Author Topic: Understanding memorandums of understanding (MOUs)  (Read 2816 times)

Reyed Mia, Daffodil

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Understanding memorandums of understanding (MOUs)
« on: March 27, 2018, 04:30:14 PM »
Understanding memorandums of understanding (MOUs)

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Resumail Network wasn't going to survive. The Dallas-based company's flagship product -- Resumail, resume digitization and applicant-tracking desktop software -- was too limiting in a world of Monsters and HotJobs.

So in the spring of 2000, the company's CEO charged CTO Scott Howitt with reinventing the company as the one-stop online shop for HR services by January 2001.

But to pull off such a feat in Internet time, Howitt would have to bring in new partners while simultaneously finding a way to cut back on the lengthy, complex legal processes inherent to forming business partnerships.

"My idea was that we would create a bare-bones applicant-tracking system and plug in related services from all our different partners -- become best-in-breed for HR services," Howitt says.

An MOU is no contract -- understood?

Call that agreement an MOU (memorandum of understanding) or a letter of agreement, just don't call it a contract. An MOU is not a binding contract, says Steve de Groot, chair of the technology transaction group and partner at the law firm of King and Spalding in Atlanta. Although both documents define an agreement between two parties, significant differences exist.

* Contract

A contract spells out the "who, what, where, when, and costs" that define a deal. "Contracts also include representations, warranties, indemnifications, and risk sharing," de Groot says.


An MOU provides a nonbinding road map to the parties' agreement. "It's a shorthand version of the deal, written in plain English. An MOU needs to lay out the economic sharing, the principal obligations of each party -- who's to do what and when, who's bringing the technology to the table, and who owns it," de Groot says. MOUs do not provide the relationship exit strategies nor the penalties for violating the agreement that a binding contract provides.

* MOU advantages

Drafting and negotiating an MOU often takes less time than a binding contract. And, as in the experience, an MOU allows parties to explore partnership possibilities before entering into a long-term, contract-defined relationship.

* MOU disadvantages

One MOU disadvantage that de Groot has observed is the negotiations and events that take place prior to signing the MOU. "Oftentimes, the companies haven't addressed significant terms before signing an MOU: They haven't done all the due diligence surrounding the services that support the relationship," de Groot says. "They may come to the table guessing that a platform will support the technology agreement, and it ends up not [to be] the case."

* MOU mistakes

Strong language is the most common mistake with MOUs, de Groot says. Sometimes an MOU is written with terms that really make it a binding contract, with penalties for nonperformance and violations of the agreement. "Make sure an MOU spells out that it is explicitly nonbinding and will be subject in all respects to a binding agreement," de Groot says.

* MOU complements

If an MOU does not cover licensing and protection of proprietary information, de Groot suggests that parties also sign a licensing agreement and a nondisclosure agreement.

CTOs know that meeting partnership legalities could slow speedy partnership formation. But Howitt learned a valuable legal lesson that all CTOs should know: To devise agreements in Internet time, use MOUs (memorandums of understanding).

Tackling transition details

The company ditched the Resumail name, changed to, and went with a high-profile URL -- Howitt and Jeff Whittle,'shouse attorney and vice president of business development, had a goal to sign a service-partnering deal each week during the fall and winter.

But Howitt soon discovered that working quickly to find partners then integrating their services into the site wasn't the problem. Negotiating the contract was.

An early deal Howitt struck was with Recruiters-Aid, which would provide technical recruiting services through the URL. Finalizing the lengthy contract's details delayed the partnership two months. Time and energy was wasted on paperwork that could have been spent on technical issues or closing other deals, Howitt says.

"After that, our in-house counsel and I talked it over: We could use a 1-or 2-page MOU, [defining] basic revenue splits and an agreement with our partner that we'd write 'the rules' as we went along," Howitt says.

Key partnership points

The MOU must-haves for Howitt and Whittle included the service offering target launch date and key partnership milestones, a loose configuration of revenue splits, brand protection and creation of joint marketing tools, a broad understanding of each party's responsibility, and the ability for either party to walk away from the deal without penalty.

Closing deals with MOUs has another advantage over contracts for Howitt: flexibility. "We can see how the new package works out; we're not sure we'll ever get to the 'telephone book' contract," Howitt says.

Working with MOUs is similar to dating, says Whittle, who writes the MOUs that either he or Howitt signs. Using an MOU, the partners "can find out if we like each other and what we need to tweak. This tells us where to build additional structure into the next level," Whittle says.

And if the partnership has potential beyond the initial trial and the first MOU, Whittle and Howitt are prepared to write a lengthy contract, or another MOU, to cover new contingencies.

Making your case

Whereas Howitt had little problem moving from contracts to MOUs, other CTOs may face resistance from legal departments or other executives. If that's the case, Howitt suggests pairing an MOU with something to capture their attention: competitive edge.

"Make them understand the competitive edge that [you] stand to lose by taking the time to get together a contract instead of an MOU," Howitt explains. "In today's world, battles are won and lost over the course of a couple of months. If you are not careful, your competitor can be the first to market with your idea while you are sitting on the sideline assembling the contract."

Another strategy for CTOs who need to make a case for cutting out complexity is to quantify the benefits of doing so.

"CEOs want to see the relationship in dollars and cents," Howitt says. "If you can put a dollar figure to the relationship, they will want to get those dollars rolling in the door as soon as possible."

Finally, Howitt suggests one other advantage to the MOU arrangement to try out on reluctant CEOs. "I also try to pose the MOU as a 'try before you buy' relationship, where neither [partner] is at risk as we see how well we work together," he says. In today's fast-paced business environment where partnerships can determine a company's future, the MOU is the kind of flexible device that deserves a place in the CTO toolkit.
Reyed Mia (BBA and MBA in Finance)
Assistant Director
Daffodil International University
Manager, Bangladesh Venture Capital Ltd.
102/1, Shukrabad, Dhanmondi, Dhaka-1207.
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