Exclusivity – Run Away or Embrace?

exclusivityIt finally happened.  You’ve been trying to get the attention of a huge strategic partner and finally they gave you a chance to explain the value you can bring them.  In fact, maybe you were fortunate enough to have them come after you (see related blog article titled “Get the Strategic Alliance Partner to Come After You“).  Not only do they get the value you can offer but after a couple of subsequent meetings they utter the “exclusivity” word.  You’ve heard from your advisors and read in books to avoid exclusive relationships if at all possible.  But you don’t want to bring the positive momentum to a grinding halt by immediately saying “no”.  Where do you go from here?

First, getting a request for an exclusive relationship can be far more of a blessing than a curse, as long as you play your cards right.  Your strategic partner might have just showed you their cards.  They possibly see so much value from what you are doing that they don’t want their competitors to enjoy the same benefit.  But it is possible they are playing a small game with you and are just asking for exclusivity because they’re big and you’re small.  Let’s explore further so that you can hopefully turn this into a great thing.

Start with a Litmus Test for Seriousness

Before you give up the opportunity to strike similar deals with other companies, you must find out how serious these guys are.  How much are they willing to put into the partnership?  Find out.

  • Will they allow the partnership to be announced to the public (website, press release, social media)?
    • If so, will they participate in this announcement or will they simply allow you to do it?
    • You would love to leverage their communications reach.
  • Will they engage in co-marketing activities to help generate awareness and market demand for whatever it is the two of you are doing together?
  • If a joint solution or technical integration project is at the heart of the partnership, how many resources would they put on the project and how would the project be managed?
  • Will anyone on their side be compensated (ie – bonus) based on the success of your joint program?
  • If their sales team has any role, will they give you access to them?
    • Webinar, presentation at next sales kickoff meeting, blurb in next sales newsletter, etc

The types of questions you ask will vary depending on the type of solution you offer and the type of partnership you are entering.  But what should be clear is that you deserve to know the benefits you will likely gain if you agree to exclusivity.  It is worth the time to explore these things before moving forward.  In fact, try to determine what your potential partner is willing to do before they even utter the “exclusivity” word.  If they have already committed to a majority of the things on the wish list before asking for exclusivity, then the bar for justifying exclusivity just got higher.

Protect Yourself

If everything seems too good to be true and exclusivity feels reasonable, you should still try to protect yourself.  After all, terms and price are negotiated hand-in-hand (see related article titled “Tell Me Your Price and I’ll Tell You My Terms“).  Consider these ideas:

  • Limit the exclusivity to a specific list of competitive companies rather than anyone or even “anyone in the ___ market”.  The fewer the better.
  • Put a time limit on the exclusivity.  You can always renew it if things are going well.
  • Make the exclusivity subject to business results (get specific) and/or important milestones (get specific)
  • Limit the exclusivity to a specific geography (ie – country)
  • Limit the exclusivity to a specific application use (use case).  This works best if there are limitations that can be implemented in the product/technology to help enforce.
  • Ask for exclusivity in the opposite direction – your partner can’t strike similar deals with your chief competitor(s)

By the way, maybe it’s obvious but you should make an attempt to combine multiple of the above protection mechanisms rather than thinking you have to just select the best one.

Commercial Terms

Even if you are able to negotiate some of the items in the protection list above, agreeing to exclusivity can also come with more favorable commercial terms for you – most commonly a better price.  That’s not as much the case if your new partner agrees to significant performance milestones but otherwise try to combine some of the previously-mentioned protection mechanisms with a better price for your product/technology than “normal”.  Remember that when you grant exclusivity you are giving up opportunity and because of that you should be compensated.

What if You Get Acquired?

Offering broad exclusivity could be an issue for a potential future acquirer, specifically if they compete with your new strategic partner.  Rather than kill some of your future acquisition options, negotiate an option to dissolve the exclusivity.  Your ideal option is to be able to terminate the exclusivity with ___ months of notice in the event of a change of control (ie – acquisition).  How many months is fair?  Well, it depends on how long your partner needs to viably replace your technology with something else.  In some cases, this might be 3-4 months and in other cases it could be 1 year.  But at least your future acquirer will see a path to unwinding a relationship they don’t want.

A less desirable option, but certainly better than nothing, is to have a buyout right.  In the event of an acquisition, your acquirer has the right to pay money to your strategic acquirer to terminate the exclusivity.  How much must they pay is something you’ll need to negotiate and it’s possible that rather than a pre-set number up front, it will be a formula based on some prior period of performance.  That could be the revenue they generated from their product, the gross profit from their product, the royalties/license fees they paid you, or some other metric.  Essentially, you are paying them for the “pain” they would experience if you suddenly terminate their exclusivity.

It is also possible you will combine the above two options into something that might look like this:  Exclusivity buyout at a price equal to license fees paid to you over the past 6 months and termination of the exclusivity 9 months from the date of notice.  Hopefully you also have some ability to terminate the contract altogether, even if the notice period is long (ie – 1 year).  Basically, like was mentioned before you want a way for your acquirer to “unwind” the relationship if it’s not in their best interest.

Summary

If your partner isn’t willing to leverage their size and scale (see the first list of items) and if they aren’t willing to let you have any protections (see the second list of items), you possibly want to run away from the exclusivity request.  That doesn’t mean run away from the partnership.  It just means don’t agree to exclusivity.  And if they say they will only enter into a partnership if there’s exclusivity, you just might need to call their bluff.

Wait, there’s much more!!!

If you enjoyed this article, you’ll love what I cover in my video library called Founders Academy, which includes all of the key concepts and insights to help you dramatically increase your odds of success using topic-specific streaming video modules.  Click Here to Learn More

“Founders Academy is a must!  Gordon unlocked new value in concepts I thought I was already familiar with.” (startup founder)

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Author: Gordon Daugherty

Over the past 15 years Gordon has seen nearly 1,000 startup pitches, advised more than 200 entrepreneurs and been involved with raising over $45M in growth and venture capital. Throughout his 28 year career in high tech, serving twice as President and three times as CMO, Gordon has both an IPO and a $200M acquisition exit under his belt. Now his emphasis is purely focused on helping startups and early stage tech companies. Through his Shockwave Innovations advisory practice and as Managing Director for Austin’s Capital Factory startup accelerator, Gordon is an active angel investor, VC and startup advisor.

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