Recently a number of clients have asked us to create new arrangements which allow them or their strategic partners to share the risk and reward of specific projects. 

The projects have included product design and development, marketing consultancy, software development, investor readiness, distribution arrangements and fundraising activities. Typically these have involved early stage companies with cash constraints, where the companies’ strategic partners are able and willing to be rewarded other than by straightforward payment of fees.

Employee options, sales commissions and success fee arrangements are well understood but the arrangements described about have involved companies issuing shares in return for services, entering into revenue sharing arrangements, granting options to advisers and negotiating arm’s length equity investments in conjunction with commercial supply agreements.

It’s difficult to say whether this is a trend that can be seen more widely or whether it is just a coincidental element in our new instructions. It might however be the result of businesses adapting to cash constrains where they have a continued willingness and need to explore new opportunities.

Each arrangement creates a longer term relationship than might arise through simple payment of fees and this long term strategic relationship is the first key concern that managers and owners must recognise and approve.

Once this high level issue has been approved, the parties need to carefully think through the practical implications. Each arrangement has its own unique considerations but irrespective of whether shares are to be issued, revenue income is to be shared or a formal equity investment is to be made, the commercial terms must have sufficient detail and clarity to ensure both parties fully understand their rights and obligations and the contract has the necessary certainty going forward.

For a creative company it is easy to say, “Lets work together and I’ll give you 15%”. It is more difficult to establish, how long the parties will work together, what that work will involve, when it will be done, what the work needs to achieve, exactly how the 15% will be calculated, when is it paid and what happens to the 15% is there is any disagreement.

Legal advisers will ask the pertinent questions and highlight any risks but to satisfy this second key concern and achieve the necessary clarity and certainty, a great deal of input will be required from both the contracting parties.

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