How to handle exclusivity requests from customers
What to do when your customer wants you to sell your product only to them
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Early stage startups that sell their products to big companies face this situation frequently. A big customer asks for an exclusivity deal where the startup cannot sell the same product or service to other customers. If the founders say yes, they are at the mercy of this large company. If they say no, then they are potentially letting go of a good amount of revenue (which could be meaningful in the early days). So how can founders navigate this request from their customers?
Here are 6 key points to note:
1. Draw a clear boundary: If you decide to go ahead, you should negotiate terms that are favorable. You should draw a clear boundary with regards to exclusivity e.g. time-bound, feature-bound. You don't want to box yourself into this structure forever. With regards to the upfront one-time payment, ask for more money. You're signing up to do one-time work that can't be reused, so you need to make sure it's worth your time. Some agreements might include automatic renewal clauses. You could be locked into an undesirable long-term commitment without realizing it.
2. Payment schedule in written form: Agree upon the exact payment schedule in written form for the entire duration. You'll be surprised at what you discover when you discuss this item with your customer. Ideally it should be unconditional. If there's a condition that says "we'll pay you if meet this subjective metric", they can always wiggle out of it. All the evaluation needs to happen before the agreement is signed.
3. Understand the ask: Exclusivity can mean different things. It could be features, the use of data, or a particular set of a competitors. You should clarify what the customer wants, ideally in a written format. This will help you structure a deal that could benefit both of you.
4. Impact on future growth: If you sign this exclusivity deal, how will this impact your business? Will it limit your growth opportunities or product development? Ensure that this agreement doesn't stifle your startup's ability to innovate. Or doesn’t stop you from pivoting if needed. Your ability to evolve is critical in the early days.
5. IP ownership: Always get legal advice. Exclusivity agreements can have far-reaching implications. Avoid all "Joint IP" clauses. It never works in the startup's favor. Also make sure you know how to navigate potential regulatory issues, especially if you're dealing with data or international markets. Make sure to define the exit clause. Include clear terms for terminating the agreement and understand the penalties if either party breaks the agreement.
6. Unintended expansion of scope: The scope of exclusivity might gradually expand beyond the original intent. This usually happens either through additional requests or ambiguous wording. Make sure there's a hard limit here.
What's a workaround?
One way to structure an agreement that can satisfy both parties is by creating an outcome that can be called exclusive. And this outcome takes inputs from both sides. For AI startups, the outcome is usually an AI model built using your software + your AI expertise + customer's data + customer's domain expertise.
This AI model will be a new exclusive thing that cannot be sold to anyone else. You'll create it from scratch for this specific customer in this specific instance. If any ingredient changes in this recipe, it won't be covered in the scope of exclusivity. Customer already owns their data and domain expertise, so you cannot sell that. But you are free to sell your existing software and AI expertise to other customers.
Keep the dialogue open with your customer. Understanding their concerns and objectives can lead to a mutually beneficial arrangement. These types of deals are usually not black-and-white. You can tweak clauses to meet the expectations of both sides. The goal is to understand what the customer really wants to achieve with this exclusivity deal. And figure out a path to get there.
If you're a founder or an investor who has been thinking about this, I'd love to hear from you. I’m at prateek@moxxie.vc and our fund Moxxie Ventures leads seed rounds.
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