Consulting on work related to future planned product

We recently approached a large company with a proposal to build them an application we thought they'd find useful.

The idea is that they'd partner with us to get it developed and get unlimited use of it and in turn we'd retain the rights to continue developing it and selling it as a product elsewhere.

They then threw a bit of a curve ball at us and decided they would rather take this idea and develop it in house and have full ownership of the IP and source code etc. We would just consult and help them do that.

Now, we would still like to pursue this idea ourselves and sell it elsewhere but we would have to re-write it from scratch and not use any source code from their project. That's fine.

So we can perhaps come to an agreement that allows us to develop our own product separately and also allows them to fully own their own source and IP so everyone gets what they want.

But, are we walking into a minefield whereby, regardless of any commercial agreements, we could make a powerful enemy when we release a product that looks similar to what they have developed and they could suspect we used their source code even when we didnt?

Does anyone have experience with this type of situation?

There are two kinds of software IP: code and design. You might start from scratch on code but you'll wind up building on all the design conversations you have with the client. If your consulting is a work-for-hire, they have a claim on the design IP as much as the code.

You can negotiate permission to do your own version. You might argue both designs will diverge post-engagement as you apply different talent to different customers. You might argue your research findings and your design work would be discovered independently so you should share non-exclusively in that IP. You might also offer to delay work on your project by n weeks so they can be first to market.

Reaching agreement now might help you set today's expectations. It won't help you in the future as your client's leaders, product owners, and technical staff turn over, circumstances change, etc. Assess the risk. What are the chances you'll keep doing business with them? How much? What are the chances they'll stay interested in this app space? How much power do they have in the industry? Could they hurt you with other clients and partners? What risk mitigation strategies could you design and sustain?

The most useful thing you can do in negotiating this is knowing what you really want. The rest should be straightforward.