Alliances should be structured in one of four ways: as an equity alliance, as a non-equity alliance, as a global alliance, or as a joint venture (Cartwright & Schoenberg, 2006; Rigsbee, 2000). How the alliance is structured depends on several different things, because not all alliance structures would be appropriate for all types of companies or all types of negotiations. It is very important that the alliance is one that is agreed upon by both parties, however, and that neither party feels as though the type of alliance chosen was something he or she was pushed into in order to get things moving. A clear understanding of each type of alliance is important. For example, a global alliance is usually something that is undertaken between large, global companies. That type of alliance would not be appropriate for two small-time, sole proprietors who live and work in the same time and are trying to work together to grow a local customer base. A joint venture may be a better type of alliance in that situation, and would certainly provide a more realistic starting point for any kind of negotiation or discussion (Rosenbaum & Pearl, 2009).
Equity and non-equity alliances are also important to distinguish between. In an equity alliance, each firm owns part of the company (often in different percentages) and the firms work together in an effort to create a competitive advantage for all firms involved (DePamphilis, 2008). A non-equity alliance involves the pooling of resources by two or more firms, but it does not involve the creation of a company that is "owned" by all the firms based on the percentages to which they have contributed (DePamphilis, 2008). There are many reasons to choose one type of alliance over the other, and which one is chosen by a firm or a group of firms often depends simply on the option with which the majority of intended parties is more comfortable. As long as all firms are in agreement, any option is viable.
There are both pros and cons of equity and non-equity alliances, of course, just as there are with other types of alliances and business structure. With the non-equity alliance, the firms who engage in this option are not as "tied" to one another as with some other options. There is a contractual relationship between the firms, but they have only agreed to share specific resources in specific amounts with one another (Mowery, et al., 1996). They often have capabilities and/or resources that are unique to them, but they might need something that another firm has, and that is unique to that particular firm. When that is the case, and both parties (or a large group of parties) can benefit from working together, there is really no reason not to do so, provided the details are agreeable to everyone. A competitive advantage can be created that way, which will allow all of the companies involved in the non-equity alliance to gain customers, build profits, and see increased market share (Rosenbaum & Pearl, 2009).
That sounds like a great reason to just go with the non-equity alliance and not even consider the equity alliance, but it is not good to be too hasty. There is a downside to the non-equity alliance in that each company has far less invested (Rosenbaum & Pearl, 2009). In other words, they do not "own" anything. They have simply agreed to work together, and to allow the other companies in the alliance to use their resources capabilities. If one company decides to break the alliance, there is often little that can be done. There is no company to dissolve, no ownership to take over, and no real way (other than trying to sue the company that left) to do much about the fact that the company decided to get out of the alliance. Writing provisions for these things into the alliance is very important, but it can also be something that many people overlook (Rigsbee, 2000). Why would someone leave? What if one company goes out of business? There are all types of considerations that have to be addressed with a non-equity alliance. While there are benefits to it, there are also certainly concerns to consider.
As for equity alliances, they have their own list of pros and cons. An equity alliance can be thought of as more secure, because all the parties to that kind of alliance have more invested in it than they would with a non-equity alliance (Rigsbee, 2000). A company is created by different firms, and they all own a percentage of that company. That makes them much more invested in the welfare of the company and how successful it is. They are still looking for a competitive advantage, but they are looking to create it by becoming one with other firms that can help them get there, instead of just pooling resources into a type of collective as they would in a non-equity alliance (Rigsbee, 2000; Rosenbaum & Pearl, 2009). It is far different for everyone to own a percentage of all the tools purchased, for example, than for everyone to simply bring the tools they have and allow others to use them. The stakes are not the same.
With that stronger level of involvement, though, comes a stronger tie that is more difficult to break. A company that wants to leave an equity strategic alliance may find that it is much more difficult (and much more costly) to do than leaving a non-equity alliance. The equity alliance creates ownership of a separate company, and a specific percentage of that consolidated company belongs to each one of the companies involved in the alliance (Rigsbee, 2000). Getting out of the alliance can mean that a company may lose what was invested in that alliance - time, money, talents, equipment, etc. It can also mean a buyout from the other companies in the alliance, and the terms under which that can take place are not always good. Protecting oneself is important no matter which kind of alliance is chosen, but an equity alliance is more significant and should be given more careful consideration, especially as to how the company will leave the alliance at a later date if things do not work out acceptably (Cartwright & Schoenberg, 2006). Like other types of business ideas, alliances do not always work. They can have difficulties and struggles, and some of those can be too much to bear.
Legal pitfalls to include in alliance negotiation include may different types of issues. Listing all of them here is not possible, but there are a few that are more significant than others. The development of strategy is one area that can fall into legal problems (DePamphilis, 2008). Who created the strategy? To whom does it belong as intellectual property, and can others use it outside of the alliance? Asking those kinds of questions and agreeing on the answers is vital to ensuring that the alliance that is created is going to be safe, effective, appropriate, and as successful as possible. While there are no guarantees, a legal pitfall over intellectual property can ruin an alliance that otherwise might have been very successful. Another thing to avoid is a misunderstanding about exactly what type of alliance is being undertaken and how the legal aspects of that alliance affect everyone involved in it (Mowery, et al., 1996). It can be easy to confuse different options, especially if one is new to the business world.
Additionally, always be sure that alliance termination is discussed, and that there is something spelled out clearly in writing when it comes to how and when the alliance can be terminated, and on what grounds (Rosenbaum & Pearl, 2009). Many people do not do this, and they just assume that the alliance will go on forever because everyone is happy with it. They might be happy in the beginning, but if they end up unhappy later there needs to be provisions. If nothing is addressed properly, it can be easy for one or more companies to simply walk away, leaving other companies "stuck" because they no longer have access to resources they needed and that were owned and managed by the other companies. Something like that taking place can be very costly for the companies involved and can sour them on developing alliances in the future - even if those alliances seem to be very beneficial to them. In order to avoid losing out on a current alliance or choosing to stay out of them in the future due to a bad experience, a lawyer who'd a neutral party should help to draft the alliance (Rigsbee, 2000).
It is very important to understand alliance termination, because it can be complex and difficult if provisions for it were not included in the original alliance when it was created. Sometimes an alliance is terminated on rather hostile grounds, or because of serious problems and disagreements. However, there are plenty of other times…