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Key Takeaways
- Trial contracts allow startups to demonstrate their platforms at lower costs and risks, proving reliability and performance to potential enterprise customers.
- Pilot programs allow companies to test new technologies with minimal commitment, improving their operations and risk management strategy.
- Successful pilot programs can lead to formal agreements, giving startups credibility and revenue while providing companies with innovative solutions to improve their businesses.
Software startups often struggle to make a name for themselves among potential customers, especially when it comes to landing a major licensing deal. Potential customers typically purchase large platform licenses through their purchasing offices, which look at the performance and reliability of the platform.
Since startups typically don’t have a successful track record in attracting potential customers, they can try their platform for free or at a lower cost to show what their platform can do and how reliable it is. The company – a potential customer – can test the latest technologies without having to worry about a full and often costly rollout.
The pilot contract: an overview
A temporary arrangement that allows a company to test a new project on a small scale, a pilot program allows a company to evaluate the success of a project before making a larger commitment. To protect itself, the startup usually creates a “pilot contract,” a legal document that outlines the agreement. The trial contract gives a company temporary access to a startup’s new platform and may include some early features that are still being tested.
The pilot contract helps startups in several ways: it reduces their legal responsibilities and lowers risks; protects their ideas and inventions; and helps get their platform operational. A trial contract can help potential customers bring in a new supplier to improve their current work processes, and when the company wants to fully utilize the startup’s platform, they can rely on what they learned during the trial.
A fictitious partnership
StoreBuddy is a fictional software startup that offers a computer vision platform for retail stores.
It uses the latest technology to monitor customer behavior, including how they navigate stores, where the most footfall comes and how much time they spend interacting with products and displays.
Town Square Retail is a fictional national chain struggling to understand why revenues are stagnant. The company knows it needs a solution to stay competitive, but isn’t ready to implement a large, system-wide platform yet.
Pilot contracts reduce the risk
StoreBuddy offers a trial license to Town Square Retail at a much lower cost, which can only be used within select stores. This reduces Town Square Retail’s financial risk because there is little or no money involved if StoreBuddy does not perform as expected. Additionally, only a small number of sites have data uploaded to the platform, reducing Town Square Retail’s responsibility if data is mismanaged.
Because Town Square Retail pays a lower fee, StoreBuddy can further minimize its responsibilities by offering a short licensing period of three to six months. They can also limit all warranties, avoid bug fixes, and limit any direct or indirect damages to the amount of the lower license fee.
StoreBuddy, in turn, will not make any warranties or promises in the pilot contract that would diminish its responsibility, nor will it agree to protect or reimburse Town Square Retail for any claims by other parties against Town Square Retail for use of the platform.
Pilot contracts protect startup IP
Trial contracts outline the rights of the startup and ensure that the valuable assets – such as ideas, inventions and creative work – developed during the project are owned by the startup. This allows startups to focus on innovation without fear of losing their unique ideas.
In our example, Town Square Retail has access to StoreBuddy’s private documents that explain the platform’s features. But it is in StoreBuddy’s best interest to ensure that Town Square Retail keeps these documents hidden until the features are made generally available.
To protect itself, StoreBuddy adds conditions to the pilot contract that guarantee privacy. As such, Town Square Retail will not share platform data with third parties. Furthermore, it can only upload ‘dummy data’, which prevents them from learning how the platform works. It also prevents Town Square retailers from looking for another provider to add similar features to its own product or create an internal product that makes StoreBuddy’s paid products and services obsolete.
Benefits for the customer
After the initial agreement period, Town Square Retail saw improved business operations and an increase in monthly sales. The number of shoplifting incidents also decreased. Town Square Retail identified items that were not selling well, prompting them to remove these items from the shelves and offer new products to their discerning customers. Town Square Retail gained a strong reputation among its employees and customers and was praised for the variety of products creatively placed in their stores.
This ultimately led to a formal agreement between StoreBuddy and Town Square Retail where StoreBuddy’s platform was rolled out to all Town Square Retail locations.
Benefits for the startup
In addition to proving that StoreBuddy’s product works, the company has also gained the trust of a new customer. This made it easier for them to approach investors and attract new customers. In addition, the long-term contract generated significant revenue, allowing the team to improve its offering. StoreBuddy used the pilot project to attract potential investors, which resulted in a financing round.
The pilot was a success and benefited both companies.
Drawing up a trial contract: useful tips
When creating a pilot contract, there are a number of guidelines that you must take into account.
- To limit their financial risk, both parties must ensure that details about the project, costs and contract duration are clear.
- To avoid potential problems associated with offering a lower pricing structure, the startup should include statements in the contract indicating that it is not responsible for bug fixes or service interruptions; that it does not cover legal claims; and that it limits its liability to the amount of the reduced license fee.
- In an effort to keep trade secrets and competitive intelligence confidential, IP and security clauses must be documented.
- To minimize privacy risks on the customer and enterprise sides, the contract clause should limit the customer’s data use.
- In the event the customer chooses to discontinue the pilot program, contract language that allows cancellation for any reason – no questions asked – provides protection.
The bottom line
Implementing a trial contract is beneficial for both startups and enterprises. Startups can open new avenues for growth, increase bottom line and reduce their liability risk. Companies can collaborate with startups early to evaluate new solutions at lower costs and drive innovation.
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