Engel & Schultz, LLP
and Business Contracts
Legal Issues in Production, Sales, Distribution
Licensing and Corporate Partnering Agreements
Federal grants are an overlooked option for bootstrapping startups
by Robert A. Adelson, Esquire
As an entrepreneur or consultant in business yourself or advising others on a new product or service, legal issues in production, development, sales and marketing arise. Whether for software, hardware and other products sold or licensed, questions can include:
- How to bring a product, tool, or service to market?
- How to obtain necessary equipment and supplies?
- Ways to expand marketing, sales and distribution capacity?
- Methods of licensing products, devices and technology?
- Scope of warranties, maintenance and service obligations?
- Merits of corporate partner/strategic alliance arrangements?
1. Production and Development Contracting.
Contracts for production and manufacturing should incorporate accepted specifications and realistic warranties, and cover ramp-up, payment, delivery and acceptance terms. The manufacturer must coordinate these terms with its own labor, overhead and supply contracts (which should where possible include a right to "cover" short-falls).
Additionally, software and product development contracts require elaboration of product description which may be through function, performance or work objective or a combination, and payment or terminaiton rights based on achievement of performance milestones. Such contracts typically also contain source code escrow or other default protections and rights to upgrades or enhancement.
Service contracts may specify level of support, personnel and response time and hourly, retainer or fixed fee payment schedule. Confidentially, proprietary information/work for hire and other restrictive covenants are included in these and other contracts also.
2. Marketing, Sales and Distribution Arrangements.
Marketing and distribution arrangements decide product niche and distribution channel strategy and allocate responsibilities to achieve market penetration. The marketing plan and contracts will quantify, allot and coordinate packaging, image and promotional responsibility. Timely trademark protection (including filing for inteded use) should be a part of this program.
Beyond these responsibilities, contracts with distributors including value added resellers may be granted exclusive or non-exclusive rights to sell broadly or in particular product fields, channels or market segments, geographic territories, within the defined time period of the contract term. Contracts normally provide compensation based on sales, with minimum sales and quotas and penalties for failure to meet quota.
Where direct sales are made, company salesmen are also typically compensated on performance through commission or bonus. Company sales contracts with reselles or end users should contain appropriate limitations on warranties and liability disclaimers.
3. Technology-Based Licensing.
Given the limited personnel and cash assets of many startup and emerging companies, product licensing is often utilized to obtain cash or speed product to market. The company may try to limit the scope of exclusive or non-exclusive rights licensed, with the view to future licenses or to preserve its own right to enter the market with other applications of the core technology.
Technology-based licenses normally contain a royalty free grantback license to the company to use licensed technology for its internal purposes and a reversion to receive back the technology if minimum royalties are not paid. Such licenses often place patent prosecution and intellectual property rights protection burdens on the licensee although licensor must assume some maintenance responsibilities.
4. Corporate Partnering and Strategic Alliances.
These arrangements take different forms, including partnerships, joint venture corporations or contracts for manufacture, distribution or licensing, such as already described. Strategic alliance objectives often include the following:
- Cash Funding and Validation of product or company.
- Access to Distribution capability or Manufacturing Capacity -- often the case for the new or emerging company partner.
- R&D Risk Sharing and Access to Technology/Expertise experience.
- Competition Preemption and Preview to Acquisition -- often the case for the established or larger partner.
However, even though such arrangements often hold great promise, there are risks, so care must be taken in negotiation arrangements (including precautions for technology safeguards, dispute resolution and termination) and, once achieved in maintaining the relationship.
This column is the second of several contributions prepared by Attorney Robert A. Adelson that are to appear, with his permission, in The Business Forum Online® in succeeding months.
Robert A. Adelson, Esq. is a partner at the Boston law firm of Engel & Schultz, LLP. Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University Law School in Chicago, where he was a member of the Law Review. He has an advanced law degree, an LLM in Taxation, from New York University.
Mr. Adelson is a member of the Massachusetts, New York and U.S. Tax Court bars. He has been an attorney in practice since 1977, specialized in business law, including corporate, taxation, securities, options, licensing and technology contracting. With a stress on value-added services, Mr. Adelson represents many new and smaller corporations and businesses in many fields such as software, biotechnology and emerging technology areas.
You may also want to read Mr. Adelson's Culpepper Letter
(Newsletter Issue 163, September 1997)
Negotiating the Terms of Executive Employment:
Getting What You Deserve
Robert A. Adelson, Esq.
Telephone: 617.951.9980, ext. 205
Your comments and suggestions for these pages are most welcome!
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