How Joint is Your Venture?

by Ervin Cohen & Jessup LLP
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For many businesses with a particular core technology, one path to a wider market and increased revenues can be to “joint venture” with another company which has a complementary technology or other core strength.  This can take many forms, from a strategic contract between two separate companies to forming a new limited liability company.  In the excitement of forming a business collaboration, both sides should also focus clearly and candidly on what each (a) brings to the table, (b) expects to get from their collaboration, and (c) sees as the structure, management, and purpose of their joint venture.  Here are some key points to reach agreement on at the outset:

1. Should You Form a New Legal Entity? This largely depends on the scope and nature of what the parties will do together.

  • For example, if you and the other company are jointly developing some specific technology for a particular use by a larger third party, then a strategic alliance contract may serve that limited purpose.
  • On the other hand, if you’re combining resources to create technology which may evolve into a variety of applications and markets, then you might form a limited liability company to segregate the activities of this new company from your respective existing businesses.

2. Who Will Contribute What? The two companies must clearly delineate what each is contributing to their joint efforts.

  • Will this require new, project-dedicated capital? If so, how much, when and who puts up what part?
  • Each party will have its own bundle of pre-JV intellectual property. What specific IP will each party reveal to the other in this venture?
  • What personnel, facilities and other resources will each party bring to the joint venture?

3. Who Will Manage the Joint Venture?  Each party has its own working group and management. Now that you’re working together, who has responsibility and authority for what JV decisions?

  • Often, each party will have a distinct primary role in the joint efforts, but the details may overlap. A critical element to the JV’s success is to clearly lay this out from the beginning.
  • Major decisions (e.g., material changes in the development plans or strategy, additional capital, key personnel changes) typically require agreement of both parties.
  • Each party should name a project manager as its primary contact point on key operational matters and decisions.
  • What if you disagree at some point? Your agreement should provide an avenue to resolve differences, starting with a “meet and confer” step, and moving to a mediation or even a focused (easier said than done) arbitration.

4. Who Will Own What?  While your agreement should clearly provide that each party continues to exclusively owns its pre-JV intellectual property, your joint purpose is to create something new.  Who will own what rights to the jointly-developed IP?  These issues need clear agreement from the outset:

  • How do you clearly define what is considered to be “jointly developed” in the JV versus the enhancements each party may develop in its own IP (which it will expect to separately and exclusively own)?
  • Should rights to even the jointly-developed IP be divided between the parties based on different commercial uses, market channels, etc.?
  • What steps should be taken to protect (a) the separate IP of each party during the course of the JV, and (b) the new IP jointly developed by the JV?
  • If the jointly-developed IP begins to produce one or more revenue streams, how is that divided between the JV partners?

5. What Happens at the End of the Day?

  • When the joint venture comes to an end, whether because of a dispute or simply because it has completed its joint mission, how will the IP be divided (along with the JV’s work product, such as prototypes, drawings, specifications, etc.)?
  • Same question concerning any continuing revenue streams?
  • Any personnel engaged by the JV?  Facilities or equipment leased by the JV?  Accounts receivable, accounts payable, contract obligations of the JV? How will each of these be divided?                                 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ervin Cohen & Jessup LLP | Attorney Advertising

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