With technology stocks still being battered amid a lack of available venture capital, technology companies can benefit from strategic alliances as a growth option, according to a team of corporate attorneys at Foley & Lardner, based in Tampa, Fla.
"Strategic alliances, while not uncommon among Fortune 500 companies, offer significant benefits to small and midsized technology companies as well," says Martin A. Traber, head of Foley & Lardner's corporate division for Florida. "These include increased market penetration, economies of scale, enhanced product development, cost reductions, and the creation of additional business opportunities."
While Foley & Lardner are, at least in part, motivated because they may get some of the business created from such alliances, their tips on the topic should be helpful to a small-business owner contemplating one. Brad Fischer, senior counsel for business law in Foley & Lardner's Tampa office, says small companies can protect themselves against problems with alliances by paying attention to several key issues including:
-- Each party should recognize its and its prospective partner's motivations to determine whether these are compatible and have enough ongoing incentives on both sides.
-- Companies should conduct a thorough due diligence review of the prospective partner and its technology. -- Businesses should start the process with a nonbinding term sheet that outlines expectations. Before signing a letter of intent (which may be binding), the company should seek legal review to avoid overly restrictive agreements.
-- Rights of exclusivity should depend on the achievement of milestones such as revenue targets.
-- Parties must carefully define ownership, licensing, manufacturing, and distribution rights, distinguishing between core technology and products, or applications derived from core technology.
-- Parties must define why and how to terminate the alliance, as some license, production, or distribution rights may survive termination.
-- Before signing the agreement, each company should build consensus for support within its organization.
Even with those guidelines in mind, Fischer leaves us with this warning: "Unfortunately, not all strategic alliances work, and there are always risks inherent in the process. Smaller companies in particular may be more vulnerable because of their perceived lack of bargaining power."
Judged against the inherent dangers in going it alone these days, a strategic alliance may be worth the risk.
By Robin J. Phillips in New York