Keys to a Successful Joint Venture Arrangement
December 8, 2017 | Working together: Companies, Iowa schools mutually benefit from partnerships
Joint ventures are often an attractive way to develop and commercialize new technologies by taking advantage of multiple parties’ skills and resources. However, any time that multiple parties work together there is a real risk of conflict at some point. Much of this conflict can be avoided by doing some upfront work to clearly set and communicate expectations. Here are some tips for anyone considering a joint venture:
1. Think hard about how decisions will be made. This may seem obvious, but many times joint venturers don’t have a clear idea how decisions are going to be made. Generally, all parties expect a say in big decisions but never discuss what constitutes a big decision. The parties should think upfront about who will make the big decisions and what constitutes a big decision. These generally include things like hiring key employees, developing new products/ services, borrowing money, entering into large or long-term contracts, bringing in new partners or terminating the joint venture.
2. Determine intellectual property ownership. Many joint ventures are set up to commercialize a new technology. Sometimes the technology is independent and the parties contribute the key intellectual property to the joint venture. More often, there is some joint technology to be developed that relies on existing intellectual property independently owned by each joint venturer. When setting up the joint venture, the parties should determine how existing intellectual property will be licensed to the joint venture, the scope of technology to be owned by the joint venture and, most importantly, who will own derivative works.
3. Decide who will fund the joint venture. Successfully developing and commercializing a new technology is expensive and risky. While the parties usually agree on how to fund the initial development plan, the joint venture will often have to pivot or require additional resources to meet all of its goals. The parties will want to discuss upfront how additional funds will be acquired. There are multiple options, including each party contributing their proportionate share, one party loaning funds to the joint venture or agreeing to raise independent outside capital.
4. Preparing for the breakup. I would love to say that all of these arrangements work out in the long term, but that just isn’t the case. The worst-case scenario is where the parties just dislike each other and can’t work together going forward. But other things can drive the parties apart, including a party getting acquired, selling the relevant division or having financial troubles. Every joint venture should have a mechanism to terminate the joint venture and clearly describe what will happen to the existing assets, the intellectual property and existing product/service lines upon termination.
Bottom line, joint ventures can create a lot of value and benefits for everyone involved, but they do require a significant investment of thought, effort and resources upfront to make sure they work well.