7 Sales & Licensing Documents You Need to Bring Your Product to Market
When bringing a product to market, there are several legal documents specific to sales and licensing you need to consider from the outset. Your product is the tangible result of your ideas and creativity and it’s essential to protect it. Without these documents, you risk running into obstacles at your startup’s most critical moments, from handling conflicts to closing financing and M&A transactions.
While this can sound intimidating, the good news is there are many resources for startups out there to help you build a strong legal foundation. In SFU VentureLab’s “Sales and Licensing” webinar, we had Ariel Laver, Associate at Fasken, and Jeff Holowaychuk and Zahkir Nathoo, Associates at Clark Wilson LLP, guide us through 7 legal documents you need when developing and commercializing your product.
Before disclosing anything about your product to a potential partner, sign an NDA that restricts both parties from sharing confidential information. Key considerations of this agreement include:
- Nature of the discussions: Are both parties disclosing information or is it one-way?
- Purpose of the discussions: What kind of information exchanges classify as confidential?
- Restrictions: For what purpose can a party share the information discussed?
While entering into an NDA is a critical step to forming a partnership, according to Ariel, “An NDA is not a substitute for a definitive agreement or intended to cover actual product development. It’s just a tool you use to get into the door.” Move quickly to sign a development agreement before you start any meaningful work on the project.
2. Term Sheet/Letter of Intent (LOI)/Memorandum of Understanding (MOU)
Laying out the main terms of your collaboration in a Term Sheet, LOI, or MOU early on allows you to cut down on negotiations and legal fees when your lawyer eventually puts together a development agreement. Similar to NDAs, don’t rely too heavily on this document as it is mostly non-binding and just intended to set a framework for the definitive agreement.
3. Collaboration/Development Agreement
Everything you’ve signed so far has laid the groundwork for the development/collaboration agreement, a document that specifies each party’s rights and obligations during product development. This is another foundational document that will determine the roadmap of your collaboration. Discuss and document the following terms with your partner:
- Work allocation: Who will do what, and by when?
- Ownership of IP: Who owns the results and work product?
- Commercialization rights: Will this agreement also cover licenses and use rights?
The biggest mistake Ariel sees entrepreneurs make here is entering into joint ownership of IP without a good business reason. While you’ll avoid tough negotiations by splitting everything 50/50, according to Ariel, “It becomes much more difficult to protect and enforce IP as you need to keep going back to each other to get approval at each stage… it causes headaches when you have something valuable.”
4. Joint Venture Agreement
Similar to the development agreement, this agreement specifies timelines, work allocation, and IP ownership. However, it also decides how decisions are made, who will fund what, and what commercialization rights each party will have. With funding, many entrepreneurs believe they can finance everything through profits or raising capital. However, this isn’t always the case; documenting each party’s funding commitments positions your startup to meet its obligations no matter what happens down the road.
5. Manufacturing Agreements (physical products only)
When selling a physical product, you’ll need to enter into an agreement with a manufacturer who can transform your idea into something tangible. Key terms of this agreement include IP ownership, product specifications, warranties, and insurance. According to Jeff, IP terms are some of the most important to carefully consider during documentation. When dealing with any third parties, including contract manufacturers, he says to “make sure you know where [the IP] is coming from, what rights you have to it, and what rights you have to pass [the IP] on to your customer.”
Years ago, one of Ariel’s clients came across an exciting opportunity to sell their startup. However, during due diligence, the acquirer found they used open-source code with a “copyleft” license, compromising the entrepreneurs’ ownership of their product. Rushing to find a solution, they found someone who could replace their license with a commercial one – the catch? Knowing the transaction had to close the next day, the seller charged $200,000 over the normal price for the license!
As Zakhir explained, “If you get a potential purchaser or investor, or if an issue arises and you don’t have things laid out clearly in a document, it may be time-consuming and costly.” In this startup’s case, the cost was hundreds of thousands of dollars that could have been avoided with careful legal consideration early on.
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6. License Agreement/Cloud Services Agreement
To retain control of what happens to your product once it leaves your hands, you need an agreement that documents exactly what rights a third party using your product has. The specifics of any agreement will vary widely based on the product – SaaS products require a cloud services agreement whereas a license agreement is used for many other types of software or kinds of IP. Regardless of what you’re selling, the key is to describe it thoroughly as the product description will affect the rest of the agreement’s terms. Ariel explains “the initial question to ask is, is this product an off-the-shelf product or will it include custom development?” For example, if you define your product as custom development, deciding which party pays for the development and owns the IP will be heavily negotiated.
7. Product Agreement
It’s finally time to get your product into the hands of your end customer through a product agreement. This document’s structure depends on your distribution strategy as different agreements are required when selling directly to your end customer (supply agreements) or a third party such as a reseller or distributor (reseller/distribution agreements). In all three agreements, you really want to be clear who is responsible for shipping; according to Jeff, the question to ask is “Once [your product] leaves your hands, who is responsible if those goods get damaged along the way?” Answering this assigns the risk associated with shipping to one party who will be responsible for paying insurance.
By investing time into these 7 legal documents, you’re positioning your startup to hopefully avoid conflicts, be resilient should a conflict arise, and take advantage of any opportunities that come your way. The hard work doesn’t end here; scaling up and building your startup’s legal resiliency is an ongoing process.
At SFU VentureLabs, a science and technology growth accelerator in Vancouver, we support startups through this process by providing them with the mentoring, programs, and services they need the most, when they need them.
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SFU VentureLabs does not provide legal advice. Please ensure you talk to a lawyer on these issues.