You’ve already realized you need a technology partner and chosen the right one, but the final critical step is building the right partnership agreement. You can avoid simply throwing together a standard agreement so you can get started ASAP. Instead, this is your chance to ensure you and your partner are aligned and prepped to succeed.
But getting this step right isn’t just about succeeding or not, it’s about supercharging your relationship to achieve even more. As you’ll see with the examples below, the right partnership model can open up a world of otherwise impossible options. This is important for a startup looking to get a core technology off the ground.
Subcontracting vs Partnership
Let’s get into the heart of drawing up a partnership agreement. But before that, you need to understand how such an agreement is fundamentally different from run-of-the-mill subcontracting. It comes down to both the details and spirit of your agreement. For a subcontractor, the arrangement is simple payment for services. Whether your business ultimately succeeds isn’t necessarily very important to them.
In a partnership, by contract, the agreement is generally designed to align interests. This is why the tech partner should be just as invested in your business’ success as you are. Just remember to know what you’re getting into and approach a partnership as that: a partnership. Treating a tech partner as a subcontractor isn’t likely to lead to great results.
Partnership models for technology partners
Although they can be mixed and matched as needed, these are four basic elements on which we’ve built successful partnerships. Each one focuses on structuring the specific partnership to address the core needs of the startup. These could be extending the runway, sharing risk, or simply gaining time and flexibility to build an in-house team.
This is a fairly straightforward way to ensure that your interests are well aligned with that of your technology partner. This could be a deal that simply trades equity for work. It could also be structured more like an employee equity compensation in which equity is traded for specific benchmarks.
Alternatively, an equity trade can be one component of a blended deal. For example, upfront costs can be reduced or deferred in exchange for equity when a key benchmark is achieved. You can think about this arrangement as being similar to what you might offer a CTO in the early stages when you can’t offer a competitive salary.
One more innovative form of risk-sharing we’ve used with our partners has been revenue sharing. In this model, the tech partner works at a cost under an agreement in which the remaining work payments would come once the company releases its MVP and begins earning revenue.
One of our clients simply didn’t have enough funds to develop their MVP. Our revenue-sharing model enabled them to successfully launch their MVP. Afterward, they even adjusted the payment terms down the line to help ensure they could still succeed. In this case, the company’s IP was used as collateral.
This is another example of the benefits of working with a partner who’s invested in your startup’s success. A standard subcontractor wouldn’t likely agree to such adjustments after an agreement was reached. But in this case, that would have doomed the company. For us, sharing risk and being flexible enabled the client and tech partner to succeed together.
Flexible payment terms
This can apply to a deal built on equity or IP sharing, or on its own. In any case, by bringing on a technology partner, you’re quickly gaining access to an existing experienced development team. However, for most startups, the costs associated with that can put plenty of pressure on their runway and force them to spend more time raising rounds instead of managing the company.
Flexible payments, usually built around equity or IP sharing, can enable a startup to do more with less. This could be a single payment structure for the duration of the partnership or an option to adjust payment terms should you find yourself, for example, in a tight spot hustling to raise your Series A. Backloading payments can help take off pressure when you’re raising your next round or simply allow you to invest in critical elements of your business now. Just be sure to declare when you’ve done this in your investor agreement.
Ultimately, knowing you’ve got options, as well as a reliable partner, should make those stressful moments every founder faces a little easier on you.
Adjustable work teams
This partnership element also ties in with the rest and can also be applied on its own. Often, a startup needs to start working with a fully functioning team right away so it can get its product to market faster. However, eventually it’s often essential for them to get their own internal team up and running. The trick then is how to manage the transition from a technology partner to an internal development team.
Here, you might start out with a 10 person external development team from a tech partner and gradually transition to a 10 person internal team. Besides the obvious benefits of being able to hire better people without as much pressure, this allows you to more effectively build an internal culture. Each new internal hire begins working with an experienced team, so you have less culture development work on your plate.
Even if you’re unsure whether you want to build an internal team at all, including the option to do so in a partnership agreement is another effective way to build flexibility.
Key elements to include in your technology partner agreement
One of the core benefits of hiring a technology partner instead of building your own team from scratch is the impact this can have on your velocity. An existing development team can simply start much quicker. However, you still may want to include specific provisions related to velocity in your agreement. This could be specifying when the team should be available and how quickly they should act on instructions.
Ideally, when you align your company’s interests with the team these shouldn’t be major issues, but it’s still good to get ahead of potential problems by setting terms out in the initial agreement.
We’ve talked about this a lot here but it really is critical. Getting this right is key to ensuring every other element of the partnership also functions well. Even with all the rules and provisions in the world set up, getting people to work against their interests is just never easy.
Besides structuring the agreement with some of the models mentioned above, in our experience, it helps to have an attitude of real involvement. You want to find a technology partner which doesn’t treat you as just another customer. Close integration and alignment will remove relationship barriers and speed decisions. When you align your interests and the development team sees the success of the startup as also being their success, the two can truly operate as one effective team.
Once the actual work starts, priorities change and it’s important for the partner to have an open mind about that. Versus rigidly following a plan for the plan’s sake. They should also have the flexibility to constantly adapt. The latter requires management skills in order to keep friction in the development team to a minimum and provide value for the business at the same time.
All that is to say, you want to ensure flexibility is there both in the terms of the partnership agreement and in the mindset of both parties. Talk about this early and often so everyone sees adjustments to the plan as something expected and not as a sign of failure or an annoyance.
One of the most common areas where a technology partnership can fail is transparency. Issues here can easily lead to inefficiencies at best and souring of an entire relationship at worst. This is why this is another element that you need to include both in the agreement itself and talk about from the early stages to ensure both sides are on the same page. In our experience, ensuring the development team is open about progress in real-time makes an enormous difference. This also involves regular and frequent product demos and feedback.
Starting a technology partnership
In the end, when you’ve combined aligned interests, flexibility, and transparency, you have the bedrock of a successful partnership. However, once you’ve found the right partnership terms for your situation and signed the deal, you’ve still got to ensure it starts off right. For us, this boils down to getting two key elements done correctly.
Decide on integration
Begin by deciding how integrated you want to be. Do you want your tech partner to function as more of an outside entity or be extremely integrated into your day-to-day operations? This can get very granular: do you want them working with your own email accounts, working in your general company Slack channel, etc.
Often, you’ll want to lean towards more integration as this offers the culture benefit mentioned above. Also bear in mind that this can change over time, again this is one of the flexibility benefits of working with a technology partner.
Set up good communication practices
Once you have some sense of how you want to integrate your tech partner, you need to establish communication practices to support that integration. In our experience, this comes down to structuring and mediating meetings to keep everyone focusing on results. Often, this is done in consultation with the founder because the technology partner will have more experience and can share best practices. Ultimately, getting communication right plays a key part in building long-term trust between the parties and setting the working rhythm.
Looking for the right tech partner?
With so many elements to get right from the provisions and structure of the partnership agreement to actually putting that agreement into place. This is why it’s so valuable to work with someone with deep experience building these kinds of partnerships into something valuable and transformative for both sides. If you’d like to hear more about our experience, or just have some questions, feel free to get in touch.