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Hidden Risks from Licensing Deals with Other VC Backed Tech Startups

Posted by attorney Mark Walters

If you work for a tech startup company, and especially a venture backed startup, this article is for you. If your software VC backed startup enters into enterprise software licensing contracts with other VC backed startup companies this article is really for you.

Question: What does your VC backed startup company have most in common with the VC backed startup companies with which it enters into enterprise software licensing agreements?

Answer: Both companies are for sale to larger companies.

So, what are the business risks that arise when your enterprise software customer is acquired by a larger company? First, there is the risk, if you have not carefully drafted your licensing agreement, that you will have lost a larger customer. The acquiring company may get perpetual right to use your enterprise software throughout its huge enterprise as part of the fruits of the acquisition. Second, and far worse, there the risk that the acquiring company, which may be a potential purchaser of your VC backed company, will have no need to acquire your company because it can get all the rights it needs to your technology by purchasing your customer.

When two VC backed startup companies are entering into enterprise software licensing agreements, the licensing party should discuss what happens if and when the customer (licensee) is acquired. The contract should include some agreed restrictions on the ability of an acquiring company to get the keys to your company's technology kingdom, and the ability to greatly expand the number of seats. This is an area for negotiation, and it should not be ignored.

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