A COMPREHENSIVE GUIDE TO START-UP EVALUATION AGREEMENT
This article defines an evaluation agreement and explains why it is critical for start-ups. However, the significance of evaluation agreements is not limited to start-ups; it also extends to the start-ups’ potential clients. The article outlines the many provisions that make up an Evaluation Agreement and demonstrates them using a sample clause.
What is an Evaluation Agreement?
It is a pact reached by two or more parties. The parties agree to test and assess a new product or service offered by one of the he terms of the agreement. The agreement’s objective is to evaluate the product or service in question, and if the findings of the evaluation are positive, further talks are held to parties under expedite the product’s sale or subscription. Time and scope constraints apply to such agreements. Time, because the review will be completed in a short period of time, usually a couple of months. Scope, because throughout the evaluation phase, the product given for review is empty of certain of its capabilities.
Why does start-up need Evaluation Agreements?
There are two main reasons for the same:
Getting new customers and pushing the sales numbers:
It is difficult for start-ups to promote their products to potential clients because they have little to no market recognition. The majority of potential customers are hesitant to use new software, especially if it has only been lab-tested. Customers can see and feel their degree of comfort and compatibility with the product given through the Evaluation Agreement, which provides a trial run for such software. If the trial run goes well, both parties will find it much easier to negotiate and facilitate the final transaction.
Testing of the waters
As previously said, most software is developed and tested in a lab environment, and its interaction with real-world conditions is typically unpredictable. A trail run given by the Evaluation Agreement is a critical feedback tool for any new software start-up. This ensures that the start-up has enough room to solve any defects in their product as well as make necessary revisions in response to a potential customer’s specific needs.
Why are companies interested in such agreements?
1. To check whether the product offered is a good fit
Every company faces its own set of problems and challenges. Companies need inventive products to combat them. These items are typically created by new start-ups that have yet to establish themselves. Furthermore, the organisation is unsure whether the product being offered is the right fit for the challenge it is facing. By signing an Evaluation Agreement, the firm is able to evaluate the product and determine how much faith it can have in both the product and the start-up that is providing it.
2. Pursuit of potential avenues for investment
Businesses are seeking for new and unexplored business opportunities in addition to tackling difficulties they are currently facing. A start-up firm usually has the potential to grow exponentially. A corporation will invest in a start-up if it discovers that it has the right idea, the proper execution of that idea, and the right personnel to execute that idea. The Evaluation Agreement assists the organisation in making such a determination.
Types of Evaluation Agreements
Broadly, Evaluation Agreements are of two types:
1. Short evaluation
There is no purchase/license clause in these agreements. This means that once the evaluation period has ended, the other party will not be able to purchase the software. The parties can choose between two choices. Either the two parties go their separate ways, or they come together to discuss the terms of the start up’s software purchase.
These agreements do include a purchase/license clause that allows the other party to keep using the product after the evaluation period has expired. The purchase and licence clause are the most important portion of the contract. As a result, even before the evaluation time begins, the entire agreement, including the terms of software acquisition, has been fully negotiated. As opposed to Short Evaluation, there is no compelling need to renegotiate the terms at the end of the evaluation period.
Important clauses in an Evaluation Agreement
Some of the most important clauses under an evaluation agreement:
1. Purpose of the evaluation
This is usually found as part of the agreement’s recitals or as a separate section immediately following the Recitals. It specifies the evaluation’s goal, the items and services that are being evaluated, and the goals that the given products and services are attempting to achieve. It also limits the agreement’s scope by limiting how the product can be used by the intended customer.
2. Intellectual property (IP)
- Define what “intellectual property” means in the context of the agreement;
- Define what “intellectual property” means in the framework of the agreement;
- Define what “intellectual property” means in the context of the agreement;
- Define what “intellectual property” means in the
- Make the preceding definition as inclusive as feasible;
- Clearly identify who owns the Intellectual Property.
- Make it clear that the other party does not own the Intellectual Property in question and will have no rights to it after the evaluation time ends.
This is also the clause where the start-up can inculcate all feedback, results, and any other relevant data to be part of the IP. This way the other party becomes duty-bound to revert back such important information to the start-up. Another addition can be an explicit statement declining any share in profits to the other party which has accrued as a result of the above-stated feedback. Most importantly, this section protects the IP of the start-up. The other party gets barred from using or copying the software in any unauthorized fashion.
Return of IP and confidential information
The IP must be returned and all private information must be destroyed following the examination, according to this rule. It’s important to remember that the Confidentiality Clause will remain in effect even if the agreement is resolved. Rather, it will bind all of the parties to the agreement long after it is terminated.
Term of evaluation
This is a straightforward clause. It specifies the start and end dates of the evaluation period. In common language, such a period begins on the agreement’s effective date and ends on a date set forth in the agreement.
Who is responsible for any expenses incurred during the evaluation? What will be the method of payment for these costs? When will these bills be paid? This clause provides answers to all of these questions.
Evaluation and review of the process
This clause specifies who will conduct the evaluation and if the review will be supervised by a representative of the start-up. It can also specify the forms and data that must be kept in connection with the evaluation. Such forms and files are critical for a start-up since they provide crucial feedback.
Disclaimer and limitation of liability
These contracts feature a purchase/license clause that allows the other party to continue using the product after the evaluation term has ended. The most significant part of the contract is the buy and licence clause. As a result, even before the review period begins, the complete agreement has been thoroughly negotiated, including the terms of software acquisition. There is no pressing need to renegotiate the terms at the end of the review period, as there is with Short Evaluation.
Evaluation Agreements are a boon to start-up businesses. They are a safety net for start-ups in that they allow them to share their intellectual property without the fear of their IP getting stolen. Start-ups also get invaluable feedback from potential customers. Yet, as indispensable as these contracts seem to be, they are in no way easily negotiated. Small start-ups might face a great deal of resistance from companies in terms of the restrictions on use. Still, the Evaluation Agreement will inevitably play a larger and greater role in the coming years for software start-ups.
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