Issues to Consider in Revenue Sharing Deals
Cross-promotion and revenue sharing agreements can raise lots of difficult issues. I’m going to review a few highlights. If your deal involves a significant money or rights that are significant to your business (e.g. non-public code or algorithms), it would be best to get legal counsel to help you think through all the issues and review the documentation.
That said, here’s a few key issues.
1. Clarity in the Revenue Share.
It may seem obvious that the terms of the revenue share must be clear, but people often aren’t very careful about it. Why? Because it’s the key business issue, they tend to have discussed it a lot before anyone starts producing documents. So they think they know the terms. If you know what a document is supposed to say, that can color your reading of it. You may miss provisions that contradict your understanding. It can be even harder to spot ambiguities. So remember that the documentation will determine your rights. It will almost always provide that any discussions that lead up to it don’t count for much, if anything. Make sure it says what it’s supposed to say and that it says it clearly.
The key issues here are the things that trigger revenue shares and determine how much you give (or get), the timing of payments, and audit rights. The simplest agreements provide a fixed payment for a trigger that both sides can observe (e.g. someone clicks on a link to your site from the other party’s site). Often, however, that’s not practical because you only want to pay for paying traffic (or, at least, a certain quality of traffic). If the measure depends (as it often does) on something you can’t determine directly yourself, make sure you have rights to audit the other side’s compliance.
If you are going to share revenue, you need to be clear about how the revenue is measured, including any deductions off the top. In this context, think about whether disclosing enough to let the other party figure out if you’re paying what you should will require you to disclose information that you need the other party to keep confidential or really don’t want the other party to have on any terms.
If the other party has audit rights (you shouldn’t volunteer this), they need to be carefully defined (you don’t want to spend lots of time and money on audits). It’s also important to think through ways the other party could game the payment measure and either deal with them specifically or give yourself some rights to adjust the payments if you think the traffic has been artificially generated.
By the way, don’t use the words “partnership,” “partner” or “joint venture” in the documentation, other than to say clearly that both parties agree they aren’t forming a partnership or a joint venture. Trust me. You do not want that.
2. Information and Privacy.
The simplest promotion agreement involves the information that someone at the other party’s site clicked on a link to get to yours. In other words, a promotion relationship almost always involves some sharing of explicit or implicit information. That means that you have to address ownership and use of information as a business issue. You should make sure you address it head on and that the deal is clear to both parties.
This is also obvious but sometimes overlooked. You need to think through how long the arrangement will persist and how it can end. If you don’t need to make much of a commitment to get things going and the other party won’t be able to hold you up by terminating, it’s best to provide that the contract continues until one party terminates (or a short period of time after notice of termination). Don’t default to this before you think through how things are likely to play out in different possible scenarios (most importantly, the wild success or abject failure of the deal or one of the parties).
4. Branding and Trademarks.
If the other party is going to post a link to your site on its site, you’ll probably want that link branded. You’ll also probably care when and where it appears. For example, you may care whether it’s on the home page or deeper in, whether it appears “above the fold” on most monitors, and what’s next to it when it shows up. You’ll also probably care about the exact graphic (size, definition, color etc.). Finally, you’ll want some rights to yank it if the other party misbehaves. A big issue to consider here is whether you need to review and approve before the other party posts it or if you can only review and object after the fact. Even if you don’t care too much about any of these issues as a business matter, you need to retain some quality controls as a condition to maintaining trademark rights in your brand. So make sure that you have some contractual controls over how your brand is used.