Nobody ever said doing business with China would be easy.
My firm’s China lawyers have recently been hit with an influx of American tech companies with the following characteristics:
- They have a good, but not great technology (chip, internet of things, environmental, hardware or software).
- They were heavily funded but they have only around six months of cash left, at their present burn rate.
- They are being wooed by massive Chinese companies that want the American tech company’s technology.
- They are being wooed by massive Chinese companies that do not want to pay anything upfront for the American tech company’s technology.
This post is going to focus on number 4, and on what we are seeing Chinese company’s offer and with what American tech companies should counter.
Chinese companies are offering one of the following two things, both of which will typically be horrible for the American tech company for the following reasons:
1. A technology licensing deal that will pay the American tech company x percent or x dollars for every widget the Chinese company sells in the future that uses the American tech company’s technology. This is usually a terrible deal for the American tech company, for two reasons. First, it is not likely to solve the American tech company’s immediate cash problems as it is not likely the Chinese company will 1) incorporate the new technology into its product and 2) sell the product and 3) pay the American tech company for the product sales in time to save the American tech company. Second, and most important, it is usually very difficult/impossible for an American company to accurately (or even close to accurately) monitor the sales of a Chinese company. See 8 Tips for China Licensing Agreements.
2. A joint venture arrangement with the American tech company getting x percent in the joint venture. This is usually a terrible deal for the American tech company for two reasons. First, it is not likely to solve the American tech company’s immediate cash problems as it is not likely the joint venture can be formed in less than 4-6 months and will likely take even longer than that if the American tech company is going to want its technology transfer to the joint venture to count as a contribution to the joint venture for equity purposes. Second, it is usually very difficult for an American company to accurately monitor the sales of its China joint venture entity. Let’s just say that I’d be rich if I had $1000 for every Western company who has called for help because it “has been in a China joint venture for 5+ years and never made a penny and yet by all appearances the joint venture is thriving.” See China Joint Ventures: A Warning.
What should these American tech companies do instead?
They should hold firm with the Chinese companies and require those companies pay a large upfront sum to license the technology. Nearly every time we have counseled our clients to do this and they have done so, the Chinese company has backed down and paid.