Equity · Advising

Revenue sharing option vs. equity?

Ankit Kumar Test Manager / Senior Test Specialist at Telstra

January 7th, 2015

Hi All,

Would appreciate if experienced members could provide their opinion on an interesting proposal which I have recently received.

One of my friends is running a successful company(non IT) with a strong sales team. They are now planning to start something in IT/software space(not product development) but do not have the right skills and knowledge. They want me to lead the game with a 10% pie of total revenue, and they are happy to bear out all the necessary expenses(office cost, hiring or sub-contracting costs, day-to-day expenses, sales commission payouts[20%]) to run the show. They have huge ambitions and good know-how of local market.

Do you think it's a reasonable proposal? I am more keen to know if there is any alternative pie sharing model which I should propose.

Derek Liu Startup Guy

January 9th, 2015

As any new branch is a huge risk for a startup company, it's understandable that a deal would be crafted to minimalize risk on the company's behalf.  If you are happy and willing to go in and potentially take all the risk away for them and end up with nothing shall the venture fail, then you should setup the scenario in what you should be entitled to shall the scenario become a success, especially in a big way.

It's not important right now, but what will be your role shall your entity becomes successful?  And if the company shall hire such a position, what kind of equity deal would they be offering?  Structure your agreement to success scenarios in the future and it could end up being more lucrative and motivating for you.

Michael Libes Serial Entrepreneur, Mentor, Advisor, and Educator

January 7th, 2015

Yes, that is in the ballpark of reasonable. An alternative structure is redeemable equity. They give you X% in Common shares, and a promise to repurchase those shares at a fixed price using 5%-10% of top-line revenues, returning a reasonable return on investment to you. The advantages of structuring the deal as equity vs. just a revenue share are on the downside possibilities. What if this product fails? What if the revenues are far lower than both you and they expect? With equity, you at least have some ownership in the company, and thus other options for remunerating your time. *Luni* Founder & Managing Director of *Fledge*, the conscious company accelerator - fledge.co Creator & Global Director of *Kick*, our pre-accelerator - kickincubator.com Entrepreneur in Residence at *Pinchot*, a university for the common good - pinchot.edu Author of *The Next Step*: Guiding you from idea to startup - lunarmobiscuit.com

Ankit Kumar Test Manager / Senior Test Specialist at Telstra

January 8th, 2015

Thanks for your response Michael. It is really very much practical.

Equity option seems to be good, however they would use their existing company to run this business and would definitely hesitate in giving up a chunk from that. I think it would be better if I push them to set up a new entity for this business and have equity based arrangement.