Five Tips for Signing Your First Enterprise Customer
Having a multinational as a paying customer is the holy grail for many early stage startups. It is a sign of growth, indicating that the company has successfully graduated from an R&D company relying on venture funding to an independent sustainable business. Negotiation of the contract is the last in a series of hurdles you have to pass, including introductions, calls, meetings, follow up emails and demos. You may feel anxious to get it out of the way and get down to business. But negotiating with a large enterprise is not on the same playing field as negotiating with an SMB, and you should go into this process aware of the risks and challenges it holds so that it may serve you better and accomplish your goals successfully.
How are enterprises different?
Enterprises may have multiple locations and hundreds or thousands of employees. Those employees may be segregated into different departments which could have little to no day to day interaction with each other. This internal disconnect within the company and other such characteristics of a large enterprise can pose unique difficulties in contract negotiation.
Firstly, these organizations are usually not very flexible. They have set policies and procedures on procurement contracts, and the in-house counsel has limited discretion to accept changes to commonly negotiated provisions. Though this may be resolved by a meeting involving legal and business from both sides, it can delay the process and deter stakeholders in your startup from pushing back on provisions that you might not have accepted for smaller customers.
Second, large organizations are legally conservative, and take an aggressive position when it comes to compliance requirements. This may be justified from their viewpoint. Large organizations are under the regulator’s microscope and are more likely to be audited. They might be willing to take some risk where the benefit justifies it, but don’t assume your product provides such benefit. The likelihood of a large corporation taking what it perceives as a regulatory risk in order to contract with a startup is not great.
Third, by virtue of the organization employing hundreds or thousands of employees, it is broken down into separate groups. The legal department, which will be leading the contract negotiation, might not be located in the same state or country as the business unit that wants to procure your product. It could be that the people involved have never met and communicate primarily via email. This limits the ability of your contact person within the organization to get the deal through and assist in overcoming any negotiation deadlocks.
This is just a partial list, but it is enough to make the task seem daunting. Overcoming these difficulties requires a delicate balance between flexibility and holding your ground. It is important that you avoid getting into prolonged discussions about trivial issues that create limited to no exposure. Negotiating every provision and providing heavily marked-up drafts might create antagonism that makes it more difficult to negotiate the core issues. Most likely, the contract provisions that you feel strongly about and those that the corporation feels strongly about largely overlap. On the other hand, it is important that you protect your interests in your core assets and avoid creating exposure that you have no ability to assess or mitigate.
Following are 5 tips that will help you get that deal through, while maintaining a good relationship with enterprise stakeholders and protecting your interest.
1. Choose the right enterprise
Being a young startup, you probably can’t pick and choose too much, but keep this in mind when you decide what leads to invest in and where to focus your precious time and energy. Negotiating with an early adopter, i.e. a company that has made it part of its mission to be on the forefront of technology, is significantly simpler than negotiating with a corporate that views innovation as a luxury. Early adopters negotiate with startups often, which means they (and their in-house counsels) better understand technological innovations and how they should be reflected in the contract. It also means that startups are a priority, which affects resource allocation, deadlines, and the pressure applied internally to get the deal through.
Additionally, in choosing your first enterprise customer, try to avoid industries that are heavily regulated. This includes insurance, health, banking, etc., assuming it is not your core market. Of course, if you are an insurance tech startup, you shouldn’t waste your time on an early adopter online merchant, but if you have a choice of not marketing to a regulated customer first, take it. The risks you will be forced to take with a regulated enterprise will likely be greater, and could create liability that you are not financially stable enough to successfully tackle.
Another tip that falls under this category is to launch in one department within the organization, and scale your product’s adoption throughout the enterprise. People who work for large organizations often expect the tools they work with to be polished and to have their kinks and bugs worked out. They expect phone support 24/7. They expect assimilation services and to have someone around to answer “how to” questions. If you are not able to contractually commit to this scale of support, it is better to launch gradually, and create a positive opinion about your product in one department, which will allow you some grace in scaling.
2. Align expectations
When you close the deal on a sales level, you probably have a few of the details worked out, like the number of users the customer will get and the price he will pay. Maybe you have discussed some additional services, like training or integration. There are many more aspects of a service or license contract that need to be resolved on a commercial level, which you might not have considered. The enterprise probably has a default position with regard to all or most of these aspects, but they might not be applicable to you. In addition, there may be aspects that you have considered, but are assuming that your position is obvious and therefore does not need to be discussed. The enterprise might have the same assumption regarding their opposing position. Discussing this at the business level will avoid having this delay the contract negotiation. This is why it is advisable to get the lawyers involved, even in the backdrop, before a first draft is exchanged. We can highlight these issues and resolve them at the business level so they can be reflected by the enterprise in the first draft.
It is also important to align expectations on the business to legal level. You and your counsel should align on the timeline for negotiating the deal, on the extent to which you are willing to take risks and make compromises in order to close it, and on issues that, on a business level, are deal breakers for you. This is especially important if you don’t negotiate customer agreements on a day-to-day basis and your lawyer doesn’t know your organizations’ business preferences, but this is true even if you and you lawyer are usually in sync, as often the position regarding each of these points might change with a large enterprise.
3. Protect your Intellectual Property
I have yet to see an enterprise SaaS template that does not contain some form of intellectual property assignment. This is one of the major problems with supplier agreement forms. No two suppliers are the same. If they were, you would not need two. The attempt to generalize the template so that it would be all encompassing often results in the first draft containing many provisions which are simply irrelevant. For instance, many enterprise SaaS templates contain professional services, including development of new IP, as a default, while most SaaS transactions do not include such services. And even if custom developments are undertaken, the concept behind such developments often could be generalized and used for other customers. Assuming you are not in the business of outsourcing services, and unless something is actually tailored to the integration needs of a specific customer, you should avoid assigning IP in anything you develop. To the extent that you do assign any developments, you should make sure the agreement clearly reflects what IP is assigned and that all other IP embodied in the solution remains yours.
Another side effect of this attempt to generalize is the obligation to deposit the source code in escrow. A startup’s instability and financial reliance on fundraising is a great cause for concern to a large enterprise looking to use their product. What happens if the startup fails, and ceases doing business? What happens if it is sold to a competitor? The service may no longer be available, or the enterprise may no longer want to deal with the startup. The requirement to deposit the source code in escrow seeks to address this issue. It allows the enterprise, under certain circumstances, to have access to the source code of the product to support its own use. This makes sense, with respect to some services which are critical to a customer, like payment processing to an online merchant. Other services, though may provide significant benefit, are not a show stopper if they are suddenly unavailable. The risk to the startup of dissemination of its source code, its most significant asset, does not always justify the benefit to the corporation. That being said, if it is drafted correctly, the risk may be significantly reduced, so if removing it altogether is not an option, it can be negotiated to be acceptable.
4. Mitigate Risks
First, accept the fact that if you are dealing with an enterprise, some level of exposure is inevitable. You will most likely not be able to limit your exposure (outside IP claims) to the value of the contract. However, you should try to limit your liability such that you are taking smart, informed risks. You should avoid undertaking liability where you have no control over the risk or exposure. Try to assign liabilities to the party in the best position to mitigate them. And when you do undertake liability, understand exactly what risks you are taking, so you can take the actions necessary to so mitigate the risk and exposure, either by enhancing protections from occurrence, obtaining insurance or obtaining back-to-back indemnification, if a service downstream is in a better position to mitigate the exposure.
If you undertake compliance with regulatory obligations, comply. Don’t take the risk that your non-compliance will go undetected. The risk of you being scrutinized is higher when you work with large enterprises, especially when it comes to data protection. Any user worried about his information being processed by an unknown small business from halfway across the world can turn to the regulator with his concerns and bring about an audit.
5. Maintain M&A Flexibility
Another provision included in many corporate supplier templates, stemming from the same fear of startup instability, is the change of control provision. These provisions either limit the supplier’s freedom in executing an M&A or provide for a right by the enterprise to terminate the agreement if such transaction takes place. This may make sense in some cases, but consider that a startup company’s greatest assets, after IP and in some cases personnel, are its paying customers. A right by a customer or customers that generate a significant part of the revenue to terminate the agreement as a consequence of the M&A transaction may have a significant effect on the valuation in the M&A. It is advisable to try and limit this right to an M&A where the acquiring entity is a competitor of the enterprise. It should also provide that the enterprise does not have a right to prevent an M&A, only a right to terminate the agreement upon consummation, perhaps with the release of the source code from escrow. This is true of provisions limiting assignments of the agreement as well, as this would preclude the startup from executing an M&A by way of an asset sale.
