Negotiating Exclusivity with Customers
Structured correctly, contractual exclusivity with a customer can be the difference that makes a deal happen or significantly increases the value. Agree to the wrong terms, and it could be the end of your company. Here are some tips to consider.
Is it worth it?
Agreeing to exclusivity is a big decision so you shouldn’t make it lightly. Is this something you have to do in order to close a deal? Is this a deal you have to close? Will the benefits of this relationship be a game changer for the company that sets it on a new trajectory?
It’s my policy to avoid exclusivity unless it’s absolutely necessary for the survival of the company or if it has the effect of replacing a dilutive round of venture funding with guaranteed revenue that is non-dilutive.
Who does it cover?
The first question about negotiating exclusivity is who does it apply to? There is a range of possiblities that include a single entity, a named list, a geographic region, a market segment, or the entire universe.
I always insist on a named list out of principle. Otherwise it comes down to a vague description that is up to intrepretation. The bigger the list, the more it costs. I find that “name the three competitors you are most concerned with” is a good place to start.
It’s in your interest to make it as narrow as possible and in their interest to make it as wide as possible.
What does it cover?
What type of business is prohibited? Are you prohibited from selling them a certain product or providing a certain service? Are you prohibited from doing any business with them at all?
It’s in your interest to make the description of the prohibited services as detailed and descriptive as possible.
How long does it last?
Most exclusivity agreements are not in perpetuity. Either they are for a fixed amount of time or until a certain thresholds are achieved by your company or by the partnership. This is one of the most common levers to play with while negotiating.
It’s quite common to have performance thresholds that will cause the exclusivity to end early. ie. if they don’t generate a certain amount of revenue you can start selling to others.
It’s in your interest to make the exclusivity last as little time as possible.
Tip: Most default exclusivity language would state that the exclusivity period ends on the date that the agreement ends. However, as soon as you receive notice that they are terminating the agreement you want the ability to go start selling to their competitors because it usually takes many months to close a deal.
What do you get in return?
You’re giving up a lot of opportunity cost in exchange for the exclusivity, so what’s in it for you?
- Convincing your first big customer to take a chance on you
- Access to manufacturing or R&D resources
- Use of intellectual property
- Access to a new distribution channel
- Payment in advance
- Guaranteed revenue
Every time they ask for more exclusivity, ask for something in return.
For more, check out Gordon Daugherty’s Shockwave Innovations
