The founder of Bit Music, an internet radio startup, found himself deadlocked with a top executive of mass-media giant Zorin Industries Entertainment Group. It was their third meeting. Zorin was interested in becoming a client of Bit Music, but they kept going back and forth about the revenue split between the two companies.
Bit Music's founder told Zorin's chief digital officer that his previous deals had typically gone 70/30 in his favor. She was skeptical and held her ground, saying Zorin typically got the reverse split. "I'm interested to hear why you think it should be in your favor," she scoffed. On the defensive, the founder conceded he might be willing to give up a little more, depending on the overall deal.
It was a typical meeting between a startup founder and big-company representatives, except that it was make-believe. The companies and characters were invented for a recent role-playing exercise at The Hatchery, a startup incubator and networking forum in Manhattan. The four participants included a startup founder, a venture-capital expert and two lawyers.
By presenting a mock meeting between two fictional companies -- Bit Music (modeled on music service iHeartRadio) and Zorin (modeled on Clear Channel Communications) -- participants hoped to provide a useful lesson in how young startups should navigate the sometimes treacherous waters of doing deals with big companies. Here are three takeaways from the event:
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1. Avoid discounting your rates with big companies.
To get off the ground, young startups often have to cut sweetheart deals with their first few clients -- giving them lower rates or other incentives to win their business, said Tom Chernaik, co-founder of Cmp.ly, who was playing the chief executive of Bit Music at the event. That is all well and good until a startup sits down with its first big potential client. During negotiations, the big company may ask for a "most favored nation" clause in the contract, which means it wants to pay only as much as the lowest rate the startup has ever given any client in the past.
After portraying this scenario in the dramatization, Chernaik took a sidebar with his lawyer, played by Josh Sessler of Cowan, DeBaets, Abrahams & Sheppard LLP. Chernaik told him that he didn't want to give a company with deep pockets the same low rate he had given his first client. In the end, he gave Zorin's chief digital officer a safe answer, saying he would discuss it with his board and get back to her.
Big companies will often ask for this clause, but if they really need a startup's service and they need it soon, they don't have much leverage, said Kathleen Utecht, a senior associate at Comcast Ventures who was playing Zorin's CDO. The startup can say no and still close the deal.
2. Be cautious about taking funding from a potential client.
Some large media companies such as Time Warner have venture-capital divisions that invest in startups. Sometimes, during a meeting with one of these companies, they will suggest putting money into your company. While the money may be tempting, you should think twice before going after it.
For one thing, potential investors have a right to see your financials. The big company could dangle the prospect of an investment in order to gain access to your sensitive information, only to then pull the funding offer, or worse yet, kill the whole deal, Utecht told the audience.
If the company invests, it may gain a seat on your board, Sessler pointed out to Chernaik during the skit. The danger there is that it may try to prevent you from making deals with any of its competitors down the road.
3. Find a champion within the big company.
Startups are able to move quickly. "We could have you set up in a couple of hours," Chernaik told Zorin at one point. Big companies, on the other hand, have much more internal bureaucracy to wade through before a deal can happen. It might take several meetings just to hammer out the terms of the agreement. Because it takes stamina to see a deal through to the end, you need someone highly placed within the big company to champion your startup, Utecht said. It's important to also be mindful that a deal can fall apart at the last minute if that person leaves the company.
Toward the end of the mock meeting, Zorin's legal counsel -- played by Steve Masur, who, like Sessler, is a partner at CDAS -- had a sidebar with Utecht. He said he didn't want Bit Music to feel as if their partnership was a done deal, because a lot of due diligence remained to be done. For instance, large companies like Zorin might have legal issues regarding how they associate their own trademarks with another company's name, Masur said.
The lesson here is to be patient and try to connect with someone in the big company who believes in your service. With any luck, that person will stick with you the whole way. "You definitely need a champion [inside the other company]," Utecht told the audience. "If you don't have a champion it will never go through."