concession for a reasonable cap related to your damages. Do not accept language that limits damages to “total fees paid by the BDC during the term of the agreement.” If a deal unravels before substantial fees are generated, you may end up in the disadvantageous position of being unable to recoup your opportunity costs.

As such, opt for a provision that specifies a cap equal to, “(i) the greater of $__________ (a de facto minimum amount which covers your costs) or, (ii) the total fees paid by the BDC.”

Do Not Forgo Change of Control or Agree to a ROFO or FOFR

Your venture’s future is less certain that the future of the typical BDC, especially with respect to the timing and nature of your venture’s eventual exit. As such, craft your agreements to ensure your venture has maximum flexibility with regard to the scope and nature of future partnership and acquisition activities.

One tactic is to include a Change of Control provision into all your agreements. Although the text can vary, the spirit of such provisions is the same – either party can terminate the agreement without recourse (i.e., without being liable for damages or other ongoing costs) in the event that a majority of their assets are purchased, transferred or otherwise merged with a third party. Happily grant this provision on a bilateral basis, as the risk of the BDC being acquired is usually relatively low and seldom would such an acquisition result in an adverse impact to a startup.

Neither party should be forced to terminate the agreement upon a change of control. Change of Control provisions will enhance your company’s attractiveness to a potential suitor. Thus, this provision gives you, and the BDC which may eventually acquire you, the option to maintain those agreements which remain advantageous to you post-exit and terminate those which might be problematic (e.g., a relationship with one of the BDC’s competitors, markets the BDC does not want to pursue, etc.).

Another way to maintain flexibility with respect to your exit is to reject Right of First Refusal (ROFR) and Right of First Offer (ROFO) provisions. Such provisions require you to notify the BDC whenever you are approached by a potential acquirer. BDCs cherish such provisions because they enable the BDC to dramatically influence the nature, scope and timing of your exit. Such terms are most commonly tied to corporate investments, as opposed to those made by institutional investors. Rather than trying to water down a ROFR and ROFO, your response should be, “No thank you,” whenever these terms are proposed.

Do Not Serve up World-wide Distribution

Value-Added Resellers (VARs) will often seek to obtain the largest geographic territories possible. However, only grant distribution in areas in which the VARs have a proven footprint. As they expand their business, you can expand the scope of their territory.

In the early stages of your venture, it may be difficult to obtain tier-one distribution partners. Thus, you may initially be forced to establish relationships with smaller VARs with limited, regional coverage. This will prove problematic as your business grows, because it will be difficult later to sign up larger VARs, unless you are able to offer them uncontested, broad geographic coverage. As such, always reserve the right to terminate regional distribution agreements in the event that you subsequently enter into a pan-country distribution agreement.

Do Not Relinquish Joint Intellectual Property Rights

Intellectual Property (IP) provisions should ensure that both parties maintain the IP rights that they respectively own at the outset of the relationship. This is generally a straightforward and uncontested provision.

A more complicated negotiating point involves IP that is created in the course of the parties working together. Any such “joint IP” should be equally and severely co-owned and each party should retain the rights to utilize the joint IP in any fashion they deem appropriate. The BDC will generally agree to such a provision, even though there is typically little they can do with such incremental inventions in isolation, as they will likely be based upon your underlying IP.

Guard against being precluded from marketing and otherwise utilizing novel, joint IP developed during the course of carrying out the agreement. Craft terms which ensure you will not be obligated to the BDC with respect to the terms by which it can profit from jointly developed technology.

Once your development team begins working with the BDC, do not allow the BDC to unilaterally create any meaningful IP without your team’s involvement. If the BDC iterates on your technology and devises novel IP without your involvement, you risk your IP becoming subsumed by the BDC’s technological advances. Such unilateral development should be explicitly precluded in the agreement if you anticipate that this is a material risk.

Do Not Execute an Ambiguous Statement of Work

The Statement of Work defines the specific actions and responsibilities to be carried out by each party in the fulfillment of their responsibilities covered by the agreement. It should be codified as part of the definitive agreement in the form of an Exhibit.

In most cases, your tech team (not the BDC’s) will do most of the heavy lifting and will bring the majority of the technological value to the relationship. In order to optimally manage your limited resources, it is in your best interest to clearly specify the work to be performed, who will perform it and when each significant task is scheduled to be completed.

The Statement of Work should include a Non-Recurring Engineering (NRE) budget that estimates the resources required to complete each major milestone. If the NRE budget is exceeded and the reason for such overages are due to the actions or inactions of the BDC, the agreement should stipulate the scope of your compensation.

To ensure that the BDC judiciously uses your resources, assign a relatively high cost to your engineering personnel’s time. By establishing an NRE budget upfront, the BDC will know how many “free” NRE hours are included per the agreement and what it will cost them when they invariably ask you to expand the scope of the project.

You will generally be pleased to expand the scope of BDC partnerships. However, contractually ensure that any such expansions are at your sole discretion. If you allow the BDC to unilaterally expand the scope of your involvement, you have effectively abdicated control over your technological resources. A detailed NRE budget will help you avoid becoming the BDC’s adjunct engineering team.

If you do not assign a price tag to your engineering team’s time, an aggressive BDC could quickly consume all of your technical resources, precluding you from executing other technical initiatives. You cannot afford to consolidate your development efforts on a single relationship, no matter how lucrative it may appear at the outset. The risk and associated opportunity cost of a single relationship failing is too high and could potentially lead to the demise of your venture.

Do Not Agree to Bundling Without a Minimum Price

Bundling deals can be attractive, as your product and/or technology can potentially reach a large audience by piggybacking on the reputation and market share of the BDC’s established brand. To ensure that such bundling is financially worthwhile, negotiate a de facto minimum per unit price.

A BDC will often encourage you to accept a percentage of the price they charge the end-user for your technology. If you do not negotiate a minimum price, the BDC may prove that they are not so dumb after all and give your product away as a loss-leader to induce sales of their product(s). Without a minimum price, you could be paid a percentage of nothing, or next to nothing, depending on the price the BDC charges its end-users. Since you cannot control your partner’s end-user pricing, you must specify the minimum amount that you will be paid (per unit, per month, whatever is most appropriate to the relationship).

Do Not Grant Most Favored Nations Status

Many BDCs relish this onerous provision. A Most-Favored Nations (MFN) clause essentially states that, “Mr. Little Company can never do a similar deal with anyone, under any circumstances that is better than the deal cut with the BDC.” Clearly, this is the sort of provision that a savvy entrepreneur will never fall prey.

The path of your venture is far too unpredictable to anticipate the nature and scope of every future opportunity. As such, your goal when negotiating a MFN clause is to maximize your flexibility and keep as many future options open as possible.

The MFN provision is a slippery slope and often a tripwire to a lawsuit. Do everything you can to avoid granting it. I have crafted hundreds of agreements and I have only agreed to this provision, in a highly-watered down form, in a handful of instances. Although it may require tenacity, you can generally negotiate this provision away, even if the BDC tells you, “We always get this provision.” My response to such BDC nonsense is, “Great. This sounds like an interesting challenge for us to devise a reasonable alternative because I love being different.”

One way to denude this provision is to wrap caveats around the term “similar” and to liberally use the word “substantially.” For instance, you might propose something to the effect of, “Startup X agrees to not enter into an agreement with substantially lower pricing based upon substantially similar volume commitments.”

Do Not Issue Unmitigated Exclusivity

Unmitigated exclusivity can be the death knell of a small company. It is often alluring, as it is generally granted in exchange for upfront cash and/or the promise of a significant, future relationship. However, if given the chance, the BDC may put your technology on the shelf, either as a competitive reaction to remove your technology from the market or, more commonly, because they become distracted and lose focus once they realize your technology cannot be deployed by their competitors.

Contractual Antidotes

Batman thwarted Poison Ivy’s deadly kiss by coating his lips with an antidote before taking her up on her seductive offer of romance. By effectively structuring your agreements, you too can enjoy a relationship with a BDC without suffering the potential deadly consequences.

"Uncle Saul" is a serial entrepreneur (who wishes to remain anonymous) who has led one IPO, was window-dressing in another and has executed several M&A transactions, all of which collectively generated over $450 million in shareholder value. Saul is a CPA and a Wharton MBA who never qualified for the PGA but likes to watch the NBA. Uncle Saul is also a songwriter who managed a successful rock band and plays an awesome iPod. He also teaches would-be entrepreneurs at a major California university. You can read more of his thoughts at www.infochachkie.com. .