Legal Aspects of Open Innovation for Small Companies: A P&G Perspective
I recently asked Chris Thoen, Managing Director of the Global Open Innovation office at P&G this question.
“Small companies often have limited legal resources. What can they do to get better deals and protect their intellectual property?”
As you can see below, Chris provides a great answer. However, this is a topic that many have looked into and it would be great if we can get more perspectives. Let me know what you can add.
Here is the reply from Chris:
This is an area of critical importance — to both parties involved. Unless everyone is comfortable with and clearly understands the goals, parameters and expectations of a project and of both parties, the relationship will never grow into the deep and trusted collaboration needed to deliver meaningful, maximum results.
Often, small companies do not have the same access to deep and experienced legal teams of their larger partners. Because of this, and the significant cost associated with hiring outside counsel, they will let the larger company take the lead, which usually means the first step is drafting up a full contract.
The result can be a very lengthy full-fledged document complete with legal jargon and sentences that run over three pages that no one really understands. Invariably, the smaller company will still have to pay an attorney substantial fees to first translate everything and then even more to be involved in finalizing all the terms.
While a full contract will be needed eventually, it’s not a good way to start working together. What we’ve seen work exceptionally well is for the companies to begin by creating a simple, straightforward one-to-two page letter of understanding that outlines in simple language everyone can understand the overall working principles for the partnership.
This will help flush out whether there is alignment by the parties as to key legal and technical needs for each party to ensure a “meeting of the minds” in advance of time and money being put into the legalese of a contract.
Small companies should ensure that the letter clearly addresses:
• How the partnership will deal with IP generated by ongoing work and with “background” IP that is brought into the relationship. Will there be exclusivity?
• What happens in the event of success and more importantly, what happens if the joint work is not successful? For example, can either company take their work, and what portion of it, and try again with another partner?
Great advice, Chris. As a "recovering lawyer" who knows the problems that legal counsel can bring to business deals like this, I also advocate the large and small companies agree to refrain from bringing their lawyers in until the business terms are fleshed out a bit, such as by having an agreement in principle like a term sheet etc. Big companies, like P &G, have business savvy lawyers to assist them, and who know how to get deals done. In contrast, small companies will typically have engage outside counsel to assist, most of whom have never been employed in a business environment. As a result, the counsel hired by the small company will be looking to address primarily the risks, not the benefits of the deal. The longer the small company can go without bringing their outside counsel in, the more likely the deal will not only get done, the more likely the legal costs for the small company will remain manageable.
Moreover, the small company has to recognize that the large company likely has many options for partners and projects, whereas the small company probably not so many. I have been in many situations where the lawyers make the deal harder, often seeing risk where there was little or none from a business perspective. A small company with a lawyer that is aggressive for all the wrong reasons could make it difficult to get the deal done because the large company sees the go-forward aspects as difficult.
Of course, the large company has to be trust worthy and a good partner. If they aren't, the small company will end up with the short end of the stick. So, any small company seeking to work with a large company definitely needs to "check the references" of the large company prior to moving forward as I recommended above.
Great comment Jackie. The other advice to the small company is to check out the credentials of their potential legal advisor. Specifically, they should aim to work with lawyers who have actually delivered agreements with big companies on behalf of their clients.
Kevin