Myth-Busting Government Sales for Startups: US FEDERAL
Updated: Feb 19
We work with many tech companies entering the US Federal marketplace for the first time. With the federal government’s fiscal year just having ended and agencies pressured to spend appropriated funds by September 30, we thought we would share three common assumptions when doing business with the federal government:
1) The government doesn’t negotiate license rights
2) End user terms protect the company
3) Government can be treated similarly to other enterprise customers
MYTH #1: GOVERNMENT WON’T NEGOTIATE LICENSE RIGHTS.
Like any large-enterprise customer or institutional investor, the US federal government likes to throw its weight around. But don’t conflate negotiation leverage with actual policy or law. Tech companies that have had any engagement with the US federal government—from a traditional contract, an Other Transaction agreement, or a grant or innovation program funding—have likely addressed government requests for license rights to software, technical data, or both. Did you negotiate any of those rights? Or did you assume that the government can’t negotiate, so asking would be futile?
False. The US federal government’s policies and regulations, especially for the procurement of commercial license rights, are quite favorable for the commercial company. The government’s presumption is that it will accept the same license terms that commercial companies customarily offer to the public, with certain nuances and some exceptions.
ACTION: You can and should negotiate the scope of license rights you grant the US government.
MYTH #2: END USER TERMS WILL PROTECT YOU.
Historically, tech companies have used an end user license agreement (EULA) to protect their IP and license rights in their commercial software and, more recently, terms of service (TOS) to govern the access and use of cloud services. When a simple EULA wasn’t sufficiently binding, tech companies argued that opening shrink-wrap showed consent to the EULA. As technology moved online, shrink-wrap turned into click-wrap and some even to “browser-wrap.” Does a click-through EULA or TOS in any format provide enforceable rights against the government?
It depends. With a federal agency as the enterprise customer, the agency employees use technology to support a function of the government. Typically, government end users— the ones clicking “accept”—cannot bind the government; they can’t agree on behalf of the agency to the EULA or TOS. Lately, solicitation terms have explicitly stated that any license or service terms must be incorporated into the contract itself. Finally, any provision within an end user agreement that conflicts with federal law or the contract itself makes those provisions difficult or impossible to enforce. (Out of scope for this article are consumer, cloud-based services that a federal government employee might sign up for and use.)
MYTH #3: YOU CAN TREAT GOVERNMENT LIKE ANY OTHER ENTERPRISE CUSTOMER.
A company should not wander unwittingly into contracting with government entities. To ensure that taxpayer funds are used properly, the government regulates how it procures products and services—even commercial ones. These requirements touch everything, starting with how a product is designed, manufactured and secured throughout the technology product lifecycle—from R&D/engineering, channel/partners, marketing/sales, implementation/deployment, to maintenance/support. It also affects socio-economic and cyber security requirements on the corporation itself.
Failure to meet those requirements can lead to significant penalties, both civil and criminal. Other customers and even investors may inquire in their vendor questionnaires or due diligence requests about any issues with government customers. Even if a company (or its founder) can show no wrongdoing occurred, fighting any accusation is expensive—especially if you factor in the opportunity cost of your time. Enforcement actions are a public relations nightmare. Finally, anyone with knowledge of potential false certifications or other fraud can stand in the shoes of the government and sue.
False. Contracting with government entities is high risk, and companies should proceed with caution. But a well-designed and thoughtful go-to-market strategy for government sales manages risk and allows the company to generate revenue with fewer obstacles.
Develop guidelines and a playbook for government deals so that sales teams can confidentially begin negotiations within pre-defined risk parameters.
Negotiate directly with the contracting officer or procurement official.
Manage risk with the right mix of policies, training, and processes.
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This article is not legal advice but gives a general summary for educational purposes only and is not intended to be comprehensive. Seek specific legal advice before taking or refraining from taking any action. Please see our full Legal Disclaimer