1. Outbound IPWe often see early-stage companies entering into contracts that contain ambiguous or vague intellectual property (“IP”) licensing or ownership language. As an early-stage tech or life sciences company, it is likely that the majority of your value is in your IP and nothing worries an investor more than a suggestion that you may have inadvertently given away ownership of IP where only a non-exclusive licence was intended. It is, therefore, essential to get legal input where you are licensing or transferring ownership of your IP.
2. Sometimes less is moreCompanies often think they need long and complex contracts for customers. However, we usually find this is a barrier to customer onboarding as a simple contract, which could have flown through the customer’s procurement function, can become so long it “scares” the customer and results in the customer having to engage external lawyers. This extends the contracting process for months when it should have only taken days or weeks. In reality, a long contract is likely to benefit your customer more than you as it probably just means you’re imposing more obligations on yourself. If your business provides an SaaS platform and your standard customer agreement is more than 10-pages, you should consider stripping it down. Some of our SaaS vendor clients are now choosing to use 2-page templates that contain 90% of the protections a 20-page equivalent would, and the cost-benefit significantly favours them when it comes to the reduction in customer onboarding friction and sales cycle timeframes.
4. Templates and negotiation tacticsInvest in good quality contract templates for your customers, partners (such as resellers) and even suppliers, and try to persuade these counterparties to use them. It will be significantly cheaper in the long run than trying to use (and negotiate) the counterparty’s legal documentation. If a customer wants to make amendments to your standard customer agreement, ask that they be detailed in a ‘special terms’ section of your order form or a side letter. Having hundreds of customers on the same or similar terms makes your contract management processes easier and enables future investors or acquirers to conduct due diligence quickly and efficiently. It also encourages customers to only make amendments they really need rather than making meaningless changes which still cost you time and money to review.
5. Poison pill clauses
Another issue that scares investors is when a company has signed up to provisions rather than for provisions that restrict its ability to do business. Classic examples are non-competes or most favoured customer/nation provisions (i.e., a promise that the pricing you offer one customer is the best you will ever offer). However, the most common provision, which may raise alarm bells, is exclusivity. Exclusivity may not be problematic and depending on the circumstances it might be appropriate. However, the terms of the exclusivity should be carefully considered, for example:
- What exactly is subject to the exclusivity?
- What is the territory or field (i.e., use case) for the exclusivity?
- How long does it last?
Most importantly, exclusivity should not be granted unless it can be revoked if the arrangement isn’t working. For example, if the entity granted exclusivity fails to exploit the subject matter of the exclusivity or to hit pre-agreed milestones for sales etc. Certain poison pill clauses can also disrupt potential acquisitions. For instance, a ‘first right of offer or refusal’ to purchase your company can be drafted in a fair and balanced way but if the recipient of the right has too much power or time, it can put off other potential buyers who do not want to invest time conducting diligence and formulating an offer if there is a risk of being gazumped.
6. Risk allocation
Perhaps second only to ensuring contracts have appropriate IP provisions is risk allocation. Under English law, if you breach a contract and the injured party can prove that your breach caused their loss and they tried to mitigate that loss, then they can recover all their damages that flow naturally from your breach as well as those damages that do not naturally flow but were reasonably contemplated at the time of entering into the contract. There is no default cap on the amount that is recoverable and, therefore, if no cap is agreed it means you have unlimited liability and may be forced into insolvency in the event your breach causes more loss to the counterparty than the total value of your assets. As a result, negotiating a cap on your liability in all contracts is crucial. You should also consider carefully what indemnities you are giving under your contracts as it is fairly common for indemnities that cover specific risks (i.e., third-party IP infringement) to sit outside a liability cap or be subject to a higher ‘super cap.’ This is not necessarily a red flag, but make sure you are comfortable with how the potential risks under the contract match up to the rewards and that, where possible, such risks are covered by insurance.
7. IP strategy
Having a clearly defined IP strategy is crucial, particularly in relation to registered IP such as trademarks and patents but also in relation to unregistered IP like copyright and trade secrets and IP, which is not owned by your company but that your company is dependent on a third-party for. These policies should set out the steps that the company takes and has taken to protect its IP, when and how decisions are made as to whether to register IP, and who has access to the relevant know-how that might be necessary to exploit or register certain IP.
Under English law, any IP created by your employees in England in the course of their employment is owned by you. However, the opposite applies in respect of contractors and consultants. In the absence of agreement to the contrary, the contractor or consultant will, as first author of the IP, own it. Investing in a well-drafted template agreement for consultants and contractors you engage is therefore worthwhile from not only an IP perspective, but also from a tax and risk allocation point of view. However, if you do find that you are engaging consultants or contractors on their own legal terms, it is crucial they agree in advance that you own the IP they create for you, that they ‘hereby assign’ such IP to you and agree to sign documentation in the future to affect that assignment. You should also think carefully about where your contractors are based. There are tax and, topically, sanctions reasons for doing this but there may also be specific, complicated rules and formalities in order for IP created by overseas contractors to be owned by you.
It is completely standard for software businesses to utilise open source software. In fact, it typically allows a business to build off existing efficiencies and not ‘reinvent the wheel’. When open source dependencies are licensed under permissive licences, such as MIT and BSD, there is no issue. However, when dependencies are licensed under more restrictive (known as copyleft) licences such as the GPL it can, depending on how the dependency is used, mean that a company’s proprietary code needs to be made available to the public under the same open source licence terms. Copyleft licences are less likely to be a problem for SaaS businesses because when software scripts remain server side and are not pushed to the browser for execution, there is typically (but not always) no distribution which triggers copyleft requirements. The best way to combat potential open source pitfalls is to implement a comprehensive open source policy meaning that checks and balances are in place to avoid using open source dependencies in a way that could cause future problems.
10. Founder IP
Perhaps the most common IP gap that we identify in diligence is that the founder of the company still owns the IP they created prior to their company being incorporated or them signing an employment contract with their company. This is easily fixed, for the founder can simply sign a document stating all IP they created prior to incorporating the company (or being employed by the company) that relates to the company or the business the company engages in is ‘hereby assigned’ to the company.
Ready to navigate the IP landscape for your company?
Connect with Gretchen Scott (firstname.lastname@example.org), James Taylor (email@example.com), Genevieve Watt(firstname.lastname@example.org) or Hayley Davis (email@example.com) for more information.
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