How Big Companies Can Avoid Burdening Their Startup Partners - JPKee.com

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The number of legal problems facing large, seemingly invincible businesses this year has been alarming: From Google’s international privacy and search results legal problems to Uber’s sexual harassment and driver wage battles to debates about the legal rights of the passenger United pulled off a plane earlier this year, companies have felt the sting of legal proceedings and discussions.

In response, many big businesses have frozen in place, playing an endless game of Statue until it feels like the heavy scrutiny has passed. In the meantime, they’re protecting themselves with a moat of policies and guidelines intended to keep legal trouble far, far away.

The problem is that the super structures these efforts create hamper these businesses’ attempts to partner with startups. These partnerships offer enterprises the agility they’ve often outgrown, making them major assets for continued growth [link to first article]. To limit the risk to their long-term success, big businesses have to limit the number of legal barriers they erect.

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Ditching the legal laundry list.

Big enterprises are acutely aware of the need to avoid mission-critical risks when working with smaller startups that can move more quickly and have a lot less to lose. Learning, however, is the name of the game when partnering with agile startups, and as former IBM CEO Lou Gerstner taught us, even elephants can learn to dance.

Large companies can indeed be innovative and nimble, but they have to implement flexibility to start that important process. The key for big companies seeking to gain the advantages of partnering with smaller, nimbler companies is not allowing internal policies to prevent them from accessing innovative approaches or getting a proof of concept. By recognizing the risk and scope of the partnership and working on an individualized basis to have their agreements reflect the reality of the scope and risk, enterprises can make these partnerships successful.

The burden of one-sided contracts.

The first barrier large companies throw in the path of successful startup partnerships involves onerous contracts. Excessively long and detailed contract provisions filled with technical language serve (and are written by) big enterprises, automatically putting their less legally proficient partners at a disadvantage.

These contracts seek to shift the risks to the other side and often don’t allow for sufficient flexibility in case of unexpected circumstances. Larger enterprises need to consider the risks on a case-by-case basis. When crafting service-level agreements (SLAs) and contracts, both sides need to have a detailed discussion about the risks and how to mitigate them in different scenarios. Imposing lengthy and complex contracts on the smaller partner, with little or no discussion, fails to foster collaboration and its many benefits.

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The hardship of excessive insurance.

Big companies also often impose weighty insurance standards and coverages when working with smaller partners -- for example, a $10 million minimum in insurance coverage when working with outside talent. But this exorbitant amount is unrealistic -- a single individual simply does not pose this level of insurance risk, nor can he or she obtain the coverage in a cost-effective manner.

Larger enterprises also expect open-ended liability for startups and small business partners for potential data breaches, but this isn’t a realistic or workable standard for a startup, either. A single data breach might wipe out the startup financially, making collaboration under these conditions impossible. A more individualized case-by-case standard -- as opposed to a one-sided “take-it-or-leave-it” approach -- would allow the large enterprise and startup to more realistically share (and cover) the relevant risks of the partnership arrangement.

Shedding the weight of coverage you won't need.

Realistically, one-sided contracts and excessive insurance cover one entity and one entity only: the large enterprise partner. To ensure that the partners share an even playing field without the fear of penalty -- and with the promise of a positive, open-minded approach -- there are a couple of important steps to consider:

1. Appropriately calibrate legal agreements.

What works in creating mutually beneficial partnerships is establishing shorter terms for agreements, accompanied by more frequent renewals. Partnerships thrive in this way because both sides are compelled to review the agreement as the small business partner gets more refined, learns how to better drive value through collaboration and formalizes its technology sophistication.

Another important step is limiting insurance and legal liability in a realistic way that reflects the actual risk to the business, not simply regurgitating a standardized approach. The contract must be crafted to reflect the nature of the work that will be undertaken -- for instance, allowing a lighter touch for lower-risk, less expensive remote work or crafting a longer, more complex contract for bigger projects.

A large enterprise our company worked with brought in an external on-demand specialist to work remotely for one week on a pilot project. The company realized it shouldn’t “impose” the same agreement as it would on someone who was coming to work internally for a higher-risk project lasting six months. It’s critical to craft the right agreement for the right person on the right project.

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2. Cover your risks -- and only your risks.

When it comes to security and legal standards, large enterprises also need to precisely calibrate and cover their risks. If a large enterprise works with a startup on a small, low-risk project and demands a complex financial audit, that startup (like most) would likely fail the audit.

Large enterprises need to realistically assess how to be flexible in this scenario, looking at the startup partner’s cash flow and balance sheet differently in light of the reality that a startup’s capital availability is going to be different. A one-size-fits-all approach will kill collaborative potential, along with any chances of innovative success.

A company I’ve interacted with set cash flow expectations for partners based on their size, setting standards that would reflect each partner’s length of time in business, position in the market and outside investments. This was a quick way for the big company to gauge a potential startup partner’s financial health while keeping its desire for a bigger partner budget in check.

The numerous stories detailing the legal issues plaguing big companies are most certainly unsettling. But these shouldn’t lead large enterprises to impose blanket standards across every partnership they create in an effort to protect themselves. Rather than stifle their nimble startup partners’ flexibility and creativity, they need to accurately assess the risks at hand. Excessive coverage doesn’t provide a haven; it’s simply a fast track to excessive constraints and disappointing results.

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Author - Vikash Kumar