Would you do business in China on this basis?

I have recently received an inquiry from a Chinese company; they would like to buy our product, which is sold on a per-usage licence basis in addition to the cost of the machine itself.

The question is how risky it is to do business with Chinese firms in your experience. I know that the Chinese government has tightened its IP protection laws, but if the company in question decides to not pay the licence fees and in the worst case creates a rip-off product, I don't see that we could do much about it - we are a small startup.

At the same time, the Chinese company seems serious about doing business with us, and we like to do business as much as anyone. Would you do it? What would you look for and do in order to limit the risk involved? Have you done this and been burned, or has it worked out?

I suppose it depends on what type of license the Chinese company wants to buy. Be sure to do as much research as possible on them. I too would be wary of a company reverse-engineering my product. How many licenses do they want? If it's only 1, that would set off a red flag in my mind.

There are many US-based companies and consultants that will help you find a market and distribution channel in China. I wish I could point you in the right direction, I know I've talked to a few of these people myself. I would recommend finding a company or consultant like this and seek their advice.

Maybe before selling to China you should establish a corporate presence there and sell your software from that entity to your Chinese customers. Perhaps that would give you greater leverage in a EULA and if litigation is required? I have no idea, that's just a thought. Again, seek the advice of an expert with experience doing business between Chinese & American companies.