Manufacturing Contracts

I’m wondering if there are any particular manufacturing contracts that startups prefer. Most agreements are built for more established companies with less innovative or already produced products, so are there any agreements, or types of agreements, that you have found flexible enough while also providing a comfortable level of assurance?

I’d be ideal to have a scaled MSA for clients at different stages, a less restrictive one for startups and as they mature the terms change alongside.

Unfortunately, I don’t think manufacturers are incentivized to do this. Ideally, there’s a “YC” of hardware who can enact a SAFE to replace the previous regime of terms sheets which were not favorable to startups.

Kobby, I think that’s a great idea and a great analogy. Defining what an acceptable product is, in measurable manufacturing terms, takes a lot of work by itself and is often beyond the ability of the early stage startup without significant help. I could see an agreement that defines features in lieu of the technical specifics (details tolerances, material additives, etc.) to start and then drilling down as production scales.

This could effectively move risk from the startup to the manufacturer in the early stage, which would also increase cost, but could allow for companies with real upside to leverage the strengths of the manufacture in a way that would make sense for both parties. The manufacturer would likely need a long term commitment from the startup for them to feel comfortable absorbing this early stage work and risk, but I think longer term commitments with manufacturers are helpful as they align both parties to make great products. Of course, the devil is in the details, but this could be a really interesting model.

Greg,

Thanks for the feedback. I think there’s an approach to incorporating acceptable product standards that should not be too burdensome to the early-stage hardware startup. I’ve seen a startup implement it recently.

First, you negotiate your standard MSA. Then you bring in an addendum that is the Quality Assurance Plan (QAP) or your set of acceptable product standards. Typically the QAP is discussed after the MSA is signed, if it’s brought up at all, by the early inexperienced startup. In this case, you bring it up before the MSA is signed. I agree with you on not specifying the technical specs too much but sticking with broad features. This should work without significant legal resources. Note that manufacturers may push back and say IPC standards should suffice but the early-stage team should be firm. The acceptable standards if focused on features should be agreeable to both sides.

If the manufacturer balks, then you probably shouldn’t be working with them anyways. The process of negotiating the QAP will be eyeopening for both sides.

A second, more experimental idea, and one I haven’t seen anyone try yet, is a manufacturer bonus. Like the first one, you’d negotiate the MSA and know what the pricing and key terms are. Next, you’d add an addendum that pays the manufacturer a 5-10% bonus, paid some months after delivery say 4, if the product is delivered exactly according to spec and there are no post-production issues. This bonus is placed in escrow at the signing of the MSA. If all goes according to plan, both sides are happy and the startup not financially burdened because it has already paid the bonus in escrow. If things don’t go well, and most of the time it doesn’t the first time, and it is fault of the manufacturer, the startup is free to withdraw the bonus immediately. If it is the startup’s fault, then the manufacturer earns the bonus. I’m curious what folks think of this idea and whether it’s practical.

Both ideas are meant to give early hardware startups some flexibility with the current state of manufacturer-friendly MSAs, and they can be added or removed as the startup scales. They should be light to deploy as well legally and work best during the initial few runs as the relationship with the manufacturer is built.