Cracking the Contract Conundrum

Open innovation is a strategic imperative in fast-moving times like ours, and startups are important partners. In our work with both large corporates and startups, we hear over and over again that the biggest obstacle to their collaboration is the contract. The investor world sees it too.   

That’s why Nikhil Gargeya of Activate created SiPA, a framework simplifying that crucial initial contract. And now we’re here to share SiPA and what we’ve learned from talking with dozens of corporate leaders, startup leaders, and lawyers.  

Fundamentally, startups are different from other partners such as peers, investors, or agencies — and your contracting process has to change accordingly.  The trick is designing the minimal meaningful project to kickstart this collaboration process painlessly. Through this project, you’ll learn about your partner’s team, technology, and processes early. When the time comes for complex discussions, you’ll have the foundations in place.  

Why Teams Need Startups

You need startups because they are: 

• Nimble: Startups bring a fresh approach to quickly delivering a solution to the market and can respond more nimbly to customer and market input.
• Comfortable with risk: Startups are pros at playing in the uncertain spaces that are very difficult for large, highly aligned organizations. 
• Exploring the cutting edge: Startups are often first to observe or pursue a signal that could become an important trend.
• Inexpensive: Relative to other vendors or acquisitions, startups can be a bargain.
• Early: By partnering with a startup, you can get in with an idea before it draws the attention of competing investors.  

However, these advantages also mean that startups need some special considerations.  

Startups are also:

• Capital-efficient: Startups need to make very careful choices about how they spend money because every dollar is precious. If your contract is so complex that your partner has to hire expensive legal counsel just to decode it, they might need to walk away.  
• On a short runway: Startups draw down their resources every day. The three months you normally need to complete your internal contract process could spell doom for your partner. And don’t forget about your procurement timeline! If your standard terms pay invoices 90 days out, you’re withholding much-needed energy from the exact same partner you engaged so that they could move quickly for you.     

How to Make a Simple-enough Contract

1. Boil your clauses down to the absolute basics: agreement to engage, scope of work, deliverables, payment schedule, and committed resources by both parties. 
2. Identify the smallest meaningful project that would teach you what you need to learn. What do you need to know before committing to co-creating value?
3. Enable quick approvals for small budget projects. 

Here are a few tactics you might employ:  

1. Create a dedicated annual budget for small projects to draw from.
2. Get internal stakeholder agreement in advance to the smallest possible list of approvers. Is this something that could be signed off by just one person?  
3. Organize a 10-minute meeting for all stakeholders to sign off at the same time.

The purpose of the first project is principally to learn about your partner so you can decide if you want to spend more time and resources down the line. With this in mind, limit IP complexities in this first project (as much as possible).  

Reducing Complexity 

Here are some examples of how to reduce complexity around IP language:

1. Maintain a firewall between partners for your first proof-of-concept together. Keep the core IP private to each company.
2. Design your test for an analogous case. Save your strategically sensitive use case for a later stage in the collaboration. After this first project, when you’re certain this is the right partnership to pursue, it will make sense to invest time in complex IP discussions.
3. Agree that any emergent new IP will be jointly held. 

We also recommend that you use an industry-recognized framework like SiPA. (One example document from SiPA, a service agreement, is available in PDF form at the bottom of this page.) We’ve met several companies that have come up with their own simple contract approach, and that’s fine. If you’re at the very beginning of this journey, consider starting with something that already exists, has been vetted, and has been adopted by other companies.

Nikhil Gargeya is the Partnerships Manager at Activate, a nonprofit organization that partners with US-based funders and research institutions to support research fellows. Diana Joseph is the founder of Diana Joseph Consulting, which focuses on developing personal agency and initiative using cognitive science research and innovation techniques. 

For assistance with SiPA or simple contracts in general, reach out to Nikhil Gargeya (nikhil@activate.org). To participate in ongoing research to improve open innovation agreements, contact Diana Joseph (diana@dianajoseph.com).

Working With Startups