Startup Guide to Engaging and Negotiating with Big Enterprise
By Callie Pioli
Many tech startups offer new, game-changing products and services to solve inefficiencies in big business. But overcoming the gap between how startups and big enterprise negotiate commercial agreements might pose a tougher challenge than inventing the better mousetrap. A successful startup will need to be well-organized, well-resourced, and armed with an understanding of how the enterprise customer operates.
Here are some tips on bridging the gap between the priorities and expectations that startups and big enterprise bring to the negotiating table when trying to introduce or adopt new technologies.
The Enterprise Perspective on Startups
While every enterprise has its own complex perspective, startups should keep in mind the two concepts that often drive the large enterprise perspective.
- Transparency. Big enterprises tend to be risk adverse (for good reason) and as a result will want controls in place to manage that risk. Enterprises need to know who they are dealing with and be able to report those details to stakeholders within its organization, including procurement, IT support and legal. Startups may be seen as a riskier business partner. Enterprise customers may request a level of detail regarding their service providers’ and vendors’ corporate structures, data security programs, and intellectual property management practices that can seem invasive, but allows big enterprise to make well-informed decisions when selecting a new service provider.
- Regulatory Obligations. Big enterprise companies may have certain regulatory obligations that necessarily flow-down to their subcontractors, supply chain members or service providers, meaning the startup will have certain regulatory obligations, too. The requirements of these regulations vary widely based on the industry and products involved, including how the startup may be storing, processing, and/or controlling data. This means that certain terms provided by the large enterprise customer may be truly non-negotiable and required by law ̶ an experienced startup lawyer can help the startup identify whether the purported regulatory or legal requirements are absolute or if there is room for challenging the enterprise position in the negotiations.
Preparing For The Negotiation Process with Big Business
It is important to present a well-organized and professional solution to enterprise customers. Before approaching big enterprise customers, be sure that your company is formed properly, that you have the requisite documents in place to ensure that intellectual property generated by both your employees and independent contractors is actually yours to license onwards, and that your supply chain does not have weak links in terms of security or fulfillment, among other things. Having all of these issues buttoned up is more than just good business: the enterprise customer will conduct diligence on all these issues, so be prepared.
Big enterprises are generally not willing to do business via handshake, email chain or signed napkin. Coming to the table with your own pre-drafted license agreements or terms of service shows your customers that you are well-prepared and have thought through the issues, even if they ultimately insist on using their own forms. In addition to the definitive agreement, it is not unusual to be asked to sign a Proof of Concept (PoC) and/or Non-Disclosure Agreement, and (depending on the nature of your technology) provide a Data Processing Agreement, Service Level Agreement, Privacy Notice and/or Escrow Agreement. Statements of Work and Change Orders are also critical documents that can help manage and maintain appropriate expectations when there are customizations or other professional services involved.
As such, you will likely end up with a bundle or family of related agreements. Moreover, the enterprise’s procurement process may require approval by several departments and at multiple levels within those departments. This can all translate into a lengthy negotiation, and an approval process that may take six months rather than six days. Being prepared and providing the enterprise certain assurances in terms of your preparedness and expectations can help speed up this process.
Setting Yourself up for Success
Big enterprises usually come to the negotiation table with experience, and perhaps both an in-house and external legal team. While this can be intimidating and create a power imbalance, there are several ways to prepare yourself before a negotiation that will create a more level playing field between your startup and the enterprise.
- Know Yourself. You’ve heard of KYC (know your customer), but as a service provider or seller to big enterprise, you also must KTS (know thyself). Having your own house in order before asking someone to trust you with the management of theirs lends credibility to new companies. This means (a) good corporate hygiene, (b) solid intellectual property chain of title and rights, and (c) negotiating contracts in a professional manner. While startups are often facing cash-flow concerns and hoping to lock down clients first and deal with everything else later, this kind of fly-by-night mode of operating is the antithesis of how big enterprise prefers to do business.
- Insurance. As a risk management tool, an enterprise is likely to expect a startup to have insurance before entering into a deal. The type of insurance that the enterprise will want varies across industries. In general though, it is important to develop a relationship with your broker, ensure that you have adequate coverage, and understand the contractual obligations regarding insurance placed on your startup by both the enterprise and the insurer.
- Obtaining Legal Counsel. A great startup lawyer is much more than someone who will adjust the terms that you want added or removed from a contract ̶ they should be able to leverage their own experience to read, interpret, and explain each provision of the contract, and to advise you on which terms are negotiable and what is market in the industry. On-boarding an experienced startup lawyer with sector-knowledge should be thought of as both a short and long term investment that can add real value to your business, and should be budgeted for early on.