Equity Investment and Strategic Alliance by tle11209

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									                    Strategic Alliances:
                     Why, When & How
                         Harry A. Hanson, III
                               Partner
                 Chair, Business & Technology Group
                        Choate, Hall & Stewart

                 Massachusetts Software & Internet Council
                           Legal Issues Series
                             March 21, 2002
www.choate.com                                        Choate, Hall & Stewart
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.

www.choate.com                        Choate, Hall & Stewart
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


www.choate.com                      Choate, Hall & Stewart
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



www.choate.com                       Choate, Hall & Stewart
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




www.choate.com                         Choate, Hall & Stewart
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



www.choate.com                     Choate, Hall & Stewart
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




www.choate.com                         Choate, Hall & Stewart
Early Stage Strategic Alliances                      (continued)


 Big  company enters into joint research and
    development agreement with optical MEMS
    development company
     – Provides R&D 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


www.choate.com                                  Choate, Hall & Stewart
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




www.choate.com                                 Choate, Hall & Stewart
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

www.choate.com                             Choate, Hall & Stewart
Structuring the Alliance
Successful Negotiation:
 Focuson the relationship, not the deal
 Emphasize collaboration

 Cordial         and flexible at all times
 Don’t          negotiate with yourself
 Require   each party to articulate their
   strategic vision & goals


www.choate.com                                Choate, Hall & Stewart
Structuring the Alliance             (continued)


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




www.choate.com                               Choate, Hall & Stewart
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




www.choate.com                               Choate, Hall & Stewart

								
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