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Including milestones in commercial agreements enables us to set expectations between the engaging parties and link compensation to achievements.

We advise our clients who are contemplating the use of milestones not to fall for their seemingly straightforward appearance, and to take the time to consider potential issues that may arise down the road.

In general terms, the milestones mechanism defines certain obligations that one party must fulfill in order to trigger the obligations of the other party. Milestones work great when the parties are satisfied with the direction in which the engagement is moving, however they can be a source for bitter squabble and strife if the parties have a falling out – particularly if the milestone terms are not defined clearly.

Many times it makes good business sense to have one party’s obligations contingent upon fulfillment of the other party’s obligations, say for example in an investment transaction. The investor may want to put down half of the money at the closing but wait with the second half until the company reaches certain goals.

Milestones are also commonly found in employment or supplier contracts, acting either as an incentive for achievement or as a means to gradually take the engagement forward, respectively.

As the case may be, it is important to draft milestones mechanismsdiligently and thoroughly, and make sure that the parties agree (in writing) to the questions that arise when there is doubt whether a milestone was attained. Some of these questions could be, for example:

• How is it decided whether a milestone was attained?
• Who decides whether the milestone was attained?
• What happens in case of disagreement regarding attainment of the milestone?
• What kind of dispute resolution mechanism will the parties implement?
• What deliverables must be provided to attain the milestone?
• What are the implications if a milestoneis not attained?
• If the milestone requires a team effort – what happens to the individual who fulfilled his part?
• What happens to the engagement if the milestone is not attained?

This list is not meant to be exhaustive and it goes without saying that every transaction and engagement has its own unique circumstances that must be considered when drafting a milestones mechanism.

The parties should also consider what happens if one party attains the milestone while the other party defaults on its corresponding obligations. For example, if an investor fails to advance the 2^nd tranche of the investment amount in spite of the company attaining the predefined milestone. There are some tools that are commonly used in these scenarios however we will not be digging that deep in this short piece.

I do however hope you understand from this short piece that milestones represent critical points in the business relationship underlying the contract, and that serious issues can be avoided if given some thought in advance.

The solutions chosen by the parties should obviously be practical and such that make good business sense – today as well as at any future point in time.

Einat Katzenell is the Founding Partner of Katzenell Dimant and provides strategic and practical legal advice to hi-tech, life sciences and biotechnology entrepreneurs, investors, early stage and mature companies, academic institutions and business initiatives.

Read more posts by Einat here.

einat@kdlaw.co.il   +972.9.9500555   LinkedIn

DISCLAIMER: Blog posts are not designed to provide legal advice or create a lawyer-client relationship. You should not take action based on this content.