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How much Equity?

I own a custom development company and I recently put in couple of proposals for a client. One of my quotes was for abrand new product and itwas higher than what the client could afford. I like the idea and I want to explore the option of buying in and build the software for a discounted price. So my question is , what are my options? Do I propose a partnership? Do I ask for equity in the product if yes , how much? Am I missing anything here?

11 Replies

Chris Gorges
2
0
Chris Gorges Entrepreneur • Advisor
Partner, Strategy at Rocketure
Most honest / least helpful answer here: "It depends."

Some considerations:
-Does the company have a valuation?
-What are the tax implications?
-Will they give up equity? Options? Revenue share?
-Bring you on as CTO or give you an Advisory Board position?

Essentially you have to value your time and come up with a fair "price" and go from there -- just be very careful that you don't put yourself in a bad position, and keep in mind that startups are more likely to fail / go to zero than they are to become the next unicorn (or even moderately successful).

Jeremy Stephan
2
0
Jeremy Stephan Entrepreneur
VP of Strategic Accounts, ArcTouch
Retain 100% ownership, and work out a Saas/ licensing model with them. Depending on the product, Flat Upfront Use Fee, plus monthly service fee.....or a per user fee. If they want "new" features added, then they pay for those to be done if they are not on your roadmap. Keep in mind, this supposes that you are fully prepared to run a new company and business model. Also, don't expect to be profitable with this client as that comes with scale and multiple clients using the same product.
Joe Albano, PhD
2
0
Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
It makes sense - but only if it makes sense.

I often see people here and on Quora use equity and compensation interchangeably. If you are looking at equity as a deferred (and risky) form of compensation then it probably doesn't make sense.

If the equity you would gain (not the equity you retain in your product - which should be 100%, but the equity you acquireas a result of this partnership/transaction) contributes to your business portfolio, then it makes sense.

Here's where it gets a bit complex: the experienceof developing the product and the creation of that product are embodied in the equity you already have (you own the product) ... what is the incremental value of having equity in your customer's business?

It's likely that as a result of this analysis you'll find a model like Jeremy Stephan's (above) to be your best option.
Evan Foo
1
0
Evan Foo Advisor
Entrepreneur and Venture Investor
You should get to know your client first before jumping into any equity relationship. Equity is like a marriage. Best you date through a business relationship first. You also cant take equity on products only royalties from licensing.

Take Jeremy's suggestion to create the business relationship and learn more about one another.


Simon Krokhmal
2
0
Simon Krokhmal Advisor
Product Manager at Yahoo
In any deal where equity is involved, I would treat it as if I was an investor.

Do the same due diligence you would do if you were investing in that company
Lonnie Sciambi
2
0
Lonnie Sciambi Advisor
"The Entrepreneur's Yoda"- inspiring, guiding entrepreneurs to achieve their dreams - CEO Mentor/Advisor, Author/Speaker
Some big questions that you should answer.

Are you excited about the product's potential or the company's potential? I ask that question because I assume you must be excited about one or the other, otherwise, why even propose such a thing. if you're excited about the product, I would pose a scenario of development at a reduced cost and a royalty on every product product sale up to some multiple of your invested development or over a fixed time period, as an example. If you're excited about the company, be careful, because as several of the other folks mentioned, taking equity in lieu of dollars makes you minority investor and them a partner. You have to really do your homework/due diligence before you take this leap. Remember, while you are a businessman, you are, at the bottom line, a developer, not an investor. Take it from someone who has been an investor, never an easy task even if you know what you're doing. Take a royalty deal or walk away.
Liza Taylor
1
0
Liza Taylor Entrepreneur
Communication Specialist at Keyideas Infotech
Dinakar, partnership would be a good idea because you are the person behind the product. The client has given you the concept however the coding and development are in your hands. For any partnership to be successful, continuous interaction has to be there. It is mandatory to interact once in every ten days even though you are aware of the product. Such kind of interactions would remove all the possibilities of any misunderstanding.

Good Luck.
Scott Harrison
1
0
Scott Harrison Entrepreneur
Principal Software Development at Insightful Business Technologies, Inc.
I like the old style royalty model that, if done right is equitable for both parties. It depends on the pricing and the expenses, but usually 15% of gross revenue is a fantastic income for a small development team if the idea owner (the publisher) is willing to spend money on marketing and sales. If not, then this model will probably not work. You won't retire on a single project, but this model is awesome after working this way on several projects. In your proposal, show two offers. The first is the cost of initial development and the ongoing estimated costs of maintenance and upgrades. This figure is outrageous and not affordable but is the true cost. The second offer is royalty based. Ask for a small advancement on royalties and then specify a numberfor the ongoing royalties and lay out a plan that will cover maintenance, bug fixes, upgrades, etc at no extra cost. Of course, the discussion on enhancements gets a little more interesting as both parties have an interest in the success.

Joe Albano, PhD
1
0
Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
Entrepreneurialism is a very different relationship than employment. Employment emphasises a fixed hierarchy. Successful entrepreneurialism requires flexibility and creativity.

I like these responses because they illustrate the variety of ways that multiple parties can come together to set expectations and get their needs met.
Dinakar Manchiraju
1
0
Dinakar Manchiraju Entrepreneur
Owner/Sr. .NET Consultant at Code Jumpers LLC
Thanks everyone! Definitely a lot to think about but it gives me a frame of reference I would use to approach the client. Given this specific scenario my preferred option would be royalties.
I really appreciate everyone's feedback!
-Best
Dinakar
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