Equity · Startups

How much Equity?

Dinakar Manchiraju Owner/Sr. .NET Consultant at Code Jumpers LLC

December 4th, 2015

I own a custom development company and I recently put in couple of proposals for a client. One of my quotes was for a brand new product and it was 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?

Chris Gorges Managing Director, Infinia Group // Founder, Biddlist

December 4th, 2015

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 VP of Strategic Accounts, ArcTouch

December 4th, 2015

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.

Lonnie Sciambi

December 7th, 2015

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.

Simon Krokhmal Product Manager at Yahoo

December 4th, 2015

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

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

December 4th, 2015

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 acquire as a result of this partnership/transaction) contributes to your business portfolio, then it makes sense. 

Here's where it gets a bit complex: the experience of 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. 

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

December 8th, 2015

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. 

Liza Taylor Communication Specialist at Keyideas Infotech

December 8th, 2015

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. 

Anonymous

December 4th, 2015

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.


Dinakar Manchiraju Owner/Sr. .NET Consultant at Code Jumpers LLC

December 8th, 2015

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

Scott Harrison Principal Software Development at Insightful Business Technologies, Inc.

December 8th, 2015

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 number for 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.