Any high tech enterprise that is not using the right contracts in its day-to-day operations may be more at risk than a company with a less technical orientation would be. High tech enterprises have all of the problems of a small- to medium-size company, plus the need to carefully protect their intellectual property (IP). They also have some unique agreements, such as development, joint development and some forms of OEM contracts.
For information on three kinds of contract from the high tech enterprise perspective, please to go to High Tech Enterprises: 5 Contract Tips.
What follows is advice for the high tech enterprise resulting from over ten years' experience performing due diligence on high tech firms. It does not deal with contracts other than to point out that your non disclosure agreement may not mean a thing if you fail to protect your confidential information carefully.
Protecting the High Tech Enterprise's Confidential Information
Did you know that labeling your information “confidential” may not be enough? What the lawyers have told me is that if you fail to make a real effort to protect such information, it may not be deemed confidential after all. When performing due diligence on high tech enterprises, I always had to take into account the protection in place for the confidential information:
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Is access to areas where confidential information is kept and used on a daily basis limited? If anyone off the street can walk into an area where sensitive information is in use, it could be hard to prove that you treated your material as if it was confidential. That is what key card picture badges are for.
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Can a visitor just walk into the operation, or is there a sign in procedure?
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Ideally, visitors must identify themselves, sign in (a process which should include the name of the person with whom they are meeting), and receive a temporary 
badge that clearly identifies them as a visitor. That way, when the visitor asks to use the restroom and ends up in your test lab, someone will notice.
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The person receiving the visitor should come to the reception area and escort the visitor everywhere.
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Note the assumption that leaving the reception area requires a key card other than a visitor's.
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Do subcontractors have their own key cards that limit their access to certain areas?
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Is highly sensitive technical information left out on desk tops each night? That was a major red flag in due diligence.
This is just a part of what appears on my Due Diligence Check List. A very small company may not be able to comply with most of these requirements. It is important to have the ones you can in place now and add others as you grow.
Strategic Business Alliance Guides
First, an offer: Effective Agreements has made available three guides on strategic business alliances. Please take a look and let me know what you think. You can download one, two or three of the guides or all of them combined in one document. Put comments in the comment section of this blog post.
Commercial Contracts: The Confusion
Having worked with dozens of companies over the last ten+ years, I have found that even simple commercial agreements cause fear and trembling because the "C" level executives do not understand them. Why should that be the case?
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Attorneys do not take enough advanced English courses in school. No, I am neither kidding nor being facetious. The point of a commercial agreement is to state everything 
so that the meaning is crystal clear to everyone. That discipline is learned in higher level English classes. My approach originates in equal parts from working with other agreement experts (attorney and business people) and from the incredible pressure put on me by a Rice professor to write (and re-write) a final paper on Victorian Poetry (Tennyson, if you must know.)
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The last I looked, “B Schools” did not require courses on contracts. Hopefully I am outdated.
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The CEO or CFO have never had the time to study and understand the language of even the most basic document, nor have they had anyone available to explain them.
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While Amazon has plenty of books on contracts, and some of them must be effective and readable, the usual CEO and CFO have imited reading time and will choose topics they see as more relevant.
Errors When the Business Person Drafts
Some of the most common mistakes I see when business people do their own drafting:
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Inconsistent Terms. In one section it's a Widgit (capitalized as if its a defined term) and later its a Device, and finally it's a “4G smart phone application”. Here are the rules: (a) describe it completely and clearly once, creating a capitalized, defined term, then (b) only use that defined term from that point on.
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Jargon. I have never had a principal yet who did not use a lot of jargon, which, in its place is fine. The problem arises when it is used in the commercial contract when there is no need, or when a simpler term can be clearly defined and used.
Business people should not be afraid of commercial contracts; it is not a good business practice. Both the drafter and the reader can do a lot to make the process less painful.
I have worked on commercial agreements from a simple international sales contract to an international M&A transactions in places as diverse as England, Ireland, Holland, Israel, Germany, Brazil, and India. For an illustrative and amusing “war story” about misconceptions concerning the definition of business terms, click here. There is additional information on international transactions at Creating International Business Alliances – 5 Pointers.
Different Culture, Different Negotiation Strategy
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No business person should even be allowed to represent your company unless that person is very familiar with the company's culture or has at least studied it;
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If you have employees from the country in question, use them if there are no cultural 
barriers to doing so. For some countries there is.
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There are companies that do nothing but train business people to be effective in the other culture. The cost of such training will be offset by the ability to create a useable negotiation strategy;
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There are also companies that will help you prepare and provide guidance while you are in the foreign country. I would be very hesitant to do any kind of deal in China without consulting Pacific Rim Resources;
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Read the books. There are now several books in the Kiss, Bow or Shake Hands series, some on business in certain areas and all designed to help the business person.
Business Terms
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Do not forget that a company in Holland does not have to keep its books according to GAAP. (See the “war story” via the link above;”)
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A different culture means a different negotiation strategy. That does not mean that you should not have one. Your overall strategy may have to include a year of developing relationships. Eventually, though there will be a negotiation, and a negotiation strategy that takes into account all of the cultural differences between the parties will be required;
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The European Union has a body of law that will have to be taken into account. This is a legal point to be discussed with counsel; I just know the EU laws impacted acquisitions upon which I worked.
Canada
I throw this in because Americans forget it so frequently. Canada is a foreign country, not the 51st state. You may think they do business just like us, but you would be wrong. If nothing else, remember that their legal system and way of doing business come from England, not the United States.
In a previous post on international strategic alliances (click here), Letters of Intent were referred to as a conundrum, as they remain. CEOs and CFOs seem to gravitate toward them for strategic alliances, probably in order to reduce the time they must spend on the contract. Having run into a case recently where one would have been useful for a domestic contract, I decided to provide additional input on:
Assumptions on Strategic Alliance Negotiation Strategy
The discussion below assumes that the negotiations are proceeding by Effective Agreements 
preferred methodology: using an outline and a flip chart to create bullet points. (For a complete description that will make this much clearer, please view Effective Contract Negotiations – 11 Tips.)
Why a Strategic Alliance Letter of Intent?
The argument for a Letter of Intent at this stage is that it memorializes the agreed points and provides a document which management can show to the Board. If all of the terms can be described clearly in the Letter of Intent, the parties will have a firm grasp on where they stand in the negotiation and where they have “agreed to disagree.”
If the Effective Agreements negotiating process (as discussed in the 11 Tips) has been followed, the Letter of Intent will be a concise and presentable statement of the facts.
What Belongs in a Strategic Alliance Letter of Intent
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A statement that the Letter of Intent (“LOI”) is not binding, and that only the final agreement will be;
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A statement that it does reflect the thinking of the parties at that present time in regards to the strategic alliance;
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Bullets or short paragraphs on what the parties have decided concerning the major issues for the Strategic Alliance. If my model has been followed, this would be a narrative version of the bullet points taken from the working flip charts.
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Where day-to-day items have been discussed and need (a) to be memorialized and (b) shown to the Board, they should be included as well.
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The intention of the parties on how to proceed (usually to drafting a contract.)
Note that if there is an LOI and it is complete, the person charged with drafting the agreement (often the CEO or CFO) can use it in place of the flip charts.
Subcontractor Agreements can provide difficult challenges, and endless complications if they are not drafted correctly up-front. Please note that some of the potential problems are purely legal, determined by case-law and statutory changes. All of these tips will be useful to the business person. (Remember, Effective Agreements will review one template, up to an hour's work. Click here to learn more.)
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Ascertain whether you are dealing with a person or a corporation. If the subcontractor is employed by a corporation, even a one person corporation, be sure of who is the legal signatory. (Companies with whom you have an ongoing agreement to supply various numbers and types of workers on an as-needed basis will require a separate posting.)
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Even if the subcontractors to be engaged are supplied by a company, list them on an attachment to the agreement. You want personnel whose resumes you have approved working on the project. Any personnel changes need to be approved in advance. That requirement needs to be in the agreement as well.
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As in Master Services Agreements, be absolutely sure that the Statement of Work (SOW) describes the subcontractor's duties as clearly and succinctly as possible. This is another case where a bad SOW will haunt you.
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Include very strong language that ensures that whatever the subcontractor does, all intellectual property he/she creates is owned by you (or your client if that is to be the eventual outcome). Note that there are actually limits to this. If you are using a subcontractor to write a business plan, and that person relies on his/her business plan 
outline that he/she has been using for years, there must be a mechanism so that outline remains the person's IP. No subcontractor will sign an agreement that takes away something they need to continue doing subcontract work for other clients in the future.
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Language making it clear that the subcontractor is not an employee is critical. This is one of those areas where counsel should be consulted. If the subcontractor can be deemed an employee, he or she can come back and claim medical benefits you provide for your employees, even after the fact. There are also rules the government uses to determine if the subcontractor was, in fact an employee. If the decision is “yes”, you owe employment taxes on the individual; a most unpleasant surprise. This list of requirements is available online and from your attorney. Having a subcontractor agreement that clearly states the person is not an employee is an important consideration on the list, but it is not a panacea.
Subcontractor agreements cover a lot of ground. Doing them properly may prevent painful and expensive surprises.
Here are some non disclosure agreement tips that should be of use to any company. They are based on 20 years of business experience, not on any lengthy study of the law. Please download 7 Non Disclosure Agreement Tips. Some ways around the obvious difficulties discussed below are covered, plus other useful information.
Defining What Is Confidential
What are the criteria I see most often in disclosure agreements concerning what is required to make information confidential? It depends on whether the information is presented in written 
or oral form.
Written Information
A very common provision is that written information has to actually be marked “confidential”. This seems straightforward, but it really has a two landmines built into the language.
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If the information should have been confidential and someone just forgets to mark it, where are you?
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A problem arises when you mark too many things “confidential” when they are not. (I believe the test is if you keep them as confidential in other circumstances.) This is a legal point, so I am going by what lawyers told me, but it is a simple concept. If one of your people puts up a chart showing the names and locations of available meeting rooms, but it is in a PowerPoint deck, every page of which is marked “Confidential”, you could have a problem protecting the information that actually is confidential.
So, some care has to be taken if the non disclosure agreement has these provisions for written information: do not fail to mark something that is confidential and do not mark things that are not.
Oral Information
When presented orally, two requirement I often see are (i) an oral statement must be made that the information is confidential when it is presented and (ii) the party receiving the information must receive written verification that certain identified material was confidential within “x” days of its delivery.
Now, I have no empirical evidence, but how often do you think a presenter or the attendee at a simple meeting remembers to write down everything he/she said that was confidential and actually passes it on to the other side? My guess is that the percentage is very low in both cases. There would also be a temptation to write that “the presentation (or discussion) on May 17 was confidential.” I do not know if that introduces the same problem as in bullet two under Written Information, but it is probably better than the alternative of forgetting to write anything.
Download 7 Non Disclosure Agreement Tips. Some ways around the obvious difficulties discussed above are covered, plus other useful information.
You may wish to review some earlier posts about negotiations like Effective Contract Negotiations – 11 Tips and Effective Agreements Have These Three Things in Common. There is also an article on my website that applies to the subject.
Win Win Negotiations
How do you define a win win negotiation? A question with several possible simplistic answers:
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Both side are happy with the contract when they are done
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Each side gets everything it set out to get in the final contract
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Both parties expect to enjoy an equal measure of success going forward.
For the Professional
I invite comments below on my view of these definitions: they are true, but they do not go far enough. The parties will not know if the negotiation was a win win for some time, because a win win means the parties receive a return on investment (ROI) during the term of the agreement that meets or exceeds the company's criteria based on the company's cost of capital. That makes things much harder:
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Measuring the ROI on a single contract is not something every company is set up to do; and
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The cost of capital is a hard number for some companies to get a handle on, and it is a moving target. If there has been no funding event and the company is not currently borrowing money from a bank, it can be very difficult to estimate.
Back to the Common Win Win Definitions
OK, I was going to do a lighter, more fun to read blog post, and now I have dumped some 
pretty technical stuff on you.
In fact, the parties decide if the contract was a win win as soon as negotiations are concluded. What we are dealing with here is the perception that the contract is a win win. And, that takes us right back to the first three bullet points.
The Warning
My warning is for the start-up or early stage company dealing with a very large company to obtain distribution and/or direct sales, a win win may be impossible. The smaller company may very well have to accept lopsided terms to get the business. That is not to say they should refuse to proceed. As one client reminded me, one sale could pay for all of the expense in creating the relationship and for a lot of grief along the way.
The Intellectual Property as the Product
There are companies that make their living by developing then licensing or even “selling” intellectual property rights, but these are highly specialized and/or very large companies with a large portfolio of patents and other IP rights that were meant to be easily separated and traded or sold.
Please also see Intellectual Property Agreement Template: 5 Warnings. You may also arrange for a review of one of your agreement templates up to four pages.
The API and PDK
If the product is software (or equipment with a significant software component), then the seller is much better off developing it so that companies (the “buyer”) can create a new solution using:
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A standardized Application Programming Interface (“API”). The API allows “buyers” to develop product without access to any source code or much in the way of operating code.
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A Peripheral Developers' Kit (“PDK”) that will be given to potential OEM “buyers” to 
make the development of APIs simpler.
There is a parallel well known to the reader for these solutions: the “App” for smart phones which are developed using PDK or similar devices to create new functionality for the phone. The “seller” benefits (aside from any royalty arrangement) from having more and more uses in the market for its core product.
Contracts With Built-in IP Arrangements
The two major types of agreement the author sees using these techniques are:
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Original Equipment Manufacturer (“OEM”) Agreements. Here the intent is for one company (the “buyer” for this article) to combine another company's (the “seller's”) product, then selling a more complete “solution” to the end user customer. The “seller” incurs lest risk if this can be done through an API and perhaps a PDK.
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Software Licensing Agreements. The “buyer” may want to “tweak” the functionality of the software in one or two areas through the API. (Yes, the difference between this and an OEM agreement is muddy.)
In both cases, these mechanisms will be created only if there is an expectation of numerous “buyers” gaining access to the software, whether through formal OEM Contracts or simpler arrangements.
Being able to us the above techniques makes drafting a contract that solidly protects the “seller's” IP with less convoluted license grants and other impediments. Without these, the “seller” will have to negotiate:
Effective Contract Negotiation: 11 Tips1
Formal Contract Negotiation Training
There are organizations that teach nothing but negotiation skills. You should consider taking advantage of what they offer. This post should help you better negotiate in some cases, but it should also cause you to consider formal training in negotiation. Such courses will provide much more insight into the kind of role to adopt, reading cues from the other side, more complex techniques, etc.
Prepare for the Negotiation
An attorney once paid the author what he considered a very high compliment, "he is always prepared for every negotiation.” He was referring to the following effective contract negotiation tips:
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Read the contract a number of times until you are very comfortable with it. Any one contract can be very complex. As an example, download our 10 Tips on Negotiating a Basic Sales Agreement.
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Analyze the sections so you are sure of their meanings. Do not forget the definitions.
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Look for and understand the relationship between key sections, such as indemnifications and limitations on liability.
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Consult with the right people – not just management and other team members, but also subject matter experts that will have to make the contractual relationship work from day-to-day.
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Develop a written negotiation plan, usually a mark-up, but with copious marginal notes on:
A good outline of the type of agreement is a useful tool to have on hand when reviewing; download an example of one of ours dealing with OEM Agreements.
Have the Right Negotiation Team
Effective Agreements has always advocated three team members other than the attorneys, Read additional information here. The team members should be:
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One person who is the main negotiator and the only one who speaks officially for the team Everyone else should feed information to the negotiator by note, during caucuses, etc;
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One person who only takes notes so that, at the end of the day, the team knows the status of every issue (where the other side may not);
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Perhaps the most important member: the one who remains silent and takes no notes, but is free to listen to everything that is said. This is a very powerful technique. This person has time to:
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Listen to everything that is said by personnel on the other side, even if they are not active in the negotiation;
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Think through what he has heard in relation to the negotiating plan;
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Call for breaks and fill in the negotiator on what he/she has heard and his/her analysis of the current situation. Remember, the prime negotiator must be thinking about what to say to the other team next; this person does not.
View a "war story" about the effectiveness of the listener in negotiations here.
The above structure may not be optimal in every case, depending on such variables as the size of the other team, managements wish to be involved, and items requiring subject matter experts, such as highly technical issues.
Behave
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Do not get emotional and raise your voice, unless you have decided in advance to do so (hey, sometimes it works.) Definitely do not leap across the table and strangle anyone on the other side;
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Never, ever correct something one of your team member says in front of the other team with the possible exception of correcting a technological error;
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Do not talk if that is not your role.
Understanding negotiations is of critical importance to the outcome on each indivdual contract negotiation and, in total, on the health of your company.
This would be a good time to download the Outline For an OEM Agreement, as it covers one example of a strategic alliance in some detail.
My previous post was, admittedly, a rant against joint ventures except where they are required to get the job done. Now, four reasons why I think a strategic business alliance can be a better structure, and some suggestions to make them so:
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Adaptability and Specificity. The strategic business alliance can be created by one agreement or several, each specialized and with the level of detail required for its purpose. A Joint Development Agreement will be very complicated indeed, with huge sections on what happens to all of the intellectual property. On the other hand the Master Sales Contract can be much simpler.
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Governance as Needed. If the arrangement is complicated and relatively long term, some management mechanism must be introduced. We suggest an escalation process. That would work this way:
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One person from each side will be named as the primary contact for the other. Usually these are named in the Agreement, with a provision that they can be changed out on written notice. These two individuals should be able handle 99% of the problems that come along. That means management allowing them to make some of the important decisions – it is called delegation.
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If there is a matter that they cannot solve in “x” days, the problem goes to their respective vice presidents.
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If the problem has not been solved within “y” days, it goes to the CEOs. For this reason, “x” and “y” should be some days in length, to keep the CEOs from being bothered too often.
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If the CEOs cannot reach agreement in “z” days, one party terminates or sues the other one.
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Divorce. If it does not work out, all the parties have to do is terminate the several agreements. If all of them have the same termination clause (e.g., upon thirty days written notice from one party to the other), then notice is given and that is that. There is no haggling over the value of an asset as there might be with a joint venture. The contracts will require language about what happens on termination in regard to ongoing product maintenance, final payments and more (one of the ways that “Master Agreement” could be useful.)
Suggested limits on the length of the blog posts suggest stopping here, and picking up other aspects of the strategic business alliance in later posts.