Denver, Colorado First Customers, Customer Discovery/Validation Testing and Pilot Programs Legal Checklist Law Firm

First Customers, Customer Discovery/Validation Testing and Pilot Programs Legal Checklist

October 1, 2015

By: John A. Leonard

Small companies use established companies to test new ideas and software – especially in health care. Four levels of testing and legal issues are discussed below.

Pilot Project/Exploratory Research
1. Purpose: Fundamental research on the problem and possible solutions for an opportunity to find a hypothesis and solution.
2. Example: For most companies, this is the start of the Business Model Canvas. For others in healthcare, defense, science or education, there may be parameters and objectives already established and funding available.
3. Innovation and Business Model: Early innovation and business model hypothesis are established by observation and/or research.
4. Funding: Grants (e.g. SBIR; STTR; DARPA; Healthcare foundations/institutions), investment/debt by founders/third parties.
5. Three legal points you need to know:
  1. IP ownership with founders/contractors/Grant Agencies must be in writing.
  2. Form an entity to protect against personal liability and to hold IP.
  3. Search US Trademark site to clear possible names of company, goods and services.
Proof of Concept Testing: Customer Discovery
1. Purpose: Testing to confirm that a solution for hypothesis works and that potential customers or channel partners care about the value proposition. Building/Testing a low fidelity MVP.
2. Innovation and Business Model: Testing of hypotheses.
3. Example: Various testing of market size; value proposition, customer segments; channels, customer relationship, revenue and pricing models. In health or healthcare, testing with first individuals or groups of patients or users occur in a pilot project. In healthcare, efficacy is an issue. Thus, testing should incorporate clear goals, clear measurements to determine success, use of control groups, sufficient testing to ensure meaningful data.
4. Funding: None or grants, or investment/debt by founders/third parties.
5. Three legal points you need to know:
  1. Who owns testing results and feedback? Have a written agreement to protect new ideas from others.
  2. If you have not formed an entity by now, do so to protect against personal liability. This is also the time to have employment/contract agreements.
  3. Do not hand out equity like candy or make promises of ownership. Consider expulsion/buy back provisions for early founders that do not work out.
Beta Testing: Customer Validation
1. Purpose: Place a finished product, idea, software application, etc. into an existing business(es) for final customer validation. Testing for a high fidelity MVP.
2. Innovation and Business Model: Has occurred but requires validation or will form the basis of an iteration or pivot.
3. Example: Testing over a short period of time of a product, software application, etc. with users or potential businesses.
4. Funding: None or investment/debt by founders/third parties.
5. Three legal points you need to know:
  1. Know when the relationship changes from validation feedback to a customer. Customization for your iterations is free. Customization for a tester-turned-customer needs a SOW and is your revenue.
  2. From the company’s perspective, the following is important:
    1. You need a short license agreement that protects IP ownership of new ideas and existing IP;
    2. You need to assign a Beta Representative to be in charge of the relationship;
    3. You may need to provide training;
    4. You need to define the scope of testing and get a written report of the results. What are you trying to validate and what measurement will signal success?
  3. From the licensee’s perspective, the following is important:
    1. The licensee should have a Beta Representative to coordinate with the company;
    2. The term, staffing and other resources that will be given to the Beta project should be defined;
    3. IP and other confidential information must be protected.
First Reference Customer
1. Purpose: Place a finished product, idea, software application, etc. into an existing business.
2. Innovation and Business Model: Has already occurred and validated.
3. Example: Sale of goods or license of software or other intellectual property.
4. Funding: Revenue from sale or license.
5. Three legal points you need to know:
  1. Define your goal with this relationship – is there something more than just a customer relationship? Possibilities include:
    1. Strategic Alliance – Platform. (Example: the exclusive relationship for Farmville on Facebook).
    2. Strategic Alliance – Financial. (Example: a business partner purchases 10% of a company to infuse cash and grant access to partner’s customers). Can you buy out the Strategic Investor if the relationship sours?
    3. Joint Business Agreements (Examples: Sharing of customer data, referrals, joint advertising; reduced licensing fees for customers). Do you have customer approval for sharing data?
    4. Channel partner/traffic partner agreements (Examples: advertising agreements; fulfillment agreements; payment agreements).
    5. First step to sale in an early exit
  2. Acceptance testing is key: Short time period (e.g. 15-30 days); written notification of any issues; ability to fix problems.
  3. Full range of contract issues in your sales, subscription or license agreement

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

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First Customers, Customer Discovery/Validation Testing and Pilot Programs Legal Checklist