If your startup sells physical products or software, you may eventually need help reaching customers in new markets. A distribution agreement can be a powerful way to expand without building a large internal sales team.
But with expanded reach comes added legal complexity. Here’s what founders should understand before signing - or offering - a distribution deal.
What Is a Distribution Agreement?
A Distribution Agreement is a contract between a company (the supplier) and another business (the distributor) that allows the distributor to market, sell, and sometimes support your product in a particular territory or market.
Startups commonly use distribution agreements when:
- Entering international markets
- Partnering with resellers
- Launching a product in retail stores
- Working with a sales agent network
Core Clauses to Watch
1. Territory and Exclusivity
Where can the distributor sell? Are they the only one allowed to sell there? Be careful with exclusivity - it’s tough to unwind if things don’t go well.
2. Performance Obligations
Is the distributor required to meet certain sales targets or minimum order quantities? These incentives help ensure they don’t just sit on your product.
3. Pricing and Payment Terms
Will the distributor buy from you at wholesale and set their own prices? Or will you control the price point? Make sure payment timelines are clear and enforceable.
4. Marketing and Branding
Clarify whether the distributor can use your logo or brand name. Include approval rights over marketing materials to protect your reputation.
5. Intellectual Property
You’re granting them limited rights to sell - not to own or reproduce your product. Your IP should remain fully yours.
6. Termination and Transition
What happens if the relationship ends? Can you take back unsold inventory? Can they continue selling existing stock? Build in a smooth transition plan.
Common Distribution Mistakes
- Granting too much territory too early: Start with smaller, performance-based territories and expand based on results.
- Skipping audit rights: You’ll want to review sales and inventory records to ensure reporting accuracy.
- Not planning for brand misuse: Use trademarks carefully and retain the right to revoke use if your brand is being misrepresented.
Final Thoughts
A smart distribution deal can supercharge your growth - but a sloppy one can limit your options or tarnish your brand. We help startups structure fair, scalable agreements that reward growth and minimize long-term risk.
Frequently Asked Questions
FAQs
What’s the difference between a reseller agreement and a distribution agreement?
A reseller agreement usually involves buying and reselling at a markup, while a distribution agreement often grants broader rights to market, sell, and support products in a defined territory.
Should startups grant exclusivity to distributors?
Exclusivity can motivate strong performance but is risky if the distributor underdelivers. Consider tying exclusivity to sales targets.
How do distribution agreements handle intellectual property?
They should state that your startup retains ownership of all IP, while the distributor only gets limited rights to sell your product.
Can distribution agreements be terminated early?
Yes, but only if termination rights are included. Contracts should cover notice periods, treatment of unsold inventory, and customer transition plans.
Don't DIY your legal anymore
Leave it to the pros.