Partnership agreements · Strategic Partnerships

How to negotiate partnerships as a contractor?

Matias O'Keefe

February 24th, 2015

My company was hired two years ago to help define and develop a very interesting startup project (myneeds.com). As we started the development process and they noticed the value in our process and technical guidance, the client started saying, we should and would be associated with the project.
I do believe the intention is real and I do believe it would be great for the project to align everyone's interests towards building a great product.

The problem is that after many conversations with the company hiring us, we are not being able to devise a strategy for this partnership.

The company invested all the initial capital and they keep financing the project today, we added our experience and advice as part of our work for hire process.

What would be a smart way to structure a partnership at this point so we can be an interested part of the project without having to risk the development costs to the future of the company? (We still need investment coming in to pay the team?s salaries)
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Dave R

February 24th, 2015

To quote a previous comment that I saved: 

If you are trying to figure out how to divide up equity in a startup based on contributions, you might want to check out grunt funds in Slicing Pie: http://www.slicingpie.com/the-grunt-fund-calculator/

They have spreadsheets and other materials to help you with how do divide up the equity based on hours, cash, etc.  They have considered quite a variety of situations which makes it worth looking at.

This approach may give you a starting point for valuing past contributions (and the fact that you were paid for them) and future contributions.

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

February 24th, 2015

I dealt with this in a previous startup where we wanted to not only incentivize the development team (outsourced) but tie it's financial future to that of the company as well. The following is from your client's perspective, that being the company's management team you are working for.

So basically the sequence of events was:

a) they pitched a price to deliver the functions, and other things (art) shown in the RFP, which included a product requirements document as well

b) we negotiated off that starting point, dropping the price but adding equity earnouts structured in a milestone framework; minor milestones reached resulted in payment, major milestones reached resulting in additional equity allotments; milestones had dates attached as well so to get paid they had to deliver functionality on time

c) there was a process jointly agreed to as to what happened when the software deliveries did not meet spec, per se, so they had a clear path to resolving and getting paid without undue delays or unreasonable expectations on our side

d) at the end we also added a slight equity kicker for reaching a certain revenue milestone as well

Now, the issue with the above is you have to have a management team that is willing to enforce the contract and suffer some discomfort when deliveries don't meet spec and are rejected for rework and resubmission. 

In the end, business is business - the developer is assured ongoing payments when they deliver what has been committed to be delivered, nothing more, nothing less. If less is delivered, then payment gets stretched out. It did happen more than once in our case. On the flip side we never ran into the case where the development company delivered more than what was required LOL.

So the question is..is there sufficient upside to make less than what you want now, i.e., are you willing to take some risk yourselves? If not then the term "partner" is probably a misnomer.

C

Peter Kestenbaum Advisor, Investor, Mentor to Emerging firms

February 24th, 2015

Well start by definition of partnership. What do you want and what can the firm share or be willing to share If it's equity you can tie hours billed or worked to capitalization very easily. If it's share in the proceeds you can tie to success factors. We receive x% of each dollar up to ..... or if it's not funded yet you can offer to defer some or all payment s. You can also tie things to project completion or first client or until there is an institutional round. This is an area that 1099Partners consults on and supplies expertise on for emerging companies

Omar Hakim Technology Commercialization & Patent Monetization Professional | Expertise in Management Consulting & Startup Investing

February 24th, 2015

Consider establishing a "grunt fund" (http://slicingpie.com).  I think it's a novel and useful structure for dealing with early stage ventures like yours.  Good luck!