Big corporates taking over tech savvy start-ups and scale-ups, also known as corporate venturing, has become a huge trend over the past decade. For both parties the approach involves both strategic benefits and legal risks. Here’s what you need to know.
Ideally, a corporate venturing investment is a win-win for everyone involved. For the big corporate a newly acquired start-up or scale-up can help innovate faster. Due to their small and agile nature, start-ups are often better equipped to deal with rapid changes in the market. The benefit for the start-up is that a big corporate can help them scale by providing production facilities, branding and a global network of clients.
Yet corporate venturing is not without its risks. For a start-up a big corporate partner can be somewhat of a culture shock. Jeroen Sombezki, partner at Van Doorne and corporate venturing specialist: ‘Corporates tend to be slow-moving and policy bound, which is very different from the way a start-up operates.’ An even bigger risk is the unpredictability of the corporate structure. ‘Because big corporates have so many employees, strategies often change. The people with whom the start-up negotiated and implemented the deal could be replaced a year later with new people who may not share the same vision.’
An obvious risk for corporates is that the start-up may not meet expectations. But where a classical venture capitalist can easily get out of a bad investment by selling his interest, for a big corporate things are not that easy. Sombezki: ‘Corporates often have a much broader relationship with the start-up because they use its services for their own client portfolio. Dismantling the investment can be very challenging to manage.’
One of the most sensitive legal issues in corporate venturing revolves around intellectual property (IP) rights. ‘How far do you need to go in engaging IP to market your product and which distribution model do you use in terms of licenses and users? And how do you deal with data access and data marketing? Important questions that need to be answered in a corporate takeover,’ says Sombezki.
The ownership of IP rights after a takeover is often subject to legal hiccups, Sombezki says. ‘The staff of the start-up automatically become employees on the payroll of the corporate. So unless you safeguard the IP rights in the labour contract, any intellectual property rights those start-up workers had automatically become the possession of the corporate employer,’ says Sombezki. ‘Start-ups are sometimes naive about this’.
It’s a different scenario if the start-up worked with external developers, since they are not legally considered employees. Yet that’s also a situation start-ups needs to be wary about, according to Sombezki. ‘The reflex from start-up owners is often, oh, that’s just a regular employee so the IP is ours. But if you don’t make legal agreements about the transfer of IP rights, then they belong to the external developer. Things often go wrong there.’
Everything under one roof
Sombezki’s office Van Doorne has assisted many corporate venturing takeovers. They can not only advise both parties in their options, risks and benefits concerning IP, but also house all other legal services required for a corporate takeover under one roof. Sombezki: ‘We look at things like employee benefits, intellectual property rights, data protection and regulatory components. We have a lot of expertise in privacy, IP and IT and we can also take care of all the notarial and fiscal aspects.’