By UpCounsel Business Transaction Attorney Umar Farooq

Of all the words that could be used to describe software partnership contracts, “complex” and “multifaceted” might be two of the most applicable. That’s partly because there are many different forms of software partnerships, such as

  • Company A agreeing to sell Company B’s software in exchange for a percentage of the revenue
  • Company A incorporating Company B’s technology into Company A’s Product. In return, Company B receives a percentage of the revenue.
  • Company A allows Company B to sell its product on Company A’s platform, with the provision that Company A gets a percentage of the revenue.

Each of these different scenarios requires a different contract, which must be further customized in accordance with each party’s goals and priorities as well as the particular relationship dynamics at play. Therefore, negotiation is an incredibly important, albeit potentially frustrating and time consuming, part of the software partnership process.

Fortunately, there are several steps that both parties can take, both before and during the negotiation process, to limit the frustrations and the wasted time.

Before the Negotiation

Know your Objectives

Before you sit down with the other party, you should consider what you hope to get out of the partnership. For instance, do you envision a product partnership, in which the parties utilize each other’s technology in order to improve their own products? Or do you simply imagine a licensing partnership of one party’s market-ready technology or product? Either way, the bottom line is that knowing what you want before the negotiation begins is crucial to getting it in the end.

You should also know what your deal breakers are, and communicate those to the other side as soon as possible.

Do your Research

The old adage is true; knowledge really is power. Therefore, each side should conduct due diligence on the other side’s financial status, technical expertise, track record, desire to contribute to the partnership and ability to assist with the commercialization (if parties are considering joint commercialization).

Additionally, you should identify the intellectual property that will be contributed by each party to the partnership.

During the Negotiation

Focus on Key Terms

Although it’s worth spending the time and effort to ensure that your software partnership contract includes all essential provisions, you likely won’t be able to nitpick every single line. At best, doing so will annoy the counterparty and slow the negotiation process. At worst, the counterparty may decide that dealing with a company as difficult as yours simply isn’t worth their time and end the negotiations altogether.

Therefore, it’s important to know which terms are worth haggling over and which you can afford to overlook. However, essential terms differ depending on the kind of partnership you’re after.

For joint development or strategic partnerships, key terms include:

  • The scope of the partnership
  • The contributions of personnel and other performance obligations of each side
  • General guidelines on how the project will be managed from each side. Which teams will be responsible?
  • How costs will be allocated to each side
  • Whether each side will commercialize individually or whether there will be joint commercialization of technology
  • Which side will be obligated to get regulatory approvals, and how they will do so. Will there be a dedicated regulatory team comprised of personnel from each side?
  • Ownership of all intellectual property that each side brings to the table and licenses to the other party
  • Ownership of intellectual property that is created through the partnership
  • Other concerns that are unique to the industry

On the other hand, if the contract is a shareholders agreement for a joint venture company, there are other key terms to consider. Consulting an attorney can be extremely helpful at this stage, as he or she will be able to compile a non-binding terms sheet that allows both parties to negotiate and finalize key terms, such as:

  • What type of entity will be set up and where? In international joint ventures, the non-US side may insist on an offshore jurisdiction such as the British Virgin Islands or Cayman Islands
  • Obligations of each side to the company
  • Management of the company – is it a 50/50 joint venture or is one side a majority shareholder?
  • Termination clauses
  • What happens if there is a deadlock?
  • What intellectual property is each side contributing?
  • What employees is each side contributing?
  • What regulatory approvals are needed to establish the company?
  • What each side will do to avoid competing with the joint venture company, and for how long

Although all of these terms are important, keep in mind that some of them are less so. Where these less crucial provisions are concerned, you may be able to live with letting the other side get its way. Being able to identify which terms are absolutely essential and which are not is vital. The worst thing that you can do is begin negotiations and quickly lose momentum because of excessive arguments over non-essential terms that aren’t deal breakers.

Use Your Leverage

In many negotiations, the balance of power between the parties is less than equal. One side may have intellectual property that is far superior to the other side’s, or one side may be much larger, and therefore possess more bargaining power, than the other side.

Nevertheless, there are certain sources of leverage that both sides may be able to use to their advantage. For example, one side’s technology may be so unique that it would be difficult or impossible for the other side to replicate it. In this situation, the party that owns the technology has a lot of leverage, because the counterparty presumably needs that technology in order to improve their product.

Alternately, if one side already has an existing paying customer base or dominant position in a particular market, that can serve as a strong source of leverage.

Another common source of leverage is backing by powerful and wealthy investors. It stands to reason that the side with more and better investors will have more authority and decision making power over the course of the negotiation process.

The Takeaway

  1. Do your homework. Before negotiations begin, you should know what you hope to get out of the partnership and what your deal breakers are, as well as relevant information about the others side.
  2. Know which terms to focus on. Being able to distinguish terms worth arguing over from those that are ultimately inconsequential is crucial to a successful negotiation that doesn’t eat up months of your time. An attorney can greatly assist at this step of the process.
  3. Identify sources of leverage. Even if the other side has the upper hand, you may have leverage that you can use to even the playing field.

How UpCounsel Can Help

Unfortunately, it can be difficult for people without a legal background to put these tips into practice. Only an attorney has the knowledge and experience necessary to thoroughly research the counterparty, decide which terms of the contract are most important and indicate sources of leverage that you might not have thought of.

The problem is that hiring an attorney who can answer your questions, even for a simple contract, can be both difficult and expensive. But it doesn’t have to be, because now there’s UpCounsel All Access.

With All Access, you receive a team of attorneys, each of whom has been hand picked for you to suit your company’s individual needs and preferences. You’ll also gain access to UpCounsel’s network of over 2000 attorneys, which spans all 50 states and includes lawyers with all kinds of niche industry experience and areas of expertise.

With so many vetted, qualified attorneys at your disposal, you can rest assured that the legal advice you need will always be just a phone call away at a rate that fits your budget. Working with an UpCounsel attorney as you negotiate your software partnership contract will ensure that you receive the best possible terms for your company, setting you up for success later down the line.

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About the author

Umar Farooq

Umar Farooq

With over nine years of experience, including time at a global law firm, Umar is able to provide personal service and practical solutions to tackle your most challenging legal issues.

Whether it’s helping to get your business off the ground or handling tough negotiations in a pivotal transaction, Umar is available to provide insightful legal counsel and trustworthy guidance.

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