Big Companies’ Legal Risks with their Startup Partners- Valutrics
Big enterprises are acutely aware of the need to avoid mission-critical risks when working with smaller startups that can move more quickly and have a lot less to lose. Learning, however, is the name of the game when partnering with agile startups, and as former IBM CEO Lou Gerstner taught us, even elephants can learn to dance.
Large companies can indeed be innovative and nimble, but they have to implement flexibility to start that important process. The key for big companies seeking to gain the advantages of partnering with smaller, nimbler companies is not allowing internal policies to prevent them from accessing innovative approaches or getting a proof of concept. By recognizing the risk and scope of the partnership and working on an individualized basis to have their agreements reflect the reality of the scope and risk, enterprises can make these partnerships successful.
The burden of one-sided contracts.
The first barrier large companies throw in the path of successful startup partnerships involves onerous contracts. Excessively long and detailed contract provisions filled with technical language serve (and are written These contracts seek to shift the risks to the other side and often don’t allow for sufficient flexibility in case of unexpected circumstances. Larger enterprises need to consider the risks on a case.
The hardship of excessive insurance.
Big companies also often impose weighty insurance standards and coverages when working with smaller partners — for example, a $10 million minimum in insurance coverage when working with outside talent. But this exorbitant amount is unrealistic — a single individual simply does not pose this level of insurance risk, nor can he or she obtain the coverage in a cost-effective manner.
Larger enterprises also expect open-ended liability for startups and small business partners for potential data breaches, but this isn’t a realistic or workable standard for a startup, either. A single data breach might wipe out the startup financially, making collaboration under these conditions impossible. A more individualized case-Realistically, one-sided contracts and excessive insurance cover one entity and one entity only: the large enterprise partner. To ensure that the partners share an even playing field without the fear of penalty — and with the promise of a positive, open-minded approach — there are a couple of important steps to consider:
1. Appropriately calibrate legal agreements.
What works in creating mutually beneficial partnerships is establishing shorter terms for agreements, accompanied Another important step is limiting insurance and legal liability in a realistic way that reflects the actual risk to the business, not simply regurgitating a standardized approach. The contract must be crafted to reflect the nature of the work that will be undertaken — for instance, allowing a lighter touch for lower-risk, less expensive remote work or crafting a longer, more complex contract for bigger projects.
A large enterprise our company worked with brought in an external on-demand specialist to work remotely for one week on a pilot project. The company realized it shouldn’t “impose” the same agreement as it would on someone who was coming to work internally for a higher-risk project lasting six months. It’s critical to craft the right agreement for the right person on the right project.
2. Cover your risks — and only your risks.
When it comes to security and legal standards, large enterprises also need to precisely calibrate and cover their risks. If a large enterprise works with a startup on a small, low-risk project and demands a complex financial audit, that startup (like most) would likely fail the audit.
Large enterprises need to realistically assess how to be flexible in this scenario, looking at the startup partner’s cash flow and balance sheet differently in light of the reality that a startup’s capital availability is going to be different. A one-size-fits-all approach will kill collaborative potential, along with any chances of innovative success.
A company I’ve interacted with set cash flow expectations for partners based on their size, setting standards that would reflect each partner’s length of time in business, position in the market and outside investments. This was a quick way for the big company to gauge a potential startup partner’s financial health while keeping its desire for a bigger partner budget in check.
The numerous stories detailing the legal issues plaguing big companies are most certainly unsettling. But these shouldn’t lead large enterprises to impose blanket standards across every partnership they create in an effort to protect themselves. Rather than stifle their nimble startup partners’ flexibility and creativity, they need to accurately assess the risks at hand. Excessive coverage doesn’t provide a haven; it’s simply a fast track to excessive constraints and disappointing results