How to Avoid Collaboration Contracts That Disadvantage Startups (and What to Do About Them)
This article was machine-translated from Japanese by AI (Claude). It may contain errors. Read the original Japanese article.
As startups have attracted attention and open innovation initiatives have spread across Japan, startups are increasingly doing things jointly with other companies. More startups are also tackling deep problems in various industries, and it seems that they are signing contracts such as NDAs with customer companies from an early stage more and more often.
In these situations, startups tend to be put at a disadvantage. For that reason, corrective moves have emerged at the national level (introduced below), yet I have still heard of cases in which some companies that do open innovation as a business propose contracts that are unfavorable to the startup side. So I am writing this blog post, partly as a warning.
Hidden Pitfalls in Contracts
Unfair terms in PoC or license agreements, the attribution of intellectual property rights in joint research, and restrictions on the use of deliverables are easy to recognize as disadvantageous, so I expect many startups can spot the problem while going back and forth over the contract.
However, there are several other points to watch out for. For example, the following:
- One-sided liability for damages (a clause stating that the startup alone bears the burden whenever any damage occurs)
- Restrictions on trading partners
- Most-favored-nation clauses
Some of these are already included at the NDA stage. Take liability for damages, for example: if damages arise from some unforeseen accident, a startup could quickly go under.
Startups that are unfamiliar with contracts, or that are in a weak position, tend to think "that's how it is" and accept when a well-known company or an open innovation intermediary that seems to have a track record tells them "this is the template." But each of these carries risk, so I recommend reading contracts carefully.
What to Do
What helps when you notice a disadvantageous contract are the "Model Contracts (New Materials and AI)" and the "Guidelines on Business Collaboration with Startups," created by the Ministry of Economy, Trade and Industry, the Japan Patent Office, and the Japan Fair Trade Commission, together with committee members.
These model contracts and the "Guidelines on Business Collaboration with Startups" are not just useful as knowledge. Based on them, you can tell the other party, "Doesn't this go against the government's model contracts and guidelines?" and "The Fair Trade Commission might view this as an abuse of a superior bargaining position," and then say "This is a risk for both of us. Shall we find a good compromise?" That makes it possible to negotiate under the banner of the national government.
In fact, some startups I support have taken contracts forward by referring to these and showing the other side, "this is what a typical contract looks like," and it has been very helpful.
To Make the Industry Better
For open innovation companies that charge fees to large corporations and match them with startups, the customer is not the startup but the large corporation. I understand that they have an incentive to use contracts favorable to the large corporation, and I also understand that the legal departments of large corporations want to include self-protective measures.
However, such practices damage mutual trust and also hurt those who genuinely want to advance open innovation. So I would like to ask, once again, companies that broker startups and companies that are considering collaboration with startups to refer to the "Model Contracts (New Materials and AI)" and the "Guidelines on Business Collaboration with Startups," and in addition to them the "Fact-Finding Survey on Transaction Practices of Startups (Final Report): Japan Fair Trade Commission," and to check the state of their own contracts. You could also consult your in-house legal department about whether making good use of such model templates would allow the contracts to be changed to appropriate terms.
I also think startups would do well to make good use of these guides when negotiating contracts.