My 10 guidelines for startups on partnerships with big companies

The situation I see startup CEOs most out of their comfort zone is when they are dealing with interest from a large, multi-billion dollar, company in their market that wants to form a strategic partnership with them.

The cadence of reactions after the first call with the big company usually starts with:
Holy shit! [Insert big company name] wants to work with us, this is going to be huge!
And progresses to:
Are they going take our ideas and screw us?
And after initial engagement:
Oh my god do they move slow.  And have a lot of lawyers.  How will this ever get done.

It is understandable why the startup CEO is uncomfortable in these situations as it is very likely the first time she has had to deal with it.

For the savvy, and lucky, they are able to navigate the murky waters and strike a deal that truly works well for the startup and the big company, but very often startups make mistakes along the way that have the potential to be fatal to the company and can definitely be fatal to the partnership they worked so hard to craft.

Trust me. I’ve been on both sides of the table in these negotiations. During my four years at Microsoft I closed multiple strategic partnerships, that actually included investments of $40M-$60M, representing the interests of the big guy. At Arthur Ventures, I recently worked very closely with one of our partner companies to close a big partnership with one of the world’s largest health systems.

Getting the partnership done right appears daunting, but I’ve found when startups stay true to some key guidelines, their odds of getting the right deal done increases dramatically.

So without further ado, below are my 10 guidelines for startups on strategic partnerships. This isn’t advice for where to start negotiations, it is for where to finish.

Before you start

  1. Make sure the relationship truly warrants a strategic partnership
    • Sounds simple, but make sure the opportunity warrants months of documentation and negotiations. It needs to be transformative. If the big company just wants to buy more of your product than other customers, you don’t need a partnership. If both parties feel like it is something more than that, but are unsure if it will be big, start with an informal relationship and see if anything comes from it. In order to start it needs to be a big vision.  So how can you tell? Typically it will involve the words like enterprise-wide roll-out, multiyear, reselling, co-marketing, joint development, etc.
  2. Add 6 months to your closing expectations and make sure that timeframe fits with your business
    • It sucks, but it is what it is. You might feel like that both parties already have an idea of what a partnership looks like, but things will get about 20 levels deeper before you actually close. Your startup may move quickly, but the big company creates task forces, has internal approval deadlines, has delays to those deadlines due to executive travel and of course has an entire legal department who wants to protect their company from every possible risk. They will bring up stuff you would have never even thought of. Make sure you have the runway to get there before you start.
  3. Pick the platform, not the person
    • This is perhaps my golden rule on partnerships that guides everything. What does it mean? You must want to work with the company, not a person at the company. I hear it all the time: ‘Person A at the big company really gets our vision. She is going to be great to work with and make it a success’. The reality is big companies reorg all of the time. Execs leave for greener pastures. Your interest in the big company must extend past a single person. It should be nameless and faceless.

 So after being on board with those three things, you’re ready to engage in negotiations.

Engagement to Close

  1. Listen more than you talk
    • Yep, this gets back to the trust factor. In my experience, the concern of the big company stealing your idea and screwing you over is pretty overblown. They may try, but they often move to slow anyway. That said, when I was at Microsoft I was amazed by how many startups would come in and before we said a word, just start talking about their vision, roadmap and how they are going to win the market when our reason for wanting to partner was much different. The best approach, right off the start, is to get them talking about their vision for the partnership. It was probably their idea in the first place. It helps you tailor your approach and avoids playing cards you don’t have too.
  2. Get an executive sponsor within the company
    • This might seem to go against point #3 above, but it is super important. What is executive sponsorship?  It is getting a senior leader within the organization where the partnership will reside to meet with you on a regular cadence (monthly, quarterly, etc.) post-close to ensure the partnership is on track. The big company may say this will happen anyway, but that’s bullshit. Exec calendars are hard to get on and you don’t want to make asking for a meeting to seem like a special request. Get it in the docs so it becomes a norm. Staying true to #3, a major key here is to not cite a specific senior leader (i.e., Person A), but a title or role (i.e., VP of Advertising or ‘leader who Advertising division’). You don’t want someone leaving to impact your sponsorship within the company.
  3. Get the wording right
    • A common theme so far is that people within big companies move around and leave a lot. Chances are your partnership will survive your counterparts tenure at the big company. That means wording of the documents matters big time. They will not be based on standard terms like your equity financing docs (hopefully) were. Over time, both parties will forget the intention that was behind poorly worded terms. Every single time I asked my boss at Microsoft what to do on an issue that arose on a partnership we inherited (i.e., someone else did the deal and moved on, but it still resides in our group) his answer was ‘defer to what is in the agreement’.
  4. Avoid exclusivity like the plague.
    • The big company will ask for it 99% of the time. Don’t do it. It should be viewed as a deal breaker for you and they will give. However, if they make it seem like they will walk over it and you really need the deal, here is an option I have seen work as typically the big company is typically worried about one or two specific parties:
      • Give them a head start. Let them name one or two competitors that you will not work with for a short period of time, say 6 or 12 months. They are happy because they are a first mover. You are happy as you realize it is unrealistic you would close said competitor(s) during that timeframe.
  5. Don’t sweat most-favored nation (lowest) pricing
    • They will absolutely ask for it and unless you have already granted it to somebody else, you will give it. Just make sure that it is volume based. You are happy to give them the pricing, but they have to back it up with volume. Make a tiered schedule outlining their low pricing at various order levels. This is not worth burning cycles over unless they fight the volume piece, which they shouldn’t.
  6. Take a different approach to ‘Minimums’
    • Perhaps the #1 term startups put above anything else is negotiating contracted minimum payments from the big company over the term of their partnership. The ask is well-intentioned (‘I’m going through all of this pain for this deal, we have to make sure it is it’), but startups often make the mistake of thinking they are easy for the big company to agree to (which they are not) and they overplay their ask with numbers that will never get done.  That said, I have seen a more subtle approach work quite well:
      • Ask the big company what their revenue expectations to your company are over the first 12 or 18 months. They’ll give you a ballpark figure. Discount that amount and tell them you either want the contract to terminate if in fact the revenue to your company has not reached that discounted amount in the time from you chose, or they have the option to pay the difference and keep the partnership going.   It increases the startups chance of getting a minimum as the big company won’t want the contract to void so quickly, but it gives the big company an option vs. a requirement, which goes a long way for them internally.
  7. Fight change in control
    • Towards the end of the process as the big company begins to feel like they are taking a meaningful dependence on a startup, they will likely ask for some change in control provisions to prevent you from getting acquired by a competitor. The answer is no. The only people who get an impact on change and control are investors.

Which leads us to our final, bonus, section – – Congratulations, the big company now wants to invest alongside their strategic partnership with you!  They are not only concerned about the dependance they are taking on your startup, but they also believe that through their partnership they will be dramatically increasing the value of your company so they should invest so they can benefit from the upside they are creating.  The validity of the above statement and what to do in this scenario should be the topic of an entirely separate post, but instead I’ll focus on one key item, which is a repeat of #10.

Change in Control….Again

  • The most sensitive item of your investment negotiation will be their change in control clause.  It will typically take the form of two scenarios:
    • Veto right on sale
      • They want the ability to block the sale of your company to anyone.  Never agree to it.  Its unreasonable and will kill future financing prospects
    • Right of First Refusal (ROFR)
      • They want the ability to buy you if you receive an offer from someone else you want to accept.  It is much better than a veto right as this requires them to pay to play, but it is not ideal as if the information gets out in the market it can be prohibitive to other buyers putting in offers if they think it will just get matched.  If you do agree to this be sure the agreement says the big company must match the offer entirely and also set a specific time frame in which they will have to get the deal done.
  • Before going down one of those paths, I’d shoot for a 3rd option I’ve seen work well.
    • Right of first notification with bid details
      • All the big company really wants is a seat at the table if an offer is made.  Often times they have the financial resources to out bid anyone else at the table if your startup is really that valuable to them.  Offer to notify them when you receive an offer and to give them full bid details.  This gives them all of the information they need to acquire the company, but it does not break your process and still lets you control your own destiny as you don’t have to take their offer.  I have seen this get done multiple times.

So there you have it, my 10 guidelines (and a bonus) for negotiating a strong strategic partnership with a big company.  The list isn’t meant to sway you away from partnerships with big companies.  I have seen partnerships like this, when done right, greatly accelerate the growth curve of a startup, allow the startup to  leapfrog their competition and in some cases serve as the opening point to a relationship with their eventual acquirer.

Feel free to reach me at patrick@arthurventures for further detail on any of the above points.

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