So, you’re building your FOAK (First-Of-A-Kind) plant, and the calls are rolling in from investors, all asking the same question: “Who will buy your product?” And they want specifics. A handshake agreement won’t cut it—what they really want to see is a signed contract that covers a significant chunk of your output for the next few years. Welcome to the world of off-takes.
What is an Off-Take?
An off-take is a long-term agreement where a buyer commits to purchasing your product for several years. Why are they so crucial? When you're dropping hundreds of millions on a FOAK plant, both you and your investors need to be confident that there will be a market for your product once the plant starts churning out units. This is especially important in emerging sectors, where markets are far from established. Think of it this way: an oil well doesn't need an off-take because the market is a well-oiled machine (pun intended). But your brand-new cleantech? That's a different story.
Types of Off-Takes
Off-takes aren’t new or specific to cleantech; they’ve been around in the energy industry for decades under the name “Power Purchase Agreements (PPAs)”. These are typically 10-15-year contracts that guarantee the sale of energy at a pre-agreed price, allowing CAPEX-heavy projects like nuclear or wind farms to secure financing. Similarly, public-private partnerships (PPPs) for municipal infrastructure work on the same principle—guaranteeing demand and price to justify heavy upfront investments.
For cleantech startups, though, we’re more interested in off-takes that resemble the B2B deals seen in battery gigafactories, where automakers commit to purchasing a set amount of battery cells over a period of time. And yes, it’s also possible to negotiate off-takes for your own supply chain, securing key components under favorable terms.
What to Watch Out for in the FOAK off-take
Having negotiated a range of off-takes—from government PPAs to battery deals with automakers—I share some key issues you need to be aware of.
1️⃣ The Price
This is the big one. Your off-taker will likely push for the price to drop over time, and they’re not wrong to do so. After all, they’re taking a risk by committing to your product when you haven’t yet delivered anything at scale. But being a FOAK project, you have some leverage here. Push for higher prices early on to cover your costs, pay off debts, and create enough working capital to survive the tricky first years.
💡 Pro Tip: In one of my battery off-take agreements, we locked in significantly higher prices for the first few years, knowing we’d scale and bring costs down later. On the flip side, as an off-taker for wind turbine blades, I negotiated an 80% discount for the last units, knowing our supplier would have paid off all their fixed and marginal costs by then.
2️⃣ The Volume
Overpromise on output, and you’re dead in the water. FOAK projects are notorious for production delays and quality issues. Set realistic output expectations and negotiate scale-back clauses that allow for flexibility in the first few years. Your client doesn’t want to be stuck with empty promises, and you don’t want to lose credibility by missing deadlines. Remember Northvolt’s struggles with BMW—and learn from them.
3️⃣ Supplier Certification
This one flies under the radar but can be a dealbreaker. Every buyer has a supplier certification process, and they don’t care that you’re a FOAK or how innovative your product is. These processes are often rigid and executed by people who care more about their KPIs than your grand vision. Make sure you fully understand what’s required, who’s responsible, and how long it will take. And be aware that your buyer could use this certification process as an exit strategy if they lose faith in your product along the way.
4️⃣ Quality Parameters
You will face quality issues, guaranteed. Instead of risking financial penalties, push for agreements that allow you to replace defective units for free in the early years. Alternatively, you could negotiate to treat the first few shipments as experimental, used for testing rather than commercial sale. These strategies can help protect your relationship with the buyer while you iron out production kinks.
Why It Matters
Off-takes are long-term commitments, so take your time to negotiate terms that work for you. Focus on key areas—price, volume, certification, and quality—and don’t rush into an agreement just to secure funding. A poorly negotiated off-take could haunt you for years.
Want to dive deeper into the nuts and bolts of off-take negotiations? Stay tuned for next week’s long read, where I’ll break down the mechanics of letters of intent (LOI), memorandums of understanding (MOU), term sheets (TS), and full-blown contracts. 🚀