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Should I provide "work for hire" consulting services or Co-Venture in lieu of payment?

I am co-founder of a product design and engineering consultancy and we have been approached with opportunities to co-venture with startups at either a reduced rate or in lieu of payment. ie. Helping an entrepreneur develop their idea, create a working prototype and create pitch material prior to a licensing meeting or prior to running a crowdfunding campaign.

I am absolutely positive this happens all the time to other members of this site and I am curious how you approach these situations?

Note: we are in the business of developing ideas into tangible products so lets assume, for thisdiscussion,that I am only referring to consumer product ideas that have "some" market viability.

I would like advice from people who have direct experience with co-ventures of this nature and any practical information you can provide. If you have a personal vetting system, contract advice, best practices for stock options, types of stock options we should ask for, best practices as it relates to tax implications, etc. Any additional info that you can provide that I may have missed would be greatly appreciated as well!

17 Replies

Ram N
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Ram N Advisor
CEO-Founder - KarmaSnap Ltd. Entrepreneur | Neophiliac | Problem Solver | Management | IT | StartUps | Strategy
Hey Adam, I received a notification for the discussion that you have started on FounderSating site. I am typing this mail, to start the communication with you, before time fades it away! Will write more later. Today is a bit hectic. Cheers. Warm Regards, - Ram N CEO Founder KarmaSnap Ltd, for Non Profits and CSR #84, 3rd Floor, A.C. Main Road, K.G Halli, Bangalore- 560045 | Ph: +919986158351 Sent from iPhone DISCLAIMER: This email and any files transmitted with it are confidential and may contain privileged or copyrighted material. If you are not the intended recipient you must not copy, distribute or use this email or any information contained in it for any purpose other than to notify the sender and then delete it from the system. Please note that e-mails are susceptible to change.The sender shall not be liable for the improper or incomplete transmission of information contained in this communication,nor for any delay in its receipt or damage to your system.The sender does not guarantee that this material is free from viruses or any other defects although due care has been taken to minimize the risk.
Steve Alexander
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Steve Alexander Entrepreneur
Teacher - How to run a business or a life
It's tempting to co-venture, but I recommend avoiding it. Steve Alexander [removed to protect privacy]
Robert Travers
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Robert Travers Entrepreneur
Founder & CEO at Bobber, INC.
Hey Adam,

I've been shopping around a few different teams so have come across a number of agreements as you were imagining to be true. Something I think that will help you steer your focus before going case by case, would be to look at the bigger picture around "conflict of interest."

For example, if I happen to be a client of yours and had a consumer product that I was building. I wouldn't be very pleased to find that you were not only building a competitors app, but that you are also invested in its success. I would question the amount of equal attention my project was receiving, but more importantly, I would not want any of the discussions, product information, designs, details and code etc (that is my work and effort boiled down to its finest parts) being floated around in the collect consciousness of my competitors developers minds each day; for many reasons.

Something to consider. As well, I think you need to decide between how many clients you intend to serve and where you see your business growing too over the next few years. i.e If you plan on working with as many customers as possible with year over year growth, than staying out of equity arrangements makes a lot of sense as you want to let in many customers who are building in the same space. If your goal is less about consumption/output and more about quality/putting lots of effort into a few projects at a time, than selecting certain deals your passionate about and proposing equity or accepting equity for different reasons may not be a bad route. Just be careful not to overload your plate with varying commitments and taking on too much debt for work vs. income from paying clients.

I would suggest giving a few companies that do this a call and simply ask the founders how & why ? It's sometimes, just that easy.

Best of Luck,

R




Andrew Lockley
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Andrew Lockley Advisor
Investor and strategy consultant
Suggest you negotiate a fixed equity percent for an open ended agreement. Rarely will your early work be enough to ensure the firms success . You should at all times be clear that you're a (sweat) investor on the project. You will almost certainly be told "our valuation is 2 million so we'll value your day rate as a proportion of that". Unless they have A) already raised half their round and B) don't use your time until the round closes then such conversations are *almost certainly* a waste of your time. You need to get really aggressive with company valuation, so you can sell back to the management team for the pittance their shares are actually worth - and still make a profit. Typically, for any lasting involvement, you should be looking in the range 2-20pc unless the firm has already raised significant funding, or has significant commercial traction. A
Jeff Khoury
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Jeff Khoury Entrepreneur
Manager, Infrastructure Engineering at UCLA IT Services
Hi Adam, I don't do them anymore.

On at least 4 occasions I've entered in to these agreements, rendered services and provided equipment, and worked my ass off to get things going - only to have the other parties fail to uphold their end of the deal and do their parts. The projects ultimately went nowhere and I ended up owning a piece of exactly nothing.

If people want my services now, they pay the going rate.
Stephan Orme
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Stephan Orme Entrepreneur
Principal / Product Lead, Worklogistics
Most of the time equity isn't worth anything. I do it for friends or in addition to some cash payment if I have time and want to help out, but I don't have any illusions that my stake will be worth anything.
Brian McConnell
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Brian McConnell Entrepreneur
Head of Localization at Medium.com
Ah, the non-technical founder asking people with technical chops to work for free and help them build out their brilliant, game changing idea. No thanks, I prefer to be paid in legal tender. Stock is nice to have, but 99% of the time it ends up being worthless.
Steven Schkolne
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Steven Schkolne Entrepreneur
Computer Scientist on a Mission
like Adam, I don't do this any more. I've been burned by scenarios where, after building the product, the entrepreneur doesn't invest similarly in marketing and customer development. If you go into business this way, you are essentially trusting the entrepreneur to hold to their end of the bargain. If they do dumb things with the product (or nothing with the product) you have to sit there and watch. This kind of relationship is a true business partnership and you should invest as much time and energy into vetting before you hop into bed. Practically speaking, you can only do a couple of these because well it is a real business partnership and, if done right, will take substantial time/spirit involvement on your part.

If I were to do this again, the first thing I'd look for would be a guarantee that a certain amount would be spent on marketing/etc. If the app is say a $50k app, and I am doing it for deferred price, at least $50k should be there sitting for marketing, that I can see and I am guaranteed will be used well. That kind of thing. In my experience, the entrepreneurs who look for these equity deals do it because they don't have available cash -- if they don't have any money to build the app, what are the odds they have $50k available for marketing?
Adam Craft
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Adam Craft Entrepreneur
Principal Designer
Robert T., the point about "conflict of interest" is a good one and well taken. That makes sense and will consider the potential ramifications before making any deals.

Like wise Steven S, you make a very good point about working only with people who can execute and have the financial backing to make it happen. It would be pretty painful to spend time on something only to see it shelved due to lack of execution.
Judit Fabian
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Judit Fabian Entrepreneur
Seasoned Finance Professional
HI Adam, I work with a product development company to develop my prototype/product, so have a bit of insight on this. There are different facets to this issue:
- If you co-venture, you have to be a bit of a venture capitalist as well.
- Some of the co-venturing might come into play when you create intellectual property, however, it can get messy if you don't have a good and well though-out structure. You still need to make sure that the company you are working with lays out money and you weigh the benefits of how much of the fees you are willing to forego for the equity.
- The IP question is an eternally puzzling issue for product development companies. They feel that their clients pay them too small of a fee compared to how much they benefit from the IP created in the process. Hence the temptation to have a stake in the company they work with. But you need to keep in mind that the entrepreneur is taking a huge risk by paying upfront for the development and it takes a substantial effort and money to make a venture successful. I, as an entrepreneur, also want to make sure that I get to know the product development partner before I give away equity for development. IP ownership is a sensitive issue when it comes to financing a business.
- There are also other matters throughout the product development cycle and the management of the relationship between the product development company and the client that can be problematic when you are tied together with the client as partners.
- As a client, I also have a problem with the product development company being a partner in a venture that could potentially be competitive to my business. The point of your services is that you gain experience in certain areas that can benefit you in selling your services. As such, if you are a partner in a company that uses similar technologies that I would need, I would rule you out as a development partner.

As such, you need to decide whether you want to be a consultant for fee or you want to be a part of an innovative company. If you are interested in joining an innovative company, please contact me as I am looking for a person with product development experience.
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