What issues should I look at when securing a licence agreement?

What would be the most important issues to look at when securing a licence agreement to market software developed overseas in Australia?

Once you’ve satisfied yourself that the software is fit for your purpose and presents a compelling value proposition to your target market, the key issues to consider are:

1. Service and support
2. Access to source code
3. IP ownership/infringement

1. Service and support

Ensure that whatever service level you offer your clients is at least matched by the Principal. This is particularly important when dealing with an off-shore Principal as service level agreements often feature 9am to 5pm support – which isn’t helpful in a time zone on the other side of the planet!

One should also be clear about the escalation mechanisms available in case support is not delivered as contracted.

Basically you must think of everything that can go wrong… assume it will… and have an agreement in place that addresses every eventuality.

Over and above post sales support, a good Principal will provide pre-sales resources to help you develop your local franchise. Clearly identifying the resources available is an important aspect of any reseller agreement.

2. Access to source code

When selling software as an enterprise (client side) solution, your clients will come to depend on the software and will not be impressed if, for whatever reason, support is no longer forthcoming.

If the Principal goes out of business or refuses to support the software with upgrades, etc, you could be left in a difficult position. Even if your support agreement covers for this in terms of escalation clauses, you may still be left in the lurch with only costly international legal action as a last resort (no guarantee of resolution).

One mechanism to avoid such a catastrophe is to hold the latest copy of the source code in escrow so that in the event of a breakdown of support (and/or communication) from the Principal, you have the right to access the source code and put in place arrangements to support it yourself.

There are companies that provide escrow services to protect both the interests of the Principal and of the reseller.

For SaaS (Software as a Service) offerings, source code is not a complete solution as one would have to set up complete serving infrastructure. In such cases, it is best if you ensure that your liability ends if the Principal is no longer able to serve/support the software ie. transfer this risk to your client from the outset.

3. IP ownership/infringement

Understand the IP position of the Principal. Most software developers don’t bother with patents but as a minimum ensure that your reseller contract stipulates that the Principal owns all relevant IP and is not infringing any third party IP. Ensuring the Principal assumes liability for any infringements and defending any actions taken against the Principal and/or reseller is a provision that could save you big dollars down the line.

If the enterprise value of your business (based on the software) will be substantial, it may be worth conducting your own infringement search to increase your confidence that third party infringement action is unlikely.

There are plenty of other details to consider but the above matters should get you heading in the right direction.

For more Funding expert advice, click here.

Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology-based businesses.