Partnering on an idea with 2 separate and distinct companies

I am in a current situation that I need some advice on, I think it will be easiest to explain with a simplified example. I am involved in a startup company that specializes in software development (company B in the below example).

Company A had an idea for an online product, they brought the idea to company B, the development company. Company B completed the project and provided the product to Company A as expected. Company B then began adding additional features to the idea and began discussions with Company A to sell this idea to the public using the SaaS (Software as a Service) model. Is it possible for Company A and Company B to create a contract that basically says Company A (the idea generator) will get a certain percentage (yet to be determined) of any profits of the new software? Company B will be adding features, supporting, and hosting the service, while Company A will be (at least partially) involved with selling the service. However, if possible we would like to do two things:

1. Keep the companies 100% legally separated.
2. Create a contract or agreement to share responsibility of the product without having to create a separate legal entity joining Company A and Company B.

Basically Company B wants to collaborate on this project with Company A but does not want to have to set up a new company or join companies in any way. We would prefer to just set up a contract that would allow us to work together on this one project without having to mix other business or product lines.

Any help would be appreciated.

You can clearly contract any definable relationship. I'd be inclined to be careful on just one point.

As you've described it, the core property belongs to Company A. Company B created the software and (I presume) passed all rights in that software to Company B. So Company B has acquired knowhow, but some of what you describe, though natural enough, has potential for future disputes.

So I think (and I'm not a lawyer, and this is not legal advice!) company B contracts a license from company A for use of the IP encapsulated in the software, specifications etc, in the context of creating a SAAS service that builds on this original IP.

This can certainly be expressed as a percentage of revenues, or in practically any other way.

If I were in Company A's shoes, I'd want to get some fixed sum into the contract somewhere to represent a valuation of my original IP, even if this were realised under the percentage regime or triggered by some other event (e.g. if Company B had a change of ownership, or wished to engage other parties in some way). Or I might use that to set some targets for income from the SAAS, and have a right of termination if (say) those targets weren't achieved.

And if I were in Company B's shoes, I'd want some provision to 'buy out' Company A - a lump sum option to end the revenue split.

These two observations are complementary, but not totally 'same side of the table.' Negotiating that now is better than leaving it for the uncertain future.

Then there's the question of who owns what as the service is developed.

If the product and the SAAS are going to be related, then I think you need clarity on this point. And there are many ways you could capture this.

• Company A could own all new property. That sounds a bit unnatural, but it's simple and manageable (there's no mixture, company B gets to manage its risk and is assured of its ongoing ability to generate income)
• Company B could own all new property, end of story. This sounds simple, but it could be hard to unwind in future.
• Company B could own new property in SAAS, and Company B could have the right to access and utilise these new properties back into the software product (for instance by having the right to review source and documentation, and to extract specifications). That could ultimately be unwound if the directions diverged, leaving A with the software product, B with the SAAS and a cross-license on everything encapsulated in each.
• Company B might be obliged to review development of the SAAS and, on request, to build (applicable) features back into company A's software product

So I know you've already ruled other options out, but I have to say that my preference would be to do this a different way.

a) Company A could act as the lead in all cases, with Company B as the development partner (benefiting from revenue share or/and fees for the work), or b) Create Company C with Company A and B as its owners, either as a vehicle to hold the IP, or as the vehicle for taking Company A's product into the SAAS domain, or c) Company B buys the IP from Company A, who would retain a right to sell and further develop the original software product.

I always want think about the 'big success' and 'big flop' cases, and I am concerned that the arrangement you want isn't ideal for either of those scenarios.

Yes, what you want to accomplish is reasonably straightforward, assuming that (a) intellectual property rights in the work that already has been done are properly specified and allocated and (b) the agreement defining the new relationship properly specifies intellectual property rights and other aspects of the relationship between the parties.

This is not a do-it-yourself project; you should retain legal counsel to make sure that your legal and business interests are properly protected.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

How about agreeing to share profits. Meaning that money spent selling or developing is deduced from the income from the idea. This leans towards creating a new company, but without actually doing it. You would need to agree on a development and sales budget for a period of time and also the cost for one hour of work. The problem is that incentives can quickly get out of harmony. Therefore, I would already now make a deal that if the idea has a certain amount of success, then a new company will be formed with agreed upon shared ownership between the companies. If this is stated, then this will quickly become the overruling incentive for both companies, meaning that they will cooperate in harmony.

If company B owns the idea and has a liscense/sales agreement with company A then that would iron out how this would work. It is just a contract between two companies. So yes possible.