Many of the commercial deals we advise on have technological innovation at their heart, with clients seeking to achieve a competitive advantage. Whether the client’s organisation is looking to change its business’ focus, to create a new revenue stream or simply to do the same things better and more efficiently, we are often involved in documenting the process of innovation, and therefore close to the commercial and legal issues at the core of innovation. Often, in order to gain access to the creative thinking at the inception of innovation, organisations look to early stage companies, SMEs or specialist organisations who may be smaller than they are. Contracting with such businesses can however bring new challenges, particularly for larger organisations who are used to contracting on their own terms of business or who are comfortable with a specific risk profile.
So what are the challenges that we most commonly see?
Often, businesses of this kind will have little or no financial history to evidence their financial standing, and are likely to have significantly shallower pockets than the organisation looking to buy their products or services. Naturally this leads to customer concern that:
- the supplier could be vulnerable to financial difficulty – a supplier running into financial difficulty can lead to a customer never actually receiving the products/services they have paid for and ongoing support for the products/services suddenly being unavailable; or
- if there are any issues down the line with supplier performance, even with a water tight claim against the supplier, a customer could be out of pocket because the money is simply not there to be recovered – the value of traditional key contractual protections such as warranties, indemnities and limitations of liability (and the value of spending time and money negotiating these things), could ultimately be significantly reduced.
These issues can represent a material commercial risk to a customer, particularly if the products/services being delivered are business critical or costly. These concerns are even more prevalent where suppliers are based in other jurisdictions, where the customer may not have any knowledge of the laws and procedures that could apply if an issue of this kind were to arise.
Protecting long term value
The key focus of an early-stage business is typically developing and improving their offering. Processes such as: logging all of the opensource that has gone into an app (for example); ensuring that all developers are on appropriate employment/engagement terms so the supplier can exploit what is being developed; maintaining appropriate insurance and a reputable escrow arrangement, may not be the priority of those in the driving seat. A customer should therefore be asking whether it is comfortable: that they can continue to access and use the technology they have paid for, for as long as their agreement allows them to; that they do in fact own the IPR in technology developed for them, where they have paid for the IPR to sit with them; and that their competitors do not and never will have access to the relevant IPR if this is an important consideration to them.
So, how do we make it work?
All is not lost.
There are various ways to build risk mitigations into agreements with start-ups and small established organisations, which go some way to protecting customers against the risks set out above. In addition, carefully targeted pre-contractual due diligence can often give valuable insight into whether a potential supplier is running its business in a way that minimises the risks to the customer, and an opportunity to assess the supplier’s appetite to change its own practices if due diligence raises customer concerns. Nevertheless, working with these types of suppliers could well require an acceptance that some of the customer’s risks cannot be covered off to the extent that they would commonly be in traditional tech agreements. The potential value in working with this community of smaller and less established businesses is, despite the risks, proving to be an exciting and valuable opportunity for customers looking for the ever-important competitive edge via innovation.