Revenue sharing · Equity

How should I set up a revenue sharing deal with software developer partners?

Orion Parrott Founder and CEO, Lendsnap YC S16. We're hiring!

July 24th, 2015

Have you done this successfully? I am an early stage startup still needing a technical founder (last tech founder discussions ended after six weeks). I have a prototype web application already and, while searching for the right cofounder, I would like to hire developers to work on it using equity or revenue sharing only (my only options at the moment).

What are some good terms to put into a revenue sharing agreement? Is 10% a fair number? I want to be compelling to potential partners and get people to hack on the prototype for me. If someone really works out then maybe they can become a founder or have more significant ownership.

Revenue sharing seems like a good compromise that allows me to defer payment and gives the developer lower risk because they can get paid out sooner than through equity.

Terms I am already familiar with and plan to offer:
* 10% of revenue for 12 months following receipt of first revenue
* Dev also will support the product but that is compensated separately ($/hr at that time)
* The company is responsible for all expenses other than development and support, including marketing, servers
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Steven Rubenstein

July 24th, 2015

There is a joke about these deals -- there is no "revenue" in revenue-share.  Every developer has "clients" come to them and say, "Just build it for free and then I can sell it." Offering 10% is ludicrous. You are asking the developer to take on 90% of the risk.

Ray is correct the initial percentage needs to be higher -- much higher. The deal should be that the developer gets paid first -- perhaps with a small percentage taken out to cover direct expenses. (You can also factor in potential equity.)

The total amount they can receive should be above what they would have earned hourly. For instance, if you would have paid them $10k to build the software, you should offer them a premium of at least 25% (and potentially more) in exchange for the risk of not getting paid at all.

In case you are concerned this does not seem fair to you, consider it from the developer's standpoint -- they can work for cash, they can work for themselves for free with 100% upside, or they can work for you for free with potential upside that is beyond their control. Option #3 is always the least compelling.

Phil Benham

July 24th, 2015

I deal with this almost everyday.  I've been lucky as I have a couple of successful products under my belt and I can always refer to those as proof that there will be a big payday.  Many developers want to branch out on their own, already.  Your job is to convince them that your idea will be the one they should choose to work on.

The 10% thing mentioned above is just wrong.  There are all kinds of ways you could structure this; but you want to ensure that your developer is happy throughout the process.  If their heart is not in it, progress will slow down, or even stop completely sometime down the line.  I like to show them results (the way you might expect them to show you), too. Show the sales pages you built, share the ad creatives with them, discuss some initial strategies (content marketing, whatever).

I would even go so far as suggesting to offer them a 'technical partnership'.  Share 30-40% revenue with the understanding that they will alway maintain and update the product.  You might give yourself a mandatory buyout option at the end of a year...where you have the option to buy them out.


July 24th, 2015

Orion - With deals like this a structure I've found helpful is giving them a higher allocation of the first money, up to a certain dollar amount, so they're getting some cost recovery before participating in the upside with you.  

Stephen Cataldo

July 24th, 2015

It might be helpful to differentiate the types of programmers you are seeking. I can think of three overall types likely to do this kind of work, with different needs: (1) people who can get other decent work who are convinced by the larger upside possibilities (2) people who are either new or overseas in a low pay market or otherwise they think they are much better than the market says they are (3) people who are entrepreneurial and looking to be part of a startup.  In each case, I think starting with asking "is 10% a fair number?" is the wrong question... being able to explain how you got to a fair number, being really clear about what the risks are, and using metrics rather than just pouring out optimism. If you don't use Slicing Pie exactly, still give an explanation along those lines: 10% of what expectation, and what happens if the programmer succeeds and the marketing fails?

And you might want to emphasize depending on who you are talking to (1) the upside, (2) minimum compensation and the completion of a resume-worthy project that will lead to more work, or (3) that working with you will be fun and feel fair and partnership-like, and the programmer will enjoy a front-row seat in a shared roller-coaster, even if you are by far the majority stakeholder.

Good luck!

Orion Parrott Founder and CEO, Lendsnap YC S16. We're hiring!

July 24th, 2015

Thanks Ray (as always!) and Steven.  I agree with all your comments. I forgot that one: in fact I have also considered deferred payment until a specified funding event and that deferred payment would be based on a 100% risk premium for the delay (as recommended by Mike Moyer who is also active on FD). So I agree that I could incorporate something like that into a revenue sharing deal.

Thanks again! Excellent and timely advice. Let me buy you a beer when you're around!