Exclusivity Contracts, good or bad?

Recently at a meeting with a prospective client, my co-owner and I were introduced to an interesting situation.

Our product will be going into beta fairly soon, and we are making the rounds to local business owners collecting customers to participate in the free beta.

Our meeting yesterday was with the largest, most well known business in a certain segment (I'm being obscure, I apologize but it can't be helped) It would be an excellent partner to work with during the beta, and we were extremely pleased to get a meeting with them.

At the end of the meeting, we learned that they liked our product so much, they wanted to have exclusive rights in their business segment for one year, meaning we wouldn't be able to sell to any other business in their industry, within about 100 square miles. We told them that we'd be loosing out on significant data for our beta test, as well as revenue, and that they would have to pay for the opportunity to be the only business of their type in the area that gets to use our product (SaaS). They said they would be happy to pay for the privilege, so my business owner and I are now left to think up how much we want to charge them.

We have no idea how to price an agreement like this. There are roughly 20 other businesses in their industry in the area we would have the opportunity to sell to, and so far the four we've talked to have been excited to be apart of the beta (But no agreements have been signed). We are quite confident that we would be able to get roughly 12 of the other companies in on the beta, and convert them into paying customers at the end of the two month beta test. This gives us a rough opportunity cost of around $36,000 over the course of the first year, let alone the loss of valuable data from the testing at these venues.

We don't want to loose this partner, as they are huge (Probably $15-$20m / year in revenue), but we want to make sure we're not shooting ourselves in the foot by giving up those revenues.

I suppose the short form of my question is: About how much should we be asking for in the exclusivity contract?

This contract would be paid up front according to them, and would actually help us reach our funding goals for the year, and accelerate our development timeline significantly.

Here are a couple thoughts:

1. make them sign a 3 year contract if they want exclusive rights; this will help you with predicting revenues, as well as, justify some of the lost revenue
2. although it's partially addressed in item #1 - 1 large customer hurts more if they leave than 1 of 12
3. if you think you could sell 12 - then I would expect to charge them near 10 (-2 for the removing the hassle/costs of dealing with 12 people
4. offer a discount if they are willing to pay for multiple years up front
5. if this model proves successful - repeating it in the other markets would make expansion/sales/marketing easier

If you work out a deal which allows you to pay your employees, grow your company, and have adequate footing to engage a larger market in the specific venue in the future, go for it. If you believe this large corporation only wants to lock you in so they can buy you out later: you're in charge, it's your call.

It is a viable exit strategy to work toward being bought out. If you're of the venture-hearted, put in your time to fully invest your stock, then use your earnings to fuel new ventures. If you're set on staying with your current company until the end, then you have harder choices to make. But to explicitly answer your question: whatever allows you to pay your employees, grow your company, and have adequate footing to engage a larger market in the specific venue in the future. You have to come up with that number yourself, though most of it is simple math: current employee's salaries that cover the venue + (limited projected number of future employees to cover venue x base salary) + projected cost of expansion due to cover venue over 1 year + miscellaneous costs + increase for negotiation room = price for lock-in.