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Good incubator documents make great sense

by Carol James

August 2002

When Adele Lyons became executive director of Gulf Coast Business Technology Center in Biloxi, Miss., in 1991, she encountered a client who owed back rent. Lyons tried to work out a payment plan to help the client stay current on his bills and make back payments to the incubator. She also tried to help the client in his efforts to develop and market his invention. But "when we asked questions and tried to work with him, he didn't want to share information," Lyons says, not even for proposals to market his product or obtain financing for his business. In addition, he wanted the incubator to pay for product testing, infomercials and other business expenses. She agreed to help him make contacts, but declined to pay his business costs.

The client then blamed the incubator for the failure of his business, Lyons says. He contacted members of the county's board of supervisors, which oversees the incubator, and local politicians. However, Lyons was able to refer the client, and subsequently supervisors and others who contacted her, to a lease clause that places ultimate responsibility for business success or failure firmly on the client. That clause, paired with documentation Lyons prudently maintained of her dealings with the client, defused the situation. In early 1992, Gulf Coast evicted the client for nonpayment of rent.

Lyons' experience is just one example of how incubation programs use written agreements in their interactions with clients. Anyone who has ever been burned on a verbal agreement likely can think of many more reasons. Participating parties can too easily interpret verbal pacts differently, and informal agreements can lead to inconsistencies in how an incubator treats individual clients. Additionally, without a written document to reference, it is difficult to convey the terms of an agreement to successors on either side of the table.

Moreover, when it comes down to legal enforceability, a written document is the best choice. "Often an oral agreement is technically enforceable, but you have to prove it exists," says Stephen Wurzburg, a partner with Pillsbury Winthrop LLP in Palo Alto, Calif. "If it's in writing, the proof issue goes away."

In addition to limiting an incubator's liability, written agreements and policies provide a record of significant interactions between an incubator and its clients. Formal agreements also can help define the incubator/client relationship and support an incubator's mission.

"[Incubators] want to document the relationship they have with their clients – that way there's no misunderstanding," Wurzburg says. The types of misunderstandings that formal documents can prevent are countless, ranging from how an incubator handles overdue rent to expectations and requirements for graduation. Written documents delineate the incubator/client relationship, helping both parties to understand their rights. For instance, a lease protects clients against unfair actions by a landlord, such as increasing the rent without notice or failing to fix a leaky roof. Similarly, a lease can protect an incubator's bottom line by clearly indicating when the rent is due, describing penalties for nonpayment, listing additional charges for use of facilities and equipment, and explaining who pays for repairs and space alterations. A lease also outlines remedies that the client or incubator may seek if one of the parties fails to meet its obligations under the agreement.

Written documents further support an incubator's work by outlining policies, practices and procedures that fall in line with its mission. For example, a biotechnology incubator's lease and policies will discuss at length procedures for handling biohazardous materials and waste, because biotechnology companies routinely use hazardous materials and processes; however, a mixed-use program's lease and policies might ban hazardous materials from its facility.

Documents also can help accomplish a task that all incubator managers face – tracking client information. In order to prove its worth to stakeholders and sponsors, an incubator must be able to demonstrate the impacts it has on its community. Systematically and regularly tracking information about client and graduate firms is essential to achieving this goal. A clause in a client agreement, such as a lease or service agreement, can allow the incubator to obtain such statistics as revenues, jobs created, tax dollars generated and other basic metrics while a client is in the incubator and for some period of time after graduation.

The documents an incubation program uses in its interactions with clients can address everything from how to use the photocopier to the acceptable amount of time a client may remain in the program. A client handbook might cover photocopy protocol, while a lease or license likely would handle length of stay. The most common documents that incubation programs create and employ in their dealings with clients include the following:

  • leases or licenses
  • service agreements
  • applications and entrance requirements
  • client handbooks or manuals
  • conflict-of-interest policies
  • nondisclosure agreements
  • graduation policies

Incubators develop other documents, too, depending on their missions and needs. For example, at the National Research Council of Canada's Biotechnology Research Institute, where clients use and store chemical, biological and radioactive agents, critical issues include health, safety and security. BRI's Health and Safety Regulations document outlines procedures for all aspects of handling those agents, from licensing and storage requirements to reporting spills and evacuating the building. The institute's General Building Security Regulations provides procedures for client and visitor identification and entry into the building, as well as for transporting materials in and out of the building and for building evacuation in an emergency.

Incubation programs also create simple forms for a variety of purposes, including publicity. The Batavia (N.Y.) Industrial Center asks new clients to complete a get-acquainted form that it distributes to other clients and local newspapers, and another form that incubator staff use to create news releases about new clients.

Although some incubator documents are informal, providing general information and guidelines, others are binding contracts. To be a binding contract, such as a lease or license, an agreement must include three things: an offer, acceptance of that offer, and consideration, explains Newton B. Fowler III, a partner in the Venable law firm's Baltimore office. Consideration is something of value – for example, a payment such as rent.

The key to crafting a good document is making it reflect the interests of both parties – the incubator and the client, Wurzburg says. For instance, a lease lets an incubator know that it can collect its rent and fees and evict clients who are not meeting their financial or other obligations. The same document lets clients know that they have business space available for a stipulated period at a specified rent or fee.

Getting started

Drawing up initial documents, from applications to leases to graduation policies, is a task that should be part of the incubator development process. "You need to know how you're going to structure your relationship with your clients. The concepts and what is going to be in the agreements … need to be decided early on," Wurzburg says.

An incubator should have documents in place – particularly documents dealing with the space and services that clients will utilize – before it begins accepting clients and anchor tenants. It's much easier to use these documents to define the incubator/client relationship from the start than it is to add them at a later date, when existing clients have come to expect an informal relationship with the incubator. However, the reality is that many incubation programs add to their portfolios of documents after their doors open and as necessity dictates.

When putting together these documents, incubator developers, managers and board members can look to other incubation programs for inspiration and guidance. But they should take care not to replicate documents verbatim, because every incubator has its own mission and circumstances. State laws also can impact contract provisions, particularly in the real estate arena. These factors mean incubator professionals have to tailor documents to their programs' particular legal environments. When crafting any legally binding agreements, the guidance and expertise of a competent attorney is essential.

Preparing documents that define incubator/client relationships should be a team effort of the incubator manager and an attorney. "The attorney knows the typical clauses to include, and knows the nuances of business and real estate law, both generally and in the state where the incubator is located," says Jim Greenwood, president of Greenwood Consulting Group in Sanibel, Fla., and a former incubator manager.

For instance, when Wurzburg drafts any legal agreement between an incubator and a client, he usually uses an "entire agreement" clause or "integration" provision. "[This] says this is the only agreement between the two and contains all their understandings and there is nothing else," Wurzburg says. At Roanoke, Va.'s The New Century Venture Center, the "entire agreement" clause in the incubator's lease reads:

"This lease and its attachments ... shall be considered to contain the entire agreement between the parties hereto pertaining to the Premises and all negotiations and all agreements acceptable to both parties are included herein."

Of course, some incubators use more than one contract simultaneously, and those documents' "entire agreement" clauses reference each other. For instance, the Nidus Center for Scientific Enterprise in St. Louis uses a lease agreement, a stock option agreement and a service agreement. The service contract's "entire agreement" clause follows:

"This Agreement, the Stock Option Agreement and Lease Agreement together contain the entire agreement of the parties with respect to the subject matter of such agreements. No representations, inducements, promises or agreements, oral or otherwise, between the parties shall be of any force or effect if not set forth in such agreements."

The attorney's job is to make sure the incubator has protected the rights it wants to protect. A good attorney also will help an incubator manager create documents that staff and clients can read and understand. "I'm a believer in simple English," Wurzburg says. "You want the documents to be understandable on both sides so both parties can say, 'Yes, that's what we want.'"

Straightforward language helps avoid confusion about such issues as when clients' rent is due, whether a lawsuit against a client constitutes default according to the lease agreement, or what kind of advisory services an incubator makes available to its clients. "Very few of us are lawyers and very few entrepreneurs are lawyers," says Linda Clark, director of the Ohio University Innovation Center, a mixed-use incubator in Athens, Ohio.

And while an attorney knows exactly which legal clauses a document should include, "the manager knows – based on experience, information from NBIA and conversations with other incubator managers – what areas are of particular concern to an incubator," Greenwood says.

In the case of drafting a lease, the process might begin with an attorney drawing up a standard lease agreement, perhaps with some modifications based on his or her general knowledge of business incubation. "The manager can help ensure that the agreement governs more than just the real estate portion of the relationship," Greenwood says. An incubator client seeks not only space, but also business assistance and other services that expand the relationship far beyond that of the traditional landlord and tenant. Incubators provide many resources, including conference rooms; business plan reviews; connections to pro bono or reduced-price professional service providers; and entrepreneurial networking opportunities, to name but a few. An incubator may list the business services it provides in its lease, or it may include clauses referring to attachments that outline the services it offers. For instance, client leases at Lennox Tech Enterprise Center in West Henrietta, N.Y. (a suburb of Rochester), include the following clause:

"Business Incubator Program. Tenant acknowledges that Landlord intends to use the Property as a facility designed to help entrepreneurs start their businesses. In that regard, Landlord and Tenant have entered into a Business Incubator Program Agreement which is attached as Exhibit F."

Focus on mission

Crafting documents that work effectively for an incubator and its clients requires concentrating on mission. The incubator's mission states its fundamental purpose clearly and succinctly and guides its activities.

"If an incubator's documents don't reflect its mission, the program is likely to go off in some cockeyed direction," says Lawrence P. Albertson, president of consulting firm LPA Associates in Gainesville, Fla., and a former incubator manager. "Incubators should have mission statements, strategies and objectives, just like companies do. Their activities ought to reflect their documents."

The mission of Intelligent Systems Incubator (ISI) in Norcross, Ga., includes supporting corporate parent Intelligent Systems' mission of finding early-stage technology companies to operate and invest in. Therefore, the for-profit incubator has adapted its sublease to include the following clause that supports Intelligent Systems' quest for investment opportunities:

"Sublessee agrees that, in the event it seeks to raise equity capital from outside third parties, Sublessee will provide Sublessor with the same information as provided to the other parties and will give to Sublessor the same opportunity to propose an investment as is made available to the other parties."

ISI added that clause half a dozen years ago after incubator staff realized that some clients had raised investment capital from outside sources, according to incubator director Bonnie Herron. "If we had known, we really would have liked them to consider us an investor." Although the clause does not constitute a formal right of first refusal, it has worked out well for the incubator. "Most people say, 'Why wouldn't we ask? You're right here,'" Herron says.

An incubator's mission will directly influence its graduation policy. Some are flexible and some are not, with maximum stays ranging from one year to five or more years, depending on the types of companies an incubator serves. For instance, an incubator with the mission of growing biotech companies can't expect that clients will graduate in two years, given the long research and development time these companies require. A stay of seven years may be quite appropriate in a biotech incubator, where conducting clinical trials and securing U.S. Food and Drug Administration approval may require 10 years before a product goes to market.

Written in stone?

Even after each party has signed on the dotted line, events may occur that necessitate revisiting or amending contracts and policies. However, making exceptions to agreements and policies is a fine line to walk. "Obviously you want flexibility, but you don't want to have so many exceptions that they're hard to keep track of," Albertson says. "And you don't want clients screaming because you didn't do the same thing for them [that you did for another]."

Allowing one entrepreneur to pay rent late on a regular basis but not granting the same privilege to others can create ill will among clients, who almost always hear about everything that's going on in the incubator. Incubator managers must pick their exceptions carefully. Intelligent Systems Incubator will make changes in such items as client space and term of stay, and formally documents those actions as an addendum to a client's sublease.

However, not all terms are flexible. Before a client asks for a contract change, an incubator manager must decide which provisions are negotiable and which are not. The Nidus Center for Scientific Enterprise in St. Louis is willing to make minor changes to its documents on a case-by-case basis, but "we'll absolutely never change some of the major pieces," such as rent and lease covenants and representations and warrants, says President and CEO Robert J. Calcaterra. "We just cannot have different companies with many different [lease] arrangements with Nidus."

For instance, representations that a client is not being sued, hasn't violated the law, and so on, are important because "we have to know everything about the company so that if there is a very serious skeleton in their closet we refuse them the opportunity to be here," he says. "There have been cases where incubators got into serious problems because of liens, etc., on the companies in the incubator."

Keep in mind, too, that incubator and client needs – and the law – can change over time. Incubator managers may want to have an attorney review their programs' documents periodically to ensure they are up to date and achieving intended goals. Lyons plans to have Gulf Coast's attorney review the incubator's documents in the near future. "I need him to look at them and get the whole flow," she says. "Are there legal issues now that weren't there when the documents were drawn up?" She also has the attorney review policies she writes, such as the incubator's no-smoking policy.

Ultimately, the key to incubation success is building good relationships with promising clients. Formal documents are helpful tools for the job, but they cannot guarantee that a client will be a pleasure to work with any more than a slick business plan can guarantee a company's success. When considering prospective clients, managers must employ instinct long before formal documents come into play.

"Assuming you don't need every client that walks in your door, go with your gut as to whether the person is trustworthy," Wurzburg says. "The best agreement isn't going to protect you from a troublemaker. An agreement helps document the understanding and prevents faulty memory, but it isn't a substitute for a good relationship with people you're going to want to work with and trust."

Adapted from the book Put It in Writing: Crafting Policies, Agreements, and Contracts for Your Incubator, NBIA Publications, August 2002.

Documents incubators use

What documents might you want to develop for your incubation program? The most common documents that incubation programs create and employ in their dealings with clients are:

leases or licenses – contracts that govern use of space and other services in an incubator. A lease agreement grants a client an exclusive right to space in an incubator for a specified period in exchange for rent. A license agreement outlines services a client will receive, including use of space, in exchange for fees.

service agreements – contracts that delineate the services an incubator will provide and clients' obligations to make use of those services. Incubators may execute a service agreement in addition to a lease or license agreement. applications and entrance requirements – written questions and guidelines that an incubator uses to assess potential clients' suitability for the program and that potential applicants consider to determine their eligibility for and interest in a particular incubation program.

client handbooks or manuals – the how-tos and rules of residing in an incubator. Handbooks can explain admission, graduation, parking, smoking and other policies; support services the incubator provides and their costs; client responsibilities; how to operate the photocopy machine or sign up to use a conference room; and any other information clients may need to know.

conflict-of-interest policies – guidelines for revealing and resolving financial, ethical and other conflicts that incubator representatives might have between their personal interests and their official duties. These policies depend on voluntary disclosure of potential conflicts and usually outline mechanisms to resolve or eliminate conflicts of interest.

nondisclosure agreements – confidentiality agreements that allow incubator staff to exchange necessary information with incubator applicants and clients, and provide applicants and clients reassurance that incubator staff will not inappropriately disclose that information. These agreements can identify with whom incubator-related personnel will and will not discuss client companies' business and can define a period of time for which specified information will remain confidential.

graduation policies – criteria used to determine when a client will leave an incubation program. These may include any number of factors, including that the client has reached the maximum allowable stay, maximum available space or a certain number of employees.—CJ

Must-have documents

According to partner Newton B. Fowler III of the Venable law firm in Baltimore, an incubator simply can't afford to operate without the following documents:

  • a business plan for the incubator
  • a documented client intake process, including entrance criteria
  • a documented graduation process and criteria, as well as a post-graduation tracking process
  • a lease or license agreement that is "at market," that is, competitive with other regional incubators, attractive to the best candidates, and fair in its terms.

"The documents should result from a strategic planning process and reflect the goals of the incubator," says Fowler, who is chairman of the advisory board of the UMBC Technology Center at the University of Maryland, Baltimore County, and a member of Baltimore's Emerging Technology Center's board of directors and Maryland Technology Development Corp.'s incubator advisory board.—CJ

Getting your board on board

A critical but sometimes overlooked step in the process of crafting incubator documents is gaining board support. "Board blessing is necessary to ensure complete buy-in by the management and governance, and so that the board cannot blame the manager at a later time for things in the agreements – or missing from them – that result in problems for the incubator," says Jim Greenwood, president of Greenwood Consulting Group in Sanibel, Fla., and a former incubator manager. A good strategy for incubator managers to ensure their boards are on board is to include them in the document drafting and revision process. Although it can complicate the process, board members may have different and valuable perspectives to add based on their expertise.—CJ

Keywords: application -- client, client handbook, documents -- incubator, entrance policy, graduation policy, lease, legal issues, license agreement -- incubator, nondisclosure agreement, service agreement

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