White & Lee’s Soup to Nuts 2002

STRATEGIC PARTNERSHIPS Session III: April 13, 2002 White & Lee’s Soup to Nuts 2002

More than Just 10 Rules for Strategic Partnering – Paul Leboffe, Esq. Leveraging your IP Assets – Dennis Fernandez, Esq. Corporate Partners – What they Want Today International Partners - Doing Deals Overseas Entrepreneurs – There’s Nothing like Experience Today’s Agenda

What are “Strategic Partnerships”? Why enter into Strategic Partnerships? Trends in Technology Strategic Partnerships Keys to a Successful Partnership The Strategic Partnering Process Selected Key Issues in Strategic Partnering My Road Map

Many Forms Joint Ventures (formation of a new company) Virtual Alliances – JV without co-locating Joint Development Agreements – R&D Distribution & Marketing Agreements Mergers & Acquisitions Pure Equity Investments Our Focus: Licensing/Distribution/Equity BigCo/SmallCo What are Strategic Partnerships?

Big Co Competitive Advantage Technology / expertise Decrease “Time to Market” (make / buy) Access to Innovation Prevent Competition (cheaper acquisition) Why Enter a Strategic Partnership? Small Co • Funding • Reputation • Distribution Channel • Market Validation • Critical Mass • BigCo Plans

Less promiscuity; more selectivity Longer due diligence Corporate governance more important than ever Partners key to securing financing Reference customers Expedited path to revenues - key Partner strategy in business plan Increase in cross-boarder partnerships Increase in early-stage partnerships (market consolidation/market share/time to market) Trends in Strategic Partnerships

“Not Invented Here” Less of an Issue – SmallCo partners “competing” with internal development efforts (build vs. buy decisions)(particularly Int’l) BigCo partners judged by quality of their strategic partners Co-petitors – e.g., Palm and Handspring Trends in Strategic Partnerships

Corporate Investment is WAY Down! Corporate investment tracks VC investment – Overall investment off 60% $121B invested in 2000 and $50B in 2001 – Q4 Investment off 67% Q4-2000 $27B invested in 2,358 companies – $9B in 570 companies in Q4-2001 Early stage: 22% in Q3 and 16% in Q4-2001 – Avg. 1st round investments decreased from $10m in 2000 to $7m in 2001 Trends in Strategic Partnerships

Corporate VCs Reeling from Losses –E.g., in 2001 Microsoft lost $5.7B, Wells Fargo lost $1.2B, Intel lost $633m Corporations out of venture business; unless strategic, and . . . ROI now more important than ever –Must be quantifiable – Short time horizon (e.g., 6 months to 1 year) Trends in Strategic Partnerships

Maturity matters –Company must be built, with some track record and/or revenues – BigCo less willing to accept SmallCo as R&D arm – Crackerjack management team SmallCo Catch-22 – Solution: pre-sell; network Trends in Strategic Partnerships

Pick the right partner – Alliance strategy, rather than strategic alliance Commitment – Management buy-in cited as a top reason for successful partnerships – Implementation more difficult than formation Clear roles and goals Keys to Successful Strategic Partnerships

The Alliance Strategy Initial Discussions – NDA Next Steps – LOI’s, MOU’s, Heads of Agreement Definitive Agreements – Equity – Distribution – Licensing The Strategic Partnering Process

Make a list of strategic objectives and acceptable risks – This should be revisited throughout negotiations – Avoids tendency to “give away the farm” and lose sight of original objectives Carefully define your business – Know your core competencies – Foresee competitive threats – Prioritize related businesses The Alliance Strategy

Profile your Partner – Identify partners who have what you need – Ask if you fill a niche or a missing link on BigCo’s strategic path Classic case: missing piece for end-to-end solution Riskier approach: anticipate need and build to it – Consider how to approach them The Alliance Strategy

How do you know needs of partners? –Industry resources – trade publications, (e.g. Red Herring, The Industry Standard, Business 2.0), Partner Web Pages, analyst reports – Speak with attorneys, accountants and other advisors – If Partner is public, go to EDGAR http://www.sec.gov/edgar.shtml – Personal contacts The Alliance Strategy

Other Factors: –Perception Investors want verification without dominance Public – you are in BigCo’s pocket – When to seek partnerships Typically better in early rounds, but BigCos want more mature companies Network early, then establish relationship when ready – If Equity: Amount of investment Limit to 10 to 20% Consolidated reporting affects BigCo The Alliance Strategy

Non-Disclosure Agreements – ALWAYS ask partner to sign – Expect mutuality – Open the kimono slowly – Don’t expect complete protection If violated, enforceability is very expensive and time consuming (proof: define trade secrets, how disclosed, and clearly confidential at time of disclosure) Build trust first, then disclose information Initial Discussions

Carefully outline details of agreements – Get professional assistance Familiarity with other deals. Knows key issues and how to draft them Clear terms means less time on Definitive Agreement. Not typically binding – Except confidentiality, and perhaps, fees Risk of binding LOI is incomplete terms Careful: can be “binding,” even if not –Conduct of parties and reliance Next Steps – the LOI

Dispute Resolution Exit Strategy Equity Issues Distribution Issues Licensing Issues Definitive Agreement

Create incentives to work out issue –Require management involvement, moving up chain-of-command –For performance issues, tie to fees or scope e.g., exclusive to non-exclusive – Use outside “neutrals” only after internal system fails to resolve dispute Dispute Resolution

Critical to SmallCo –Left with people, equipment and facilities can’t support –Taint of abandonment – difficult to do other deals CYA – Cover your assets – Termination for “convenience” Notice period Cover salaries and/or other expenses Buy-out inventory Exit Strategy

CYA – Agree up front on who can terminate, and under what circumstances (e.g., partial termination) – Agree on ownership of IP on termination. –Agree on continuing obligations. Use of TM on completed, but not shipped products. Confidentiality. Exit Strategy

Damage control –Mutual press release –Mutual non-disparagement clause –Equity – take away: Board observer rights Right of first refusal Information rights Exit Strategy

Equity Issues • Board Participation • Limit to observer status; exclude during “executive sessions” and/or conflict situations • Tie observer rights to % ownership (e.g., 25% of originally-purchased stock) • % Ownership – “Strategic” investment without jeopardizing opportunity to pursue other partners – Maximum of 20%; otherwise, consolidated reporting

Equity Issues Equity Issues • If partnership is terminated –Ask for “call” right – Risk BigCo seeking a “put” in exchange • Contra: Put under note payable over time • Right of First Refusal – Generally not good idea • Taint if not exercised • Discourages competitors – Better: Notice and opportunity to bid • Board Participation • Limit to observer status; exclude during “executive sessions” and/or conflict situations • Tie observer rights to % ownership (e.g., 25% of originally-purchased stock) • % Ownership • “strategic” investment without jeopardizing opportunity to pursue other partners • 10% for pooling and 20% for consolidated reporting

Audit Rights –Trust, but verify –Annual are typical –Check for injunctive relief or other enforcement rights where distributing –International partners are difficult to audit Use local CPAs Distribution Issues

Too many issues to cover – definitely use a skilled attorney (see outline of issues) Scope –Use, make, distribute, sublicense, reproduce – Establish with expansion and growth in mind, as well as downside protection if partnership fails – Field of Use Licensing Issues

IP Ownership – Be clear as to who owns what: original technology, improvements, jointly developed IP – Upgrades vs. Updates (e.g., 1.X, 2.X vs. X.1, X.2) Territory: Geography and vertical markets Strategy: Carve up IP, territory and other rights to preserve as much as possible Licensing Issues

Exclusivity – Generally, not a good idea – limits value – Negotiating Ideas: Limited term Limit to territory or product line Require minimum sales or convert to non-exclusive Licensing Issues

Fees – Typically royalties based on sales volume (units or % of sales) – Joint product development – let them pay – If Licensor: Front-end fees Incremental fees for new products Include “sales” to affiliates and for demo units Request minimum volume commitment Tiered royalties – front end loaded Licensing Issues

White & Lee’s Soup to Nuts 2002