In the startup world, securing partnerships with multinational corporations can feel like hitting the jackpot. Access to resources, market reach, and industry expertise — all seem like an entrepreneur’s dream come true. However, a crucial element often gets overlooked: IP (Intellectual Property) ownership and rights. As enticing as corporate partnerships may be initially, startups must tread carefully to avoid potential pitfalls that could jeopardise their exit prospects further down the line.

Understanding the risks

For startups looking to grow and manufacture products on a significant scale, engagement with established partners becomes inevitable. For corporates, it’s a way to access the future direction of an industry at the bleeding edge of innovation, where internal processes might be less agile.

Startups aiming for scalability will find themselves needing to partner with larger corporates. Engaging with a larger partner often entails sharing trade secrets, background IP, and can even lock a startup into an exclusive relationship, limiting their flexibility and options. For example, a startup developing food products might need to demonstrate production capabilities beyond its current capacity — to secure a deal with a large food corporation. In such cases, startups risk exposing their IP, and trade secrets and often find themselves in a less favourable negotiation position later due to the exclusivity clauses in their agreements.

Partnering with large corporates offers undeniable advantages, but it’s essential for startups to recognise any potential drawbacks. Collaboration agreements often involve co-developing key IP, raising questions about ownership rights and access to background IP. Without clear stipulations in place, startups risk accumulating “IP baggage” that could diminish their attractiveness to potential acquirers during exit negotiations.

Mitigating IP risks

Startups should adopt a strategic and forward-thinking approach to mitigate IP-related risks in corporate collaborations. Firstly, conduct thorough due diligence to identify and protect valuable IP assets before entering a partnership. This ensures a clear understanding of what’s being brought to the table by both parties. In one investment we worked on for example, we discovered that trade secrets were the most valuable IP asset, yet no procedures had been put in place to protect them.

Secondly, establish clear ownership and licensing terms in the collaboration agreement. This leaves no room for ambiguity regarding ownership of foreground IP and access to background IP. This protects the startup’s core innovation and ensures it can continue to leverage its existing technology.

Additionally, startups should look to incorporate contingency plans to address potential partnership disruptions. This could involve securing rights to its startup’s IP in case the collaboration ends, ensuring continued access and development. By prioritising IP protection from the outset, startups can safeguard their long-term viability and attractiveness to potential acquirers.

Navigating long-term relationships

Maintaining successful partnerships with corporates demands a nuanced understanding of mutual interests and long-term objectives. Startups must evaluate whether to grant exclusivity to partners and establish metrics to assess partnership performance. As businesses scale, relying on a single manufacturing or supply partner can become risky. Startups should always consider diversifying suppliers, where possible, to mitigate potential supply chain disruptions.

Startups should look to map out their growth trajectory from the outset, anticipating future scaling needs and potential risks. This forward-thinking approach helps in negotiating early-stage agreements that safeguard IP rights and allow flexibility for future expansions.

Understanding and communicating your worth is also crucial. Demonstrating a proactive approach to protecting IP enhances a startup’s credibility and attractiveness to potential partners and investors. It’s essential to strike a balance in negotiations, ensuring the startup doesn’t give away too much, which often leads to regrets later on, as we often see in the music industry with recording contracts.

Numerous real-world examples emphasise the importance of early-stage housekeeping in protecting IP assets. Ambiguous ownership arrangements and lack of clarity in agreements can lead to conflict and hinder a startup’s growth. Startups must be diligent in managing their IP from the outset, whether or not it’s formally registered.

Looking ahead

Despite a sluggish pace in M&A activity in recent years, indicators suggest a potential uptick in deal-making for 2024. Factors such as stabilising interest rates, pent-up demand, and industry consolidations signal a wave of opportunity for scale-ups to leverage their IP assets for successful exits. However, strategic planning and a cautious approach to corporate partnerships are paramount in maximising these opportunities.

By understanding the nuances of IP ownership, negotiating agreements thoughtfully, and prioritising long-term relationships with corporate partners, startups can position themselves for sustainable growth and successful exits in the ever-evolving startup ecosystem. The corporate you jump in bed with today could indeed spoil your exit tomorrow, therefore, protecting IP isn’t just about safeguarding innovation; it’s about safeguarding the future of a business.

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• Source: https://www.eu-startups.com/2024/05/why-the-corporate-you-jump-into-bed-with-today-could-spoil-your-exit-tomorrow/