Considering Signing an OEM Agreement?

We are considering signing an OEM agreement with another Hardware/Software Integrator for reaching a significant numbers of customers in short order (they have been in the market for almost 10+ years and so have 100+ large customers). We are getting a lot of individual interest from many of the same customers but the tradeoffs seems to be piggy-backing on their software offerings to reach a large of customers in short order vs. spinning the sales cycles individually for each prospect. They want an exclusive at least a market segment in the U.S and Asia.

What are some of the gotchas to watch out for?

Is this a good idea at all? Have any of you got any war stories to share?

Here you go:

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Only give them exclusivity if they perform--x amount of business a year or no exclusivity--Make it an annual contract, with a trial for 3 to 6 months… to see if they can deliver

You can hold several prospects as your own for x days to close yourself and give them exclusivity except for those prospects


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We have done one deal like this. If you are giving them an exclusive, the main thing is to have them pay you a guaranteed minimum each month for which they have the exclusive. That minimum is applied against the cost of product they resell. If they think they can sell your product, they should be willing to pay you a minimum because they will be buying product from you anyway. If they do not want to pay you a minimum, then they are not confident of selling your product.

What you do not want is for them to have an exclusive for a market, not sell your product but keep you out of the market while they develop their own product based on feedback they get while talking to customers about your product. Then come to market with their own product. I have heard of companies that got caught in that trap. They do that even if they pay you a minimum, but at least you got paid something.


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Try to limit the exclusivity in any way possible - time, total dollar amount, geography, type of customer, just their existing customers, performance milestones, etc. Also, remember that they do not need to sell your product to survive, but you do. Make sure you retain the power to sell your product and insure your company's survival.

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You might consider an exclusivity period with certain well defined success factor milestones that, if not met during any particular time frame, turns into a nonexclusive license from then forward. You might limit the exclusivity to the OEM's existing customers which could be listed in the agreement, again with success factors that must be met to retain exclusivity.
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I am a VP of Biz Dev and very familiar with channel agreements. My suggestion is to sign the agreement, as it is a quick entry to market with possible immediate customer traction. But also sign exclusivity over for only one year, and based on success factors (which can be measured monthly, quarterly or annually) exclusivity can be extended indefinitely on a recurring basis. This way you can always get out if they do not perform.
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1) what is your rev. model vs. their rev. model i.e., license fee vs. maintenance fees if the ratios license fee/maint (or vice versa) are very different than their sales force will not execute the same as yours would

2) collections - will you have to wait an additional 30 days?

3) terms/details of terminating the agreement

4) discounts - do they have control over discounts on your products?

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I am in the business of helping companies with Strategic Alliances and Partnerships. You have to make certain that you have a minimum guarantee of business generated and a business plan in place to show how they intend to market your product with the espected results.

I think that in general it is a good thing to seek out companies which have complimentary products and/or services and form an alliance which is good for both companies.

How is the support going to work? Is your company 2nd level, third level, ??

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Take a look at www.softletter.com

An excellent newsletter with tons of software-specific wisdom.

Gotchas to ponder...

Whose brand is getting built here?

Performance metric to enable continuing the relationship.
(they will likely want to extend the deal...)

Can you sell updates directly or must you go thru the integrator? (Think Microsoft 'selling' DOS to/thru IBM) How much support is required? Can you charge separately or is it included? If you sell your company, the agreement should enable you to do so without the integrator's approval, their deal still remains, no $ to them on the sale.

What's the matter with taking a little longer and selling the software yourself? The OEM may take just as long and you will learn less about the actual sales process...

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Be careful, the red flag is their requirement for an exclusive. Any time you give an exclusive there has to be a guarantee. There are a host of other issues that you need to watch out for.

1. How do you audit there activity with your product?

2. Reporting requirements must be detailed and you should have the right to receive documentation regarding the sale of your product 3. There should be revenue milestones built into the contract. If they do not meet their commitments it triggers a price increase 4. Any contractual agreement should be reviewed by your legal counsel as to its enforceability. 5. Again there are a host of other issues that you need to be aware of. Be careful

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Just a couple of quick things to be aware of when considering OEM versus going direct to the end user.

a. The revenue that you'll get per copy of your software will be much, much lower than you'll get on an end user sale. The OEM is doing all the marketing and selling (that's the good news), but the way that you'll pay for that is with deep discounts to the OEM for your software. It can still be a good deal, but a system that the end user pays $100K for may only turn into $50K of revenue for you.

b. There's also a vulnerability in the OEM model. The nice thing is that developing a relationship with an OEM, particularly one with a substantial business like the one you described, is that you could potentially get a sharp increase in sales by "piggybacking" on their products. However, relationships are often not permanent, so if that same OEM has a change of heart downstream and stops selling your stuff, you could see the same kind of sharp change in your revenues, this time downward. A number of years ago, I had this happen to me in a startup I was with. We didn't do anything wrong, but the OEM had a change of management and a change of strategy and out we went. We were so dependent on that company that we never recovered from the loss - we quickly spiraled down and crashed and burned.

So, OEM deals can be very, very good for the reasons that you stated, but make sure you set realistic expectations on the revenue you're going to get and don't get too dependent on a small number of OEMs.

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With an exclusive agreement, the OEM must agree to purchase a minimum amount. If they do not, then the arrangement should convert to non-exclusive. Also, you need to make sure the intellectual property is safeguarded. We often see developers of HW or SW teach their partners and resellers everything the partner needs to make or sell a competing product. Customer service is also usually a big issue.

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One problem that I have had in the past deals with companies whose revenues come from a mixture of product sales and services revenue. I think that is probably everyone these days. It applies in this case.

Since product revenues were commissionable through the OEM agreement but all the services revenue stayed overseas, the distributor would drastically discount the product side to get the business. We ended up with almost no revenue because of the deal (which was done before I arrived.) I would suggest having a minimum per unit revenue flow back to you rather than just taking a percentage of their revenue. A percentage with a floor is probably a good idea.

The same thing occurs with after the sale, reoccurring revenue such as software maintenance or renewals. There needs to be some split of that as well. Since some of the revenue is for new releases and upgrades and some is to pay for technical support, you should decide up front who does what and base the splits on that.

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