Operations > Legal Information for Entrepreneurs > Startup Legal Issues
Legal Checklist for Ventures and Alliances

Small Business Legal Issues

Legal Checklist for Ventures and Alliances

Is your business properly addressing key legal issues pertaining to joint ventures and other partnerships? This useful legal checklist should help you assess your risks.

If your business is creating strategic alliances, joint development projects, or joint ventures, there are numerous legal issues to consider. Here's a series of questions to ask yourself to determine if you have a handle on the latest technology venture and alliance legal issues.

Is your business considering strategic alliances, joint development projects or joint ventures with key suppliers, customers, competitors or others?

The complexity, expense and competitiveness of the marketplace frequently cause businesses to work with strategic partners to share resources and risks. These initiatives may take the form of alliances, ventures or investments. The purpose of many such joint activities is to acquire, obtain access to or develop new technologies. Regardless of the form, technology ventures and alliances often involve detailed planning and significant expenditures. They may include cooperation and non-competition arrangements between potential competitors.

As such, ventures and alliances present a variety of potentially sensitive negotiation and legal issues, such as:

antitrust notifications, clearances and approvals; business plans and restricted activities; allocation and valuation of equity and intellectual property rights; executive and technical personnel selection or compensation; sharing of costs; publicity; project or corporate governance mechanisms, including voting, board, supermajority and veto rights; termination and buy-out procedures; technology licensing, technical support and administrative services; and supply, distribution and other side deals.

Ventures and alliances, therefore, may result both in a substantial amount of investigations as well as detailed contracts between the parties.

Does your business make venture capital or strategic investments in suppliers, customers or other possible partners? Do strategic business partners purchase stock in your business?

Businesses often make strategic equity investments in "start-ups" or "early stage" companies that may develop into important customers or suppliers, particular with respect to new technologies. Such companies generally are privately held and such investments are known as "private equity" deals. Likewise, businesses may purchase stock in publicly traded customers or suppliers, through "private placements" by the company issuing the securities. The investor often receives "restricted stock," which can be sold only in certain limited circumstances.

Although, these transactions usually are strategic in nature, and are done for long-term business reasons, there frequently are substantial "venture capital" concerns as well, related to the potential for significant appreciation in value. Such returns may be realized in the event of a "liquidity event," such as an initial public offering, or "IPO," or acquisition by a larger company

Regardless of whether in a private or public company, strategic purchases of equity in other companies often are investigated carefully and negotiated heavily, particularly in order to preserve flexibility for management but still protect the positions of minority investors. In addition to important representations and warranties, the key protections for minority investors include:

antidilution rights, so that investors possibly may receive additional shares in the event of later sales at lower prices per share;
co-sale rights, so that investors may participate on a pro rata basis if the majority or founding stockholder proposes to sell stock to another party;
preemptive rights, similar to a right of first refusal, so that investors may participate in later stock offerings by the company; and
registration rights, to require the subject company to register the purchased shares with securities authorities, such as the U.S. Securities and Exchange Commission (SEC), so that investors may more freely to sell any restricted shares.

In addition, any later sale of stock by a strategic investor is likely to be subject to many legal requirements, possibly including filings with the SEC.

Any strategic or venture capital investment, therefore, should be reviewed closely from a legal perspective.