It is a simple question with a complex answer. How does a startup get from zero to execution when negotiating contracts with potential customers that are large enterprises? The 800-pound gorillas. Situations in which your negotiating leverage is limited (often severely so).
As a commercial contracts attorney, clients often ask me about the one right way to approach deals. Many are looking for a cheat sheet of universal terms they should push for in contracts. But there is no one answer.
Deals are not cookie-cutter, and neither are the contracts on which they are built. That said, a basic framework can help provide startups with some grounding to better think about negotiations with large enterprises. The idea is to avoid over-lawyering, and instead approach the discussion with a legally prudent yet deal-centric mindset.
There are generally six overarching considerations as you head into negotiations with large, enterprise organizations.
- Your relative leverage.
- The most material business points you need (payment terms, deliverables, intellectual property ownership, etc).
- The most material legal points you need (how are disputes handled, the scope of your indemnity obligations, etc).
- Your overall risk tolerance.
- The potential customer’s own processes (how they want to get the deal done, who their key decision-makers are, etc).
- And, of course, the need to close.
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Your relative leverage is usually the first thing to determine. How motivated is the potential customer to getting the deal done? Do they need your product or service? Are there alternative solutions they are considering?
Do you have an internal champion (someone in their organization that can help push the deal through)? Do they have a particular ‘spend’ they need to use or lose before quarter-end? These, and other leverage-based considerations, will help inform your overall approach to the other points above.
With respect to identifying material business and legal points, it is important to determine what you need vs. the nice-to-haves. When across the table from a large enterprise, you will likely not be in a position to check all the boxes you want checked. Therefore, what you push hard for is often a strategic consideration.
If there are a dozen things you want, it is prudent to identify the few you really need. The rest are nice-to-haves. At that point, a winning strategy is often pushing for the few things you need, while also asking for some of the other points for padding.
Padding gives you room to take a few steps back during negotiations — while angling to get the needed wins. So if getting paid quickly is key but the potential customer wants to pay 90 days after invoice, perhaps ask for payment 30 days after invoice and, after negotiation, end up at 45 or 60 days.
With respect to your risk tolerance, the most obvious consideration is the contract’s ‘limitation on liability’ provision. It sets out the monetary exposure you have if things go south and the customer brings a lawsuit.
For example, the provision should include a flat dollar amount cap on your total potential liability. That said, risk is more than just a dollar amount.
There are other considerations. Such as whether you are agreeing to any terms that materially restrict your future profitability (such as not selling to any of the customer’s own competitors)?
Are you potentially assigning away any intellectual property rights that would otherwise be valuable down the road? Will any such terms affect your valuation? Will they cause heartache for future investors or potential acquirers?
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The important point is to be cognizant that risk can exist in different forms and on different levels. While your legal counsel can help advise on the relative risks of any contract, the ultimate decision is a business one.
The potential customer’s own processes are often an overlooked factor. You should inquire as to how the customer wants to conduct negotiations and structure the contract. Clients that try to insist a large organization accommodate the client’s own processes can run up against significant friction.
Instead, you should think about how to cater to the customer’s own processes while ending up at the same desired result (a deal closed on the terms you are ok with). It is the path of least resistance.
For example, if a potential customer needs to get ‘sign off’ on a deal from multiple departments (legal team, business team, and CEO sign off), how quickly will that happen? One day? One week? One month? If it is near the end of a calendar quarter, will your deal be in some sort of queue that may slow things down?
Strategy needs to built around how they internally operate. Unlike a startup, large enterprises are often entrenched in their own processes. Because you likely cannot change that, you should factor it into your calculation as to the “timing” of closing.
Again, the above points are only a general framework in which to think about things. There is no magic formula. The relative importance of each consideration is highly dependent on too many factors to spell out in a single article.
Of course, you may find yourself across from a customer with a take-it-or-leave-it position. At that point, you should get the advice of your counsel before making a decision to bite the proverbial bullet and sign.
At the end of the day, legal and business considerations should act in concert, not be opposing forces. Acting in a strategic manner to get the needed wins, take some acceptable losses, and moving forward. Signatures on a line, ringing the gong, and charging on to the next victory.
And now for the disclaimer: This article is for informational purposes only and is not meant to constitute legal advice and should not be relied upon as such. You should always seek the advice of your own legal counsel.