3.6 HOW DO WE CO-CREATE ONE-TO-ONE?
BILATERAL CO-CREATION
Continuous business model innovation is vital for all companies. An increasingly important mechanism for innovating a business model is through the establishment of external technology partnerships between startups and corporates for co-creation purposes. Startups should seize such window of opportunity and leverage the strength of such corporates to extend and enhance their product suite.
To build sustainable co-creation relationships between corporates and startups, one must carefully define their business objectives and align the co-creation framework with such objectives.
Only a handful of companies have made co-creation an integral element of their business models, building a strategy for continuous cross-enterprise development. This Section aims to describe best practices for co-creation partnerships.
It is important to note that co-creation is not limited to bilateral relationships, but more and more often is undertaken by consortia consisting of multiple partners as described in Section 3.7. The more partners are involved, the more complex the design and structuring of co-creation relationships becomes.
The startup will have the following objectives while co-developing products and services with the corporate:
• Collaborate to share risk and generate new intellectual property.
• Pool strengths to develop and exploit a particular product or service.
• Maintain intellectual property rights on co-developed products for monetization purposes.
• Remain independent while contributing towards a common goal.
• Appropriately manage governance, oversight, risks and rewards.
The corporate will have the following objectives while co-developing products and services with the startup:
• Collaborate to share risk and generate new intellectual property.
• Increase the innovation cycle and mitigate risks with technology experts.
• Maintain intellectual property rights on co-developed products for monetization purposes.
• Appropriately manage governance, oversight, risks and rewards.
Collaborative research and innovation projects are undertaken by partners with different objectives and interests. From this perspective it will be crucial for each partner to:
• Identify, manage and protect the knowledge, know-how and other intellectual property rights it contributes to the co-creation effort.
• Identify the expected intellectual property output of the co-creation effort.
• Properly manage the co-creation relationship and any potential disputes that may arise.
Various IP and governance related questions will arise throughout the lifecycle of the co-creation collaboration, from the conceptualization of the co-creation project, its execution, through the commercialization of the results.
Both the corporate and startup will be concerned about the management and protection of their intellectual property assets. Each partner will require assurance that they are able to safely disclose and make available their intellectual property assets, prevent unauthorized use by others and profit from the (intellectual property) results of the collaboration.
The co-creation effort will require each partner to make available its pre-existing intellectual property rights, commonly referred to as “Background”, and in return benefit from the other partner making available its Background. Great care should thus be taken in the identification of all assets, both tangible and intangible, that are needed for the implementation of the co-creation efforts.
Each partner should establish a list of their respective contributions (e.g. science studies, methods, materials, man days), and the potential intellectual property rights attached to such contributions (e.g. patent, copyright), and agree with the other partner which Background is deemed needed for purposes of undertaking the co-creation effort.
“Needed” in this context means the level of access that is required to the Background of the other partner if without such access, it would be technically or legally impossible to undertake the development tasks assigned to such partner, or if it would require significant additional financial or other investments.
Any potentially infringing third-party rights in respect of such contributions should ideally be cleared upfront through a Freedom to Operate analysis.
Responsibilities of the Partners
The partners should clearly define in a development plan the respective roles, tasks and responsibilities of the partners in the co-creation effort.
In addition to the specific tasks set forth in the development plan certain general behavioral principles should be understood and agreed upon:
• Best efforts undertaking to ensure an efficient implementation of the co-creation project.
• Agreement to cooperate in good faith in the fulfillment of its contractual obligations.
• Notification of the other partner of any significant information, fact or problem likely to affect the project.
In our rapidly evolving business environment, bilateral value creation is an essential tool for innovation and growth. It allows to capture synergy benefits and cross-fertilizes the technical and commercial capabilities of the two companies. Especially startup-corporate relationships can be extremely powerful since they combine distinct agility, entrepreneurship, resources and reputation levels.
But long-term successful collaborations are hard to achieve, mainly because the soft factors are neglected. Personal understanding, trust building, fit of company culture and focus on how to “grow the pie” rather than “split the pie” are essential components to unlock the full potential.
But it is surely worth it, a well-connected partnership often provides the winning proposition in the market. And the personal relationships that come with it, are what makes a business manager get out of bed for in the morning…
Kurt Du Mong, CEO Zeopore Technologies
The absence of a permanent venture legal entity owned by the corporate and the startup will require the design of a permanent contractual governance system which will allow the partners to manage the co-creation project. The governance structure should be tailored to reflect the needs of the project and the respective co-creators, for purposes of ensuring an efficient implementation of the project.
Such governance structure should allow the partners to at least address the following three management domains:
• The internal organization and management of the project by the partners.
• The treatment of Background, access rights and Foreground.
• The settlement of internal disputes.
The risk of potential conflicts related to the collaboration and IP matters requires a transparent discussion on the purpose of the co-creation effort as described above.
It should be as clear as reasonably possible from the pre-defined co-creation purpose, the contributed background and the agreed upon co-creation efforts what the expected co-creation outcome will be. The output of the co-creation efforts is commonly referred to as “Foreground”.
To ensure success of the collaboration and avoid ugly disputes at a later stage, the partners should have an agreed upon strategy concerning the ownership and commercialization of the Foreground.
Developing such strategy takes significant time and effort. The following questions are relevant is this respect:
• Which outcome is likely to be expected and how will co-ownership be treated?
• How will partners approach the protection of the intellectual property components of the Foreground?
• How will partners exploit the Foreground?
This strategy should be made legally binding in the co-creation agreement and appropriate governance mechanisms should be put in place to revisit and amend the strategy. It is important to retain a certain level of flexibility to deal with unexpected evolutions and outcomes.
With respect to the exploitation of the Foreground, it also needs to be determined which Background access rights are needed for such exploitation purposes.
“Needed” in this context means the level of access that is required to the Background of the other partner if without such access, the exploitation of the Foreground would become technically or legally impossible.
In no event should the access to Background for exploitation purposes of the Foreground imply that the partners are free to commercialize the Background on a stand-alone basis, without appropriate license and associated financial arrangements being agreed to by the partners separately from the co-creation project.
The successful commercialization of the Foreground will depend on the presence of a clear strategy which is determined at the outset of the co-creation efforts, adjusted as required during the course of the project.
If during the course of the project a partner generates Foreground that is exclusively developed by itself without intervention of the other partner, such Foreground should be exclusively owned by such partner without any compensation payable to the other partner for the ownership and exploitation of such Foreground.
With respect to the jointly owned Foreground, various commercialization possibilities exist, including but not limited to licensing, the formation of ventures or spin-offs, or franchising arrangements.
In respect of compensation arrangements between the partners, they can opt to give each partner a right to commercialize the Foreground:
• without any compensation being payable to the other partner, or otherwise being required to account to, or obtain permission from, such partner;
• with compensation being payable to the other partner on a royalty or other financial basis, or with permission being required from such partner.
It is likely to be difficult to agree upon an appropriate royalty percentage or other manner of compensation at the outset of the project, but also once the co-creation project has been completed. One manner of dealing with this issue is to provide that each partner may commercialize the Foreground without any compensation being payable to the other partner, but to restrict the commercialization rights of each partner by segmenting such rights in respect of certain fields of use, markets and/or regions.
(No) Assignment or Exclusive Licenses
Regardless of the financial aspects or segmentation of the commercialization, a clear choice needs to be made whether a partner should be able to assign the ownership of its portion of the jointly owned Foreground to a third party without the consent of the other partner.
The default legal arrangement in many countries is that if no other specific arrangements are made, a co-owner needs the consent of the other co-owner(s) for purposes of assigning their co-owned portion of the Foreground to a third party. It is perfectly possible to design tailor-made arrangements, with at the one extreme an absolute freedom to assign such co-owned Foreground to a third party, as well as intermediate solutions which e.g. prohibit a co-owner to assign ownership to a competitor of a co-owner.
It should be noted that the grant by a co-owner of any exclusive licenses to a third party in respect of the jointly owned Foreground, would make it difficult or impossible for the other partner to commercialize such Foreground itself or grant licenses within the exclusivity field to a third party.
The access rights to jointly developed Foreground should contain the right to grant a sublicense to the end users of the partners in the ordinary course of business, to the extent necessary to use the jointly developed Foreground on its own, or as part of, in connection with or integrated into products and services of the partner enjoying the access rights.
In principle, such sublicensing is not permitted with respect to Background, unless otherwise negotiated and agreed between the partners.
Getting partners to agree on indemnity and liability arrangements in respect of jointly developed Foreground is also likely to be a difficult exercise.
Appropriate indemnification and capped liability arrangements should also be made in respect of the Background that is made available, both for development and exploitation purposes.
A workable approach can consist of the following elements:
• Co-creation obligations: each partner is liable to the other partner for a (material) breach of the co-creation agreement up to a certain amount to be agreed upon.
• Background use and merchantability: no warranty or representation of any kind is made, given or implied as to the sufficiency or fitness for any purpose of the Background, with each partner being entirely and solely responsible for its use of such Background.
• Background third-party IP infringement: each partner remains liable to the other partner in case the exercise of the access rights on Background granted to such partner infringes on the proprietary rights of a third party.
• Foreground use and merchantability: no warranty or representation of any kind is made, given or implied as to the sufficiency or fitness for any purpose of the Foreground, with each partner being entirely and solely responsible for its use of such Foreground.
• Foreground third-party IP infringement: each partner is solely liable for any claims that the commercialization of the Foreground infringes on the proprietary rights of a third party, except to the extent that such third-party claim in respect of the Foreground would originate from the use of infringing Background of the other partner in the development of the Foreground.
• Indirect damages: no partner is liable to the other partner for any indirect or consequential loss or similar damage such as, but not limited to, loss of profit, loss of revenue or loss of contracts, except in the event such indirect damages are caused by fraud or a willful act.
Termination of Co-creation Arrangement
The partners should also put great care in thinking through the consequences of the termination of the co-creation efforts, upon or prior to the expiration of the relevant agreement.
A workable approach, which takes into account the reason for termination of the co-creation, can consist of the following elements:
• Completion of the co-creation agreement: Background, own Foreground and jointly owned Foreground can continue to be used as described above.
• Voluntary termination by a partner prior to expiration without consent: in the event a partner terminates the agreement voluntarily without the other partner’s explicit consent, it would lose access rights to the Foreground co-created up to the date of expiration. Continued access to its Background would be required as if it remained a party for the whole duration of the project.
• Voluntary termination by a partner prior to expiration with consent: in the event a partner terminates the agreement voluntarily with the other partner’s explicit consent, it would retain access rights to the Foreground co-created up to the date of expiration. Continued access to its Background would be required as if it remained a party for the whole duration of the project.
• Termination for default prior to expiration: any access rights to the Background of the non-defaulting partner and jointly owned Foreground will be forfeited by the defaulting partner.
It should also be considered whether ongoing support, maintenance or service levels are required upon completion of the co-creation, or the termination prior to expiration.