Copyright 2008 The Prinz Law Office.1 Getting Started with Drafting a Development Agreement: A Brief Guide to the Elements and Key Considerations By Kristie D. Prinz Founder, The Prinz Law Office

Copyright 2008 The Prinz Law Office.2 Elements of the Agreement I.Defining the Development Work to be covered by the Contract  What is to be developed? Will there be deliverables?  If deliverables, what are the specifications for those deliverables? What is the acceptance criteria?  What is the development timetable? How flexible is that timetable?

Copyright 2008 The Prinz Law Office.3 Elements of the Agreement II.Defining the Payment Terms  Will the payment be by fixed fee or by the hour?  If by fixed fee, is the payment up-front, upon receipt of the deliverables, in installments, or based on milestones?  If by milestones, define exactly what those milestones are and what conditions will trigger a milestone payment.

Copyright 2008 The Prinz Law Office.4 Elements of the Agreement II.Defining the Payment Term  If by the hour, can you cap the total hourly fee?  How promptly will payment be due upon receipt of an invoice or upon completion of a milestone?  Are there penalties for late payments? discounts for early payments?  How late does a payment have to be to cause a breach? Would that breach be material?

Copyright 2008 The Prinz Law Office.5 Elements of the Agreement III.Identifying Intellectual Property  Will intellectual property be created?  If so, which party owns that intellectual property?  Does the non-owner want the right to license the intellectual property?  Should the license be exclusive or non- exclusive?

Copyright 2008 The Prinz Law Office.6 Elements of the Agreement III.Identifying Intellectual Property  If intellectual property is to be licensed, what uses of the intellectual property are permitted/prohibited?  Can the licensee grant sublicenses?  Is the license limited to a particular territory?  Does the license extend to improvements?  Should the license be limited to a particular field of use?

Copyright 2008 The Prinz Law Office.7 Elements of the Agreement III.Identifying Intellectual Property  If there will be a license, is it perpetual?  Does the license last until the expiration of an underlying patent?  Is the license for a fixed period?  Can the license be renewed?

Copyright 2008 The Prinz Law Office.8 Elements of the Agreement IV.Identifying Any Confidential Information to be Exchanged  Will there be a mutual exchange of information or will the sharing just be a one-way exchange?  Will new know-how be created through the relationship? If so, who owns that know-how?  What are the terms of the understanding to protect confidential information/know-how?

Copyright 2008 The Prinz Law Office.9 Elements of the Agreement V.Defining Ownership of any Tools  Will either party be lending its tools to the other party for use in the development? If so, under what terms?  Will either party be purchasing new tools for use in the development? If so, what happens to the tools following the completion of the work?

Copyright 2008 The Prinz Law Office.10 Elements of the Agreement VI.Allocating the Risks  What happens in the event of a termination by either party? A breach by either party? A failure to meet the timetable or the milestones?  What should constitute a breach?  Is the contract dependent on one person? If so, what happens if that person is unable to do the work for any reason?

Copyright 2008 The Prinz Law Office.11 Elements of the Agreement VI.Allocating the Risks  What steps, if any, do you want to take to protect against a bankruptcy by either party?  Do you want to cap the total liability?  If there is a license, what is the licensor’s obligation to the licensee in the event a claim of infringement is brought by a third party? Licensee’s obligation to licensor if a licensee action triggers the infringement claim?

Copyright 2008 The Prinz Law Office.12 Elements of the Agreement VII.Resolving Disputes  What governing law applies?  Do you want to resolve licensee-licensor disputes by litigation? Or by mediation/arbitration? If so, where should such proceeding take place? What rules should apply?  If the licensee challenges the validity of any underlying intellectual property, what consequences should apply?  Who bears the costs of any dispute resolution procedure?

Copyright 2008 The Prinz Law Office.13 Key Considerations in Development Agreements I.Assessing Clarity of Development Terms  Is the development work defined specifically enough, so that the agreement is clear on job requirements? Are the deliverables expressly defined?  Keep in mind: Vague terms are almost impossible to legally breach. Also, they make individual look more like employee when you hire a contractor to perform job.

Copyright 2008 The Prinz Law Office.14 Key Considerations in Development Agreements II.Assessing Clarity of Payment Terms  Do the payment terms require clarification to understand?  Are the milestones clearly enough defined? Is it clear what triggers payment?  Have you addressed what happens if payments are not made immediately?

Copyright 2008 The Prinz Law Office.15 Key Considerations in Development Agreements III.Risk Planning  Have all potential issues that could cause either party to terminate been anticipated and addressed?  Is the termination clause clearly drafted and does it address what obligations remain and end at termination? Have you considered what would likely happen upon the bankruptcy of either party?  Have you addressed limitation of liability? Indemnification?  Have you agreed on how disputes will be resolved?

Copyright 2008 The Prinz Law Office.16 Key Considerations in Development Agreements IV.Is the Confidential Information Really Protected?  If sensitive confidential information is involved, does the agreement bind all individuals who have access to the information?  Pay attention to entity structure and issue of subcontractors.

Copyright 2008 The Prinz Law Office.17 Key Considerations in Development Agreements V.Has the nature of the relationship been confirmed?  Is this relationship really an employment relationship? (Confirm IRS rules if unsure)  Who is really doing the work? The contractor or another subcontractor? If subcontractor, there are other issues that need to be considered.

Copyright 2008 The Prinz Law Office.18 CONTACT INFORMATION Kristie D. Prinz, Founder The Prinz Law Office P.O. Box 1594 Los Gatos, CA Phone: Fax: