In a company’s early years, securing the necessary resources, expertise, and market access to help the company grow and succeed can be challenging.  A lot of businesses fail because of a lack of access to these.  To overcome these challenges, some opt for joint ventures and strategic alliances as a way to gain access to such crucial needs of a young company.  Partnering with other businesses can offer numerous advantages and lifelines. However, without careful attention to the legal intricacies of such arrangements, these arrangements could leave a young company in a worse position.  This article discusses the merits of joint ventures and strategic alliances for young companies and emphasizes the importance of establishing robust legal protections before committing fully to one or the other.

The Benefits of Joint Ventures and Alliances for Young Companies

The introduction highlighted some advantages that young companies can gain from joint ventures and strategic alliances.  This section expands on those and looks at some other benefits.

• Access to Resources and Capital. Many young companies struggle with limited money and other resources.  Even those fortunate enough to be backed by outside investment, such as venture capital, likely will want to find ways to stretch their dollars.  Joint ventures offer opportunities to access much-needed capital, allowing for improvements in research, development, and market strategies.
• Expertise and Knowledge.  Startups, given their budget constraints, might find it challenging to hire seasoned professionals or external consultants. This can restrict the depth of operational expertise and industry-specific knowledge at their disposal. Connecting with one or more established companies through an alliance or joint venture often gives those startups access to the expertise they could not otherwise attract.
• Market Access & Brand Credibility.  Finding avenues for reaching new markets can be difficult for young companies – they may be lacking the contacts, brand credibility, and other key resources.  Collaborating with a company that already is established in a market will offer opportunities for a new company to get its foot in the door of that market.  The new company can leverage the established company’s brand recognition and goodwill in those markets to start building its own credibility and market presence.
• Risk Sharing.  One wrong move for a young company with limited assets can mean the end of that company.  However, by entering into a joint venture or alliance with another company, the young company can share responsibilities and investment obligations.  If something goes wrong, the parties can lean on each other to get through it.  Even when certain challenges cannot be overcome, the younger company likely lands in a better position because any losses are shared across a group.
• Stronger Competitive Position.  By collaborating, businesses can combine their resources to pose a stronger front against competitors. This can lead to a larger market share, stronger brand presence, and the ability to tackle bigger projects or contracts that would be unfeasible for each company individually.

Protecting against Possible Legal Pitfalls

While joint ventures and strategic alliances offer tangible benefits to young companies, it is important for these companies to protect themselves when entering such arrangements.

• Robust Joint Venture and Strategic Alliance Agreements.  A robust and carefully drafted agreement will play an important role in protecting all parties involved.  The agreement should:
  • Clearly define the objectives of the joint venture or strategic alliance.
  • Specify both financial and non-financial contributions from each party.
  • Address revenue and loss sharing mechanisms, where applicable.
  • Define dispute resolution mechanisms, including the possible role of mediation or arbitration, if considered.
  • Clearly outline ownership rights, encompassing both pre-existing assets brought into the arrangement and intellectual property developed during its course.
  • Detail how the parties will winddown the arrangement when the time comes.
• Clear Ownership Rights.  This is included in the above list but bears repeating given its significance. If a party brings intellectual property, such as software, into the arrangement, how will licensing rights be addressed? When new products or intellectual property are created from the venture, how are rights to sell or license it determined?  Once the arrangement is over, who retains ownership of the products or intellectual property? Does each party get to continue selling a product after the venture ends?  There are many more questions that could be included here, but the point is that these ownership questions will need to be worked out to help avoid future disputes.
• Authority to Act on Behalf of the Venture.  Clearly determine who holds decision-making power within the venture. For example, if software needs to be purchased in support of the venture, can a party simply go out and purchase it?  Does there need to be mutual consent?  Are there expenditure thresholds beyond which mutual approval becomes mandatory? By not setting these authority ground rules (and getting them written down), a young company potentially can find itself on the hook to pay for expensive equipment, services, or other items without say in the matter.
• Potential Liabilities and Losses.  A joint venture is not immune to business challenges. From financial dips to potential legal disputes, it is important to understand the potential liabilities and their implications.  What liabilities are shared and which ones are individual liabilities for the parties?  In an effort to guard against these liabilities, the parties in the joint venture may want to consider purchasing certain insurance coverages that are specific to the venture.

Conclusion and Key Takeaways

Joint ventures and strategic alliances can offer access to resources, expertise, and to markets that might otherwise be out of reach for a new company. These arrangements can present numerous opportunities for accelerated growth and better competitive positioning. However, it is important to navigate the legal intricacies of such arrangements carefully. Failing to address these concerns can not only negate the benefits but also expose the young company to unforeseen challenges and potential setbacks.