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Businesses that sell a technology or other proprietary service are often selling to larger more established companies. Many large companies have a standard one-size-fits-all form of vendor services agreement used for everything from staplers to sophisticated software. Often the form agreement is written based on the assumption that you (the vendor) are creating the technology, concept, or idea specifically for this customer and that the entire work product being delivered belongs to the customer. Another common provision that is less onerous but can nonetheless be problematic is when the form agreement states that you (the vendor) own the underlying concept or technology but that any modifications, enhancements, or customizations completed in connection with the services belong to the customer.
In either event, signing such a vendor agreement could have a long-term, negative impact on your ability to grow and expand your business in the future. In the first situation, you have arguably sold your entire technology to your customer. In the second situation, you have kept the underlying technology or know-how, but have limited your ability to sell or license functionality or know-how you may have developed while working with that customer to other potential customers. It is not uncommon that your other customers and prospective customers have the same or similar functionality requirements but just haven't contacted you yet. You do not want to restrict your ability to work with other customers requiring similar work for which you have experience in providing.
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Read the Fine Print
Just because the agreement looks like a preprinted form with dense type and hard to read paragraphs doesn't mean it isn't enforceable. In fact, it probably is and, furthermore, a customer that believes it purchased proprietary technology from you may very well seek to protect that ownership. The customer most likely does not intend to go into your business itself, but the customer may be very interested in keeping its competitors from benefitting from the services that you provided to them. In sum, any vendor agreement form presented by a potential customer should be reviewed carefully to ensure that it does not jeopardize your ability to continue to market and distribute your technology, concept or services to others.
If You Don't Ask, the Answer is "No"
No matter how imposing or non-negotiable a customer's form of agreement may appear, don't be afraid to ask for a change. If a potential customer objects to making any changes you can always agree to sign it later, but if you don't ask, you have no chance of protecting yourself. It is rare that a potential customer will walk away simply because you asked to make a change to an agreement, and if the potential customer does, it may likely be an excuse as opposed to a reason. Finally, failure to suggest any changes to an agreement may be viewed as a red-flag by the customer that your business is not taking appropriate risk avoidance measures or is under-funded.
Negotiating changes to a vendor agreement does not need to be a hard-nosed adversarial process. Ask nicely. Point out that the form agreement does not fit the circumstances of your particular product or service. A potential customer is much more likely to agree to change its form agreement to reflect that you retain ownership of your technology during the negotiation process before you sign the agreement, than cede ownership of it after you sign.
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About the Authors:
For more information related to negotiating and finalizing licensing agreements, distribution agreements and other commercial contracts, contact Frank Lauletta (firstname.lastname@example.org) or Randy Ford (email@example.com) of Lauletta Birnbaum LLC.
About Frank A. Lauletta
As a general corporate attorney, Frank Lauletta's practice focuses heavily on representing and counseling a broad array of emerging growth and established companies in both the public and private sectors. With his broad legal experience, executive-level background, and vast relationships in the legal, venture capital, and high technology communities, Frank is uniquely suited to serve as outside general counsel to clients. Working closely with executive management teams, Frank currently serves in this capacity to a number of software, telecommunications, and high technology companies throughout the United States.
Attorney Profile: https://solomonlawguild.com/frank-a-lauletta
Blog of Frank Lauletta: https://franklaulettablog.blogspot.com/
Frank A. Lauletta
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