Software startups frequently struggle to make a name for themselves with potential customers, especially when it comes to landing a large licensing deal. Prospective clients usually buy large platform licenses through their procurement offices, which look at the platform’s performance and dependability.

Because startups typically don’t have a track record of success to attract potential clients, they can offer a trial of their platform for free or at a lower cost to showcase what their platform can do and how reliable it is. The enterprise — a potential client — can test the newest technologies without the worry of committing to a complete and often costly rollout.

The pilot contract: an overview

A temporary arrangement that allows a company to test a new project on a small scale, a pilot program enables an enterprise to evaluate a project’s success before making a bigger commitment. To protect itself, the startup usually creates a “pilot contract,” a legal document that outlines the agreement. The pilot contract enables an enterprise temporary access to a startup’s new platform and may include some early features still being tested.

The pilot contract helps startups in various ways — it reduces their legal responsibilities and lowers risks; safeguards their ideas and inventions; and assists in getting their platform up and running. A trial contract can help potential clients bring in a new supplier to enhance their current work processes, and when the enterprise looks at fully using the startup’s platform, they can depend on what they learned during the trial.

A fictional partnership

StoreBuddy is a fictional software startup offering a computer vision platform for retail outlets.

It uses the latest technology to monitor shopper behavior, including how they navigate through stores, where the highest foot traffic is, and how much time they spend interacting with products and displays.

Town Square Retail is a fictional national chain that has had trouble understanding why its revenues have remained stagnant. The company knows it needs a solution to remain competitive, but it’s not ready to implement a large, systemwide platform yet.

Pilot contracts lower risk

StoreBuddy provides a trial license to Town Square Retail at a much lower cost to be utilized only within a select number of stores. This reduces Town Square Retail’s financial risk because there is very little or no money involved if StoreBuddy doesn’t work as expected. Additionally, only a small number of sites have uploaded data to the platform, which reduces Town Square Retail’s responsibility if any data is mismanaged.

Since Town Square Retail will pay a lower fee, StoreBuddy can further minimize its responsibilities by providing a brief license period of between three and six months. They can also limit all guarantees, avoid fixing bugs and restrict any direct or indirect damages to the amount of the lower license fee.

StoreBuddy, in turn, will not provide any guarantees or promises in the pilot contract that would reduce its responsibility, nor will it agree to protect or pay back Town Square Retail for any claims made by other parties against Town Square Retail for using the platform.

Pilot contracts protect startup IP

Pilot contracts outline the startup’s rights and ensure its valuable assets — like ideas, inventions and creative work — developed during the project belong to the startup. This enables startups to focus on innovating without the concern of losing their unique ideas.

In our example, Town Square Retail has access to StoreBuddy’s private documents that explain the platform’s features. But it’s in StoreBuddy’s best interest to make sure that Town Square Retail keeps those documents under wraps until the features are made widely available.

To protect itself, StoreBuddy adds terms to the pilot contract that guarantee privacy. As such, Town Square Retail will not share platform details with outside parties. Further, it may upload only “dummy data,” which prevents them from learning how the platform works. It also stops Town Square retail from looking for another provider to either add similar features to its own product or create an internal product that renders StoreBuddy’s paid products and services unnecessary.

Advantages to the client

After the initial agreement period, Town Square Retail saw improved operations and an increase in its monthly revenue. It also saw a reduced number of shoplifting incidents. Town Square Retail identified items that weren’t selling well, which prompted them to remove those items from the shelves and offer new products for their discerning customers. Town Square Retail gained a strong reputation among its employees and customers and was lauded for its variety of products placed creatively throughout their stores.

This ultimately led to a formal agreement between StoreBuddy and Town Square Retail whereby StoreBuddy’s platform was rolled out to all of Town Square Retail’s locations.

Advantages to the startup

Besides proving that StoreBuddy’s product works, the company also gained the trust of a new customer. This made it easier for them to approach investors and attract new business. Additionally, the long-term contract brought in significant revenues that enabled the team to enhance its offerings. StoreBuddy used the pilot project to attract potential investors, resulting in a funding round.

The pilot was a success and benefited both companies.

Creating a pilot contract: Helpful tips

When creating a pilot contract, there are several guidelines to keep in mind.

• To reduce their financial risk, both sides should make sure that the details about the project, costs and contract duration are clear.
• To avoid potential issues that come with offering a lower fee structure, the startup should include statements in the contract indicating that it is not responsible for fixing bugs or for service interruptions; that it won’t cover any legal claims; and that it limits its responsibility to the amount of the reduced license fee.
• In an effort to keep trade secrets and competitive information confidential, IP and security clauses should be documented.
• To minimize privacy risks on the client and the enterprise side, the contract clause should restrict the client’s data use.
• In the event the client chooses to discontinue the pilot program, contract language that allows it to cancel for any reason — no questions asked — offers protection.

The bottom line

Implementing a pilot contract is beneficial to startups and enterprises alike. Startups can open new avenues for growth, increase the bottom line and lower their liability risk. Enterprises can partner with startups early to evaluate new solutions at a lower cost and foster innovation.

Sign up for the Entrepreneur Daily newsletter to get the news and resources you need to know today to help you run your business better. Get it in your inbox.