4 Rules for Crafting Exclusivity Agreements
Mark Suster, of Upfront Ventures, publishes an excellent blog called Both Sides of the Table. It’s one of my favorite peer publications because his investing perspectives and strategic thinking often aligns with the approach we take at Camp One. His recent article on exclusivity deals, highlighting the “Mother of All Exclusivity Deals” (Apple and AT&T), hits home as we often encounter these types of agreements. Traditionally, most investors try to steer entrepreneurs away from exclusivity deals because of the obvious concern that it will restrict business operations, limit market share, etc. etc. On the pro side, offering an exclusivity deal can often incentivize buyers to move faster and give the startup more leverage in negotiations. Mark writes, “I believe a more practical version of an exclusivity deal can actually be huge bonus for a startup.” I agree with him, as long as you craft the terms of the contract carefully using the following four parameters:
Discern the value of winning the customer in relation to how much it will cost you in terms of conducting business in your industry for that specified time period. I’ve seen instances where giving up 1-2 years of selling to competitors in exchange for a gargantuan contract may be worth it. Every transaction is different, but weighing the time commitment versus the potential long-term benefit is worth considering carefully.
As the saying goes, “Give them an inch and they’ll take a mile”. This item on the contract is no different. Your prospect will want exclusivity to sell your product over every competitor on planet Earth and maybe beyond. Try to get them to agree to single out specific competitors that will not have access to your product, as most of them only care about the other 1-3 big fish anyway. This will give you freedom to do smaller deals with lesser known companies, no matter how small the revenue may, it’s better than nothing.
If they won’t bite on the competitor angle, try for the industry angle. Whittle down your agreement to commit to exclusivity in a particular vertical within the industry. If you are selling a product in the healthcare business, try to get them to narrow it down to only pertaining to the Radiology/MRI/CT/X-Ray companies.
Just because you aren’t international yet, doesn’t mean that you won’t be selling overseas sooner than you think. Particularly if you have a solid digital content marketing strategy, you could attract inbound leads from anywhere in the world. Limit the exclusivity to only within the continental US, to at least allow for any deals that might come in from other countries.
With the right opportunity, crafting an exclusivity agreement can allow you to land larger, more long-term contracts. In addition, the restraints placed upon your company with these types of agreements gives you more leverage to make sure you are getting compensated in other ways, like marketing guarantees in the form of dollars, testimonials, case studies or PR campaigns. These secondary benefits outside of direct revenue can help grow your company over the long term in ways you maybe wouldn’t have considered before.
Have you had a successful experience with executing an exclusivity agreement that really paid off for your startup? What happened?
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