Seffi Kaminitz, Esq. is the founding partner at Kaminitz Law and has also written a number of blog posts intended to provide guidance to technology entrepreneurs, which can be found at www.founderset.com/blog. He spoke at our Friday October 24 Bootstrapper Breakfast in Mountain View and graciously provided this summary of his remarks on the key elements in negotiating licensing contracts for startups.
Negotiating Licensing Contracts
I. USE A CORPORATION
- When to Incorporate
- It is best to incorporate before starting any transaction, in order to protect your personal liability. Incorporation is often a fast process. Make sure to keep your personal and business assets separate to protect your liability.
- After sending the documents, incorporation in Delaware is processed quickly (48 hours) and in CA slightly slower (a week or two).
- Where to incorporate
- Delaware is the industry standard and has the best corporate infrastructure. You will have to pay a DE finance tax. DE is recommended for companies anticipating large growth, VC financing, or acquisitions.
- If you run your business in CA, regardless of where you incorporate, you will be subject to CA taxes. If you plan If you plan to stay smaller and more within CA, CA incorporation is a good option.
- Often the other party will include in a contract that they may terminate for convenience at any time with no liability or penalty.
- If you have given them pricing based on a committed term, you must make sure to change this language so that they are locked in for pricing for the full term and are locked for the entire contract term. Otherwise, they can walk away despite the discount they received.
III. INTELLECTUAL PROPERTY OWNERSHIP
- IP Ownership is extremely important, and one of the few clauses that can kill a new business if executed incorrectly.
- If you “sell” them your base IP when you only intended to license it to them, they can claim ownership based on the contract and you will lose your product.
- Business Argument:
- When a customer pays for customizations, they sometime expect to have ownership in the deliverables; If the other party argues that they are paying for this IP, remind them that they are paying a much lower cost than they would pay to receive the IP exclusively.
- If you are dealing with a difficult party, you can offer limited time exclusivity (6 months or a year) or contract not to deal with their competitors for a limited time.
IV. LIMITATION OF LIABILITY (LOL)
- Purpose: The purpose of an LoL is to limit the liability of your company to a certain amount in case of a breach of contract.
- Base Cap: The base cap is the general cap, which is usually fees paid, or x2, x3 fees paid, as negotiated.
- Carve-outs: The other party will seek to carve out some items from your base cap, leaving these with unlimited liability. These usually include: Fraud, willful misconduct, gross negligence, infringement on a 3rd party’s IP, breach of confidentiality and breach of security. Instead of leaving these items unlimited, push back with a new cap just for those items that is higher than your base cap.
- Example: “IN NO EVENT SHALL OUR AGGREGATE LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR UNDER ANY OTHER THEORY OF LIABILITY, EXCEED THE TOTAL FEES PAID TO US BY YOU FOR USE OF THE SERVICES DURING THE PRECEDING TWELVE MONTH PERIOD,