What Startups Should Check Before Signing with CVCs and Corporate Partners
Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.
For startups, collaborating with CVCs (corporate venture capital) and large operating companies is an opportunity to bring their technology to the wider world. If a startup can tap into a large company's customer network, financial strength and industry knowledge, it may open a path from a proof of concept (PoC) to full-scale adoption, joint development, a capital and business alliance, and even a future M&A transaction.
On the other hand, a poorly designed set of contract terms can significantly narrow the company's subsequent business growth and management freedom. There are cases where accepting a long exclusive negotiation period or a non-compete clause ends up restricting opportunities to do business with other companies. Agreeing to an exclusivity clause does not in itself transfer intellectual property rights to the counterparty, but ownership of deliverables and the scope of usage rights must be checked individually in light of applicable laws and the contract terms. If data usage rights are left vague and the arrangement is designed so that the startup cannot expand to other companies without the corporate partner's consent, or if the investment agreement includes broad veto rights or rights of first negotiation, these can become serious constraints at the time of the next financing or M&A negotiations.
Rather than moving ahead with the contracting process on the mere expectation of "partnering with a major company," it is important to check before signing whether there are exclusivity clauses, how intellectual property ownership is allocated and the scope of the license to use data.
Sorting Out Rights and Cost Allocation in NDAs and PoC Agreements
Discussions with a corporate partner often begin with the execution of a non-disclosure agreement (NDA), and the standards for handling information are set at this stage. NDAs tend to be seen as formal boilerplate, but the definition of confidential information, the treatment of residual information and the scope of the prohibition on use for other purposes affect how freely subsequent negotiations can proceed.
What startups should be wary of is an NDA with a broadly defined purpose of use. A comprehensive provision such as "consideration of a business alliance and any other matters" makes it unclear to what extent the disclosed technical information may be used. Conversely, an excessively heavy confidentiality obligation may hinder explanations to other investors and prospective customers. If there is a clause permitting disclosure to the counterparty's group companies or outside advisors, check how far the circle of recipients extends, whether they bear equivalent confidentiality obligations and whether measures are in place to prevent information from leaking to competing business divisions.
In the agreement for the PoC (proof of concept) that typically follows, also clearly set out the purpose of the verification, the verification period, the division of roles between the parties, the definition of deliverables, cost allocation and the requirements for moving to full-scale adoption. For deliverables, distinguish whether the startup merely provided a product it already owned, whether it carried out custom development for the counterparty, or whether new algorithms or UIs were jointly created, and confirm, in light of applicable laws and the contract terms, who owns the deliverables and to what extent they can be used in services for other companies. To avoid a free PoC dragging on and draining your development resources, it is prudent to specify in the contract or proposal what results will trigger a move to paid adoption.
Ownership of Existing and Improvement IP and Data Usage Terms
In joint development with a corporate partner, the issue most likely to cause disagreement is ownership of intellectual property rights. The startup has existing source code and proprietary know-how, and the corporate partner also has business data and industry knowledge accumulated over many years. When these are combined to develop improvements or new features, settling for a vague clause such as "rights in deliverables shall be determined through consultation" will be a source of future disputes.
In practice, ownership and usage terms are decided by separating existing IP, improvements, joint deliverables and general-purpose know-how. Classification alone does not determine ownership of rights. As a startup, you need to secure rights arrangements under which your core technology and general-purpose improvements are not monopolized by a particular corporate partner and can be freely rolled out to other companies. Aim for a contract design that allows the counterparty to use individual deliverables developed using the corporate partner's proprietary data while remaining compatible with the free use of your own product platform.
In the AI and SaaS space, data usage clauses also need to be checked. The structure of the contract terms changes greatly depending on whether the data provided by the corporate partner includes personal information or trade secrets, and whether the startup can reuse that data for model training or to improve features for other companies. Whether an arrangement constitutes "entrustment" or "provision to a third party" under the Act on the Protection of Personal Information (APPI) is not determined by its label alone but based on the purpose of use of the data and how it is actually handled. Check where the data is stored, whether it is sent to external cloud services or AI APIs and the obligation to delete it at the end of use, and separately and carefully examine the requirements applicable to provision to third parties located in foreign countries. If the wording of the contract terms does not match how the systems actually work, it may lead to breaches of terms or problems in information management.
Points to Note on Exclusivity Clauses, Rights of First Negotiation and CVC Investment
In alliances with corporate partners, the counterparty may ask for exclusivity clauses (non-competition), rights of first negotiation, future acquisition options and the like. From the standpoint of a party providing resources and data, the desire to prevent easy outflow to other companies has a certain justification.
From the startup's perspective, however, these clauses restrict future options. Granting broad exclusive sales rights in a particular industry blocks expansion to competitors in the same industry, and granting a right of first negotiation for an acquisition for a long period creates significant disclosure burdens and constraints in negotiations with other prospective buyers. Granting veto rights that are excessive relative to the shareholding ratio can also cause investors in the next round to pass on investing. Even where exclusivity clauses or priority rights are included, it is important to narrow the covered business areas, the period of effect and the trigger conditions to a limited scope.
Furthermore, when receiving a direct investment from a CVC or corporate partner, a different perspective from that applied to ordinary venture capital is needed. Since the purpose is often not purely financial return but synergy with the investor's own business or acquisition of technology, check the firewall clauses and information barrier rules to ensure that technical information disclosed to the investment division is not shared with the counterparty's competing business divisions. If the relationship with a particular large company becomes too entrenched, there is a concern that other buyers may shy away from an acquisition in a future M&A deal, so read the investment terms and the business alliance terms separately and confirm how they relate to each other and how they are treated upon termination.
Using the JFTC and METI Guidelines and Items to Check
The Japan Fair Trade Commission and the Ministry of Economy, Trade and Industry have formulated and published the Guidelines for Business Collaboration with Startups and Investment in Startups (Japanese). These guidelines set out in detail examples of unfair disadvantageous treatment likely to arise between startups and partner companies, and the criteria for assessment under the Antimonopoly Act and competition policy, at each phase from the non-disclosure agreement through the PoC, joint research and development and investment.
These guidelines can be used as negotiating material when a corporate partner demands an excessive transfer of IP or one-sided exclusive restrictions. A clause that conflicts with the guidelines is not automatically and immediately void under civil law, but the guidelines can be used as a legitimate basis for requesting revisions to the clause.
The following are the main practical items to check before signing a contract:
- Whether the NDA's purpose, recipients, sharing within the group and treatment of residual information are limited
- Whether the PoC agreement clearly states the purpose of the verification, the period, cost sharing and the conditions for moving to full-scale adoption
- Whether ownership of existing IP, improvement IP, joint deliverables and general-purpose know-how is separated
- Whether the scope of use of provided data, transmission to external APIs, use for model training and data deletion obligations are clear
- Whether entrustment and provision to third parties under the APPI have been sorted out based on the purpose of use of the data and its actual handling
- Whether the requirements for providing data to third parties located in foreign countries have been separately examined
- Whether the scope and term of exclusivity clauses, rights of first negotiation and acquisition options are excessively broad
- Whether the investment terms and the business alliance terms are distinguished, and whether the relationship between the contracts and their treatment upon termination are clear
- Whether there are appropriate restrictions on the scope of information shared from the CVC's investment division to the counterparty's business divisions
- Whether unfair terms are being imposed in light of the JFTC and METI guidelines
Legal Support for Collaborating with Corporate Partners
To make an alliance with a corporate partner succeed, it is not enough simply to redline the contract provisions; it is essential to assess how the arrangement will affect your business plan, your subsequent financings and any future M&A transaction.
At LegalAgent, attorneys well versed in generative AI and corporate law work together to support the preparation and revision of NDAs and PoC agreements and the negotiation of terms for joint development agreements and capital and business alliance agreements. For contract designs that advance collaboration with large companies while protecting the startup's business freedom, you can consult us through the following:
Services connected to this topic