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Thursday, February 25, 2010

Let's Do A Deal!

As each successful startup may ultimately find itself making deals with large corporate companies, it is critical that startup CEOs learn the basics of the deal-making process. To that end, TLP Boston held a deal-making competition last Wednesday where a hypothetical medical device startup explored three types of corporate deals: a licensing deal, a commercial distribution agreement, and an acquisition.

The class was split into 8 teams, 4 represented Fortune 500 companies and 4 represented the startup. My team was a Fortune 500 company and we negotiated a licensing deal with the startup. The key deal terms we considered were length of deal (number of years), upfront payment, annual royalty, and minimum annual payment to startup. All these variables impacted the NPV in various ways. Although the startup was interested in maximizing the NPV, it was equally important to find the ideal balance between short-term and long-term payoff, i.e. should one target a higher upfront payment or a higher royalty. Ultimately, the balance is determined by the startup’s confidence in the commercial potential of their technology. One wild card that came up during the negotations was the traunching of the licensing deal based on key milestones. This represents another potential issue a startup has to carefully consider during their deal-making process.

As for commercial distribution agreements, the key variables were the length of deal, margins lost through revenue sharing, and net margins. In these deals, margin distribution is key in NPV determination.

In the acquisition scenario, the key variables are total acquisition price, upfront payment, earnout rate, and escrow rate. Again, an ideal balance between short-term and long-term payoff has to be determined by the startup, which depends on the startup’s confidence in their technology.

Winners were Jay Meattle and Vishy Venugopal (Entrepreneurs from Aloo Techies) for cutting the best deal.
Winning Cohort was Bootstrappers for best overall team performance.

Congratulations to everyone.

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