Strategic Alliances:

1
Strategic Alliances Why, When How
Harry A. Hanson, IIIPartnerChair, Business
Technology GroupChoate, Hall
Stewart Massachusetts Software Internet
Council Legal Issues Series March 21, 2002
2
What is a Strategic Alliance?

• Start-up technology company receives funding from
  a larger corporation for research development
  in exchange for
• A license
• A royalty
• An equity investment
• A strategic alliance may involve an equity
  investment but is far more complex than a simple
  investment transaction.

3
Why a Small Company Benefits

• Access to funding
• Customer/product validation, which can lead to
  more customers and higher equity valuation
• Access to the big company sales/distribution
  channel
• Fewer management controls than VC financing

4
Why a Big Company Benefits

• Access to new technology
• Less development risk
• Avoid charges to earnings by funding through
  equity investment
• Create or expand access to manufacturing capacity

5
When to Explore a Strategic Alliance

• Focus from the earliest stage of development on
  strategic alliances can help validate the
  business model and enhance financing
• Strategic alliances with potential customers can
  accelerate product development

6
Early Stage Strategic Alliances
Examples

• Big company provides media company with access
  rights in exchange for revenue sharing, equity
  investment and warrants
• Small company obtains financing and channel
  access

7
Early Stage Strategic Alliances (continued)

• Big company is provided right to participate in
  beta testing of web based software solution in
  exchange for warrants and rights to
  customization/market exclusivity
• Small company obtains customer validation and
  reference

8
Early Stage Strategic Alliances (continued)

• Big company enters into joint research and
  development agreement with optical MEMS
  development company
• Provides RD funding in the form of equity
  investment
• Obtains limited rights of first refusal on the
  technology
• Small company obtains funding plus distribution
  and manufacturing rights

9
Early Stage Strategic Alliances (continued)

• Big company is provided right to participate in
  beta testing of gene chips
• In exchange for participation payment
• Future pricing discounts
• Delivery commitments
• Small company obtains product validation and
  customer reference

10
Small Company Issues

• Confidentiality
• Non-competition/non-solicitation
• Exclusivity
• First refusal limitations
• Inadvertent sale without FMV payment
• Avoid big company financing/change of control
  vetoes
• Require big company drag-along
• Require big company voting agreement, share
  transfer restrictions, IPO lock-up

11
Structuring the Alliance
Successful Negotiation

• Focus on the relationship, not the deal
• Emphasize collaboration
• Cordial and flexible at all times
• Dont negotiate with yourself
• Require each party to articulate their strategic
  vision goals

12
Structuring the Alliance (continued)

• Develop the joint value proposition
• Identify individual objectives, common
  objectives, areas of conflict
• Develop joint solutions
• Privately develop a BATNA

13
Strategic Alliance

• Can be much more successful than a traditional VC
  investment
• Value contributed by the strategic partner
• The successful definition and execution of the
  joint value proposition
• Intellectual property is always worth more than
  money