Joint ventures and strategic partnerships are strategies designed to obtain one or more of the following: direct capital infusion in exchange for equity and/or intellectual property or distribution right; a “capital substitute,” resources that would otherwise be purchased with the capital; or a shifting of the burden and cost of development, through licensing, in exchange for a potentially more limited upside.
A search for a joint-venture partner requires a thorough review of the prospective candidates, and extensive due diligence should be done when the final few are being considered. You’ll need to develop a list of key objectives and goals to be achieved by the joint venture or licensing relationship. As you compare your final candidates, take the time to understand the corporate culture and decision-making process within each prospective partner company by asking:
- How does this fit with your own processes?
- What are your previous experiences with and track record with other joint venture relationships?
- Why did these previous relationships succeed or fail?
Smaller companies looking for joint venture partners may wind up selecting a much larger business offering a wide range of financial and non-financial resources that will allow the smaller company to achieve its growth plans. The motivating factor for the larger company is to get access and distribution rights to new technologies, products and services. The bigger partner may offer access to pools of capital, research and development, personnel, distribution channels and general contacts that the small company needs.
What’s In It for You
Try to distinguish between what is being promised and what will actually be delivered. Ideally, the larger partner in a joint venture should offer a lot more than money. If your primary motivation for the partnership is only capital, consider and explore alternative (and perhaps less costly) sources of capital. If your primary motivation is access to technical personnel, then consider alternatives to the level of control and ownership that will be given up in the joint venture, and at what price. If those resources can be purchased separately, it may not be worth it to sacrifice control and ownership. Explore whether strategic relationships or extended payment terms with vendors and consultants can be arranged in lieu of the joint venture.
Be sensitive to the politics, red tape and management practices that may be in place at a larger company, and which may be very different from what your smaller, entrepreneurial business is used to. In identifying joint venture objectives, selecting the right partner and structuring the appropriate documentation, the following key questions should be asked:
- Can this relationship be built in several stages? Should a consulting or cross-licensing agreement be considered as a preliminary step to a formal joint venture?
- Exactly what types of tangible and intangible assets will be contributed to the joint venture by each party? Who will have ownership rights in the assets that are contributed by the partners during the term of the joint venture and thereafter? Who will own the assets developed as a result of joint development efforts?
- What covenants of nondisclosure or noncompetition will be expected of each partner during the term of the agreement and thereafter?
- Will the joint venture be structured as a partnership, a corporation or a limited liability company?
- What timetables or performance quotas for completion of the joint venture’s projects will be included in the agreement? What are the rights and remedies of each party if these performance standards are not met? What “reversion” rights can be maintained in the technology to avoid “shelving” problems?
- How will issues of management and control be addressed in the agreement? What will be the respective voting rights of each party? What are the procedures for resolution in the event of a major disagreement or deadlock? What is the fallback plan?
Terms of Agreement
Once these preliminary issues have been discussed, a formal joint-venture or corporate shareholders’ agreement should be prepared with the assistance of a lawyer. The precise terms of the agreement will naturally depend on the specific objectives of the parties. At a minimum, however, the following topics should be addressed in as much detail as possible:
- Nature, Purpose and Trade Name. The legal nature of the parties’ relationship should be stated, along with a clean statement of the joint venture’s purpose, to prevent future disputes. If a new trade name is established for the venture, provisions should be made as to the use of the name and any other trade or service marks in the event the project is terminated.
- Status of the Partners. Clearly indicate whether each party is a partner, shareholder, agent, independent contractor or any combination thereof.
- Representations and Warranties. Standard representations and warranties of each party will include obligations of due care and due diligence, as well as mutual covenants governing confidentiality and anti-competition restrictions.
- Capital and Property Contributions. A clear schedule should be established of all contributions, whether in the form of cash, shares, real estate or intellectual property. Detailed descriptions are particularly important if the distribution of profits and losses is to be based on each party’s overall contribution. The specifics of allocation and distribution of profits and losses among the venturers should also be clearly defined.
- Management, Control and Voting Rights. If the proposed venture envisions joint management, it will be necessary to specifically address the keeping of books, records and bank accounts, nature and frequency of inspections and audits, insurance and cross-indemnification obligations, as well as each party’s responsibility for administrative and overhead expenses.
- Rights in Joint Venture Property. Each party must be mindful of intellectual property rights, and the issues of ownership use and licensing entitlements should be addressed, not only for the venturers’ presently existing property rights but also for future use of rights (or products or services) developed in the name of the venture itself.
- Default, Dissolution and Termination. The obligations of the venturers and the distribution of assets should be clearly defined, along with procedures in the event of bankruptcy and grounds for default.