The Pilot Contract Is a Startup’s Secret Weapon, Limits Liability

Software startups often face an uphill battle to establish themselves with prospective clients. Large platform license purchases usually are made or vetted by prospective clients’ procurement offices, which focus on a platform’s reliability and deliverability—a track record of success. For software developers without successful implementations in a large enterprise, it’s hard to win a license deal.

One solution is to offer prospective clients a smaller trial implementation of their platform (often free or at a cut rate), which allows the startups to demonstrate their platform’s capabilities and stability. The benefit to prospective clients is that they get to try out the latest technologies without the risk of full implementation.

When prospective clients seek access to a startup’s platform on a trial basis, the latter often implements a pilot contract, a legal document for the deal. The pilot contract enables the startup to provide access to their new platform on a short-term basis and can include certain alpha and beta features.

The pilot contract supports startups in several ways: It limits liability and minimizes risk; protects the startup’s intellectual property; and helps to support the launch of their platform. For prospective clients, a pilot contract can add a new vendor to their portfolio to improve existing client-workflows. When considering a full implementation of the platform, the client can rely on its trial experience.

A Hypothetical Collaboration

MediaMavens is a fictional software as a service startup targeting large public relations firms with its media database software. Its platform aggregates data from across the web to provide media insights and outreach tools.

Fictional firm PRForAll has had problems with outdated media insights, leading to poorly targeted outreach and hours spent compiling accurate information from various sources. The team knows it has to find a solution to streamline performance but doesn’t want to deploy a new, large-scale platform.

Reducing Risk

By enabling both parties to test a solution on a small scale before making a large investment and entering into a long-term relationship, pilot contracts are an effective way to reduce risk.

MediaMavens offers the trial license to PRForAll at a reduced fee and for use by a small number of PRForAll’s account managers. This limits PRForAll’s financial liability, as little to no money is on the line if the platform doesn’t perform as promised. Only a handful of its users have potentially uploaded data to the platform, limiting PRForAll’s liability if data is mishandled.

Because PRForAll is paying a reduced fee, MediaMavens can significantly reduce its liability by offering a short license period, limiting all warranties, not offering bug fixes, and limiting all direct and indirect damages to the amount of the reduced license fee. There are no exceptions.

MediaMaven won’t offer or agree to any indemnity in the pilot contract to further limit its liability. That is, MediaMaven won’t agree to defend and reimburse PRForAll from or for any claims by a third party against PRForAll for its use of the platform. For example, if PRForAll’s platform use violates that third party’s intellectual property rights, MediaMaven won’t protect PRForAll from that third party’s claim or lawsuit related to the violation.

Protecting Startup IP

During the trial period, all of the startup’s intellectual property is protected via confidentiality clauses and usage rules within the contract.

In our hypothetical, PRForAll has access to MediaMaven’s proprietary documentation describing the features of the platform, but MediaMaven must ensure that PRForAll doesn’t share that documentation with others before those features are made widely available.

To protect itself, MediaMaven includes language in the pilot contract that ensures there are material enough provisions for confidentiality that include platform documentation. That is, PRForAll can’t disclose information about the platform to third parties.

MediaMaven’s contract language limits PRForAll’s data uploads to “dummy data.” This prevents PRForAll from reverse engineering the platform’s outputs to determine its critical analytical features. It also prevents PRForAll from seeking out a different provider to implement the same features in its own product or build an internal product with similar analytical features, ultimately rendering the need for MediaMaven’s paid products and services unnecessary.

Supporting Commercial Rollouts

A successful pilot can support a commercial rollout by creating a baseline of terms to be used by the parties’ lawyers to craft the full commercial agreement; many of the pilot’s limited terms can be expanded or redrafted for what the “market” value would be in the full enterprise license agreement.

Pilot contracts effectively introduce both parties’ sales and procurement teams, via platform demos and contract negotiations, where they can actively build trust.

In our hypothetical situation, the agreement led to a multiyear contract between the two companies, with MediaMaven’s technology used by all PRForAll’s employees.

Benefits to Client

After the initial agreement period, PRForAll saw improved operational efficiencies and an increase in placing client stories. Along with that increase came time savings per employee.

PRForAll also avoided distributing misguided pitches, preserving their media relationships. Finally, PRForAll’s reputation soared among its employees and clients alike and became known as a “tech-forward” firm.

Benefits to Startup

Implementing a pilot contract is beneficial to the startup in a number of ways. In addition to the validation of MediaMaven’s product, the company also gained credibility; it had a much lower barrier of entry when pitching investors and new business alike.

Feedback from PRForAll offered MediaMaven invaluable insights that their engineers then used to improve both the user interface and product features. MediaMaven used the pilot to pitch potential investors. Because the pilot was successful, both companies benefited.

Best Practices

As the hypothetical agreement demonstrated, there are some best practices to keep in mind when drafting a pilot contract:

• Both parties should ensure that scope, fees, and length of contract are well-defined to limit their financial risk.
• Startups should incorporate language into the contract that disclaims any responsibility for bug fixes or service outages; cuts off any indemnity obligations; and limits all liability to the amount of the reduced license fee.
• Startups should ensure IP and confidentiality protections are built into the contract to keep their trade secrets and any competitive information under wraps.
• Language that restricts the client’s data usage will minimize data privacy risks for both parties.
• Clients should advocate for a termination for convenience right to get out of the contract if it doesn’t wish to continue. Given the low-dollar spend, this shouldn’t affect the startup’s revenue recognition.

Using a pilot contract for a startup’s software platform rollout has myriad benefits. Startups can identify new areas for prospective client growth, increase profits, and mitigate risks that would potentially cause legal issues. Prospective clients can get a leg up on the competition by testing new technologies early at a low cost and creating a culture of innovation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Spencer Rubin is an associate at Grellas Shah, where he advises startup technology clients around corporate law.

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