The University Startup Company Law Firm California Massachusetts Florida www.rothmanandcompany.com steve@rot

1. The University Startup Company Law Firm California Massachusetts Florida www.rothmanandcompany.com  steve@rothmanandcompany.com (310) 993-9664 Stephen P. Rothman, Esq. NCET2 Rothman Slides Strategic Partnerships 1

2. Negotiating Process Strategic partnerships are complex Take longer to work out than other deals Relationship often extends over several years, changing circumstances; contrast one shot purchase; more like a marriage than like a date Use of “agreements to agree” Documentation tends to be long; high transactions costs, including personnel time and legal fees Takes a longer time to work out a deal with a large company; layers of decision makers; person you are dealing with probably needs to sell deal internally; fairly bureaucratic; heavily lawyered. That can also be used as a negotiating tactic From inception to final signing papers can easily take a year 2

3. Economics of the Deal I How will each party make money? 1. Equity appreciation LargeCo strategic partner may not care too much about the equity value, if they are primarily motivated by something else Opportunity to split up fields of use and get significant funding without giving up significant equity Need exit strategy (for the startup) Avoid option to buy / right of first refusal Notice in advance of sale, to the extent not prohibited by contract, ok Formula buyout – may not come out right; opportunities to game it Buyout by LargeCo at appraised value IPO Where strategic partner is a customer, avoid them also being an equity holder 3

4. Economics of the Deal II 2. Ways of making money other than equity appreciation • Selling to other party (purchase of goods or equipment; fee for services) • Then how is pricing set? Fixed or variable • How to deal with change in cost structure • If it’s a JV operating as a separate business, selling to third party? • Then how are profits split? • Are profits distributed or retained for growth? • Does one party have a preferred return? • If individual partners are making ongoing contributions to the JV (supplies, IP, management, cash), how are they compensated for it? 4

5. Control • If there is a JVCo, does one party designate a majority of the directors? • 50/50? • Equal representation with an independent third party to avoid deadlock. • Mutually agreed budget; annually (agreement to agree) • Provisions for modification • Veto over major events – sale, dissolution, merger, others? • Partners have veto rights over many things, or hire JVCo management and get out of the way? 5

6. IP Who is putting it in? One party will develop as part of the deal Both parties contributing IP to the venture, and they will be integrated One party owns background IP, but JVCo will improve Third party, such as university, owns Who will own / have rights to / the IP? SmallCo, LargeCo, JVCo? Assignment v. license Duration of license Co-ownership (usually considered a bad idea) Divide by field Startup / Largeco / University deal, where university owns key IP – does startup license from university and sublicense to Largeco; or JV entity takes direct license from university; Where does the IP go if the deal fails and is unwound? Where does the IP go if the startup fails? (software source code escrow) 6

7. Finance More money needed than expected One party required to put in money? Both? Neither? How much equity does a party get for future contributions of cash? (Dilution) Agreed in advance? 7

8. Diligence • Problem of one party losing interest - JV may be a small matter for LargeCo, but the only business SmallCo has • LargeCo may worry whether SmallCo is capable of performing • Milestones • Remedies if the milestones are not met • Price penalty • Pull the plug • Springing license on other party’s IP if they don’t perform? 8

9. Exclusivity I • Exclusive supplier arrangement - customer not allowed to use other supplier • If no exclusivity, can purchaser take the technology developed by other party and put it out to bid? If so, how is developer fairly compensated? • If exclusivity, how does purchaser assure competitiveness of price, quality? 9

10. Exclusivity II • Exclusive purchaser arrangement - supplier not allowed to sell to other customer • LargeCo, having perhaps paid JVCo or SmallCo for development, or assisted with it, doesn’t want technology used by competitors • JVCo or SmallCo doesn’t want to limit its market size • Compromises: Can’t sell to limited list of specified competitors; leaves rest of market available. “Head-start” provision - no sales to others for a specific period of time 10

11. Competition and “Corporate Opportunities” • Can an owner compete with JVCo? • If not, what is the scope of the non-compete? • LargeCo often wants waiver of corporate opportunities doctrine 11

12. Documentation • Can vary based on the structure and particulars of the deal • If a supply relationship, may just be a Supply Agreement • If an entity being set up, then governing documents for the entity • For LLC, Operating Agreement • For corporation, certificate or articles of incorporation, shareholder agreement, voting agreement, etc. • Often multiple side agreements • Lease of real estate • Employee Secondment • Supply agreement • IP licenses • Others 12

13. Questions? Stephen P. Rothman, ESQ. ROTHMAN AND COMPANY, P.A. www.rothmanandcompany.com E-MAIL:steve@rothmanandcompany.com (310) 993-9664 13