Consulting · Fundraising

Should I provide "work for hire" consulting services or Co-Venture in lieu of payment?

Adam Craft Principal Designer

February 24th, 2015

I am co-founder of a product design and engineering consultancy and we have been approached with opportunities to co-venture with startups at either a reduced rate or in lieu of payment. ie. Helping an entrepreneur develop their idea, create a working prototype and create pitch material prior to a licensing meeting or prior to running a crowdfunding campaign. 

I am absolutely positive this happens all the time to other members of this site and I am curious how you approach these situations?  

Note: we are in the business of developing ideas into tangible products so lets assume, for this discussion, that I am only referring to consumer product ideas that have "some" market viability. 

I would like advice from people who have direct experience with co-ventures of this nature and any practical information you can provide. If you have a personal vetting system, contract advice, best practices for stock options, types of stock options we should ask for, best practices as it relates to tax implications, etc. Any additional info that you can provide that I may have missed would be greatly appreciated as well!

Gerry Grant

February 28th, 2015

I have been doing Internet Marketing for twenty years and involved in the venture capital angel investor community for twenty-one years. I am now on the other side looking for early stage investors of their knowledge and time at PicVidShare. Be willing to do some for just warrants for a while, when they get invesotrs or crowdfunding they should be paying you a discounted rate.

Think like an angel investor. I have done this for years. The best is a greatly reduced rate and stock warrants. The graffiti artist that painted the Facebook lobbies is worth $200 million.

If you select carefully who you will help you are lucky to get a ten percent success rate. Help ten one might make it.

Robert Travers Founder & CEO at Bobber, INC.

February 24th, 2015

Hey Adam, 

I've been shopping around a few different teams so have come across a number of agreements as you were imagining to be true. Something I think that will help you steer your focus before going case by case, would be to look at the bigger picture around  "conflict of interest."

For example, if I happen to be a client of yours and had a consumer product that I was building. I wouldn't be very pleased to find that you were not only building a competitors app, but that you are also invested in its success. I would question the amount of equal attention my project was receiving, but more importantly, I would not want any of the discussions, product information, designs,  details and code etc (that is my work and effort boiled down to its finest parts) being floated around in the collect consciousness of my competitors developers minds each day; for many reasons. 

Something to consider. As well, I think you need to decide between how many clients you intend to serve and where you see your business growing too over the next few years. i.e If you plan on working with as many customers as possible with year over year growth, than staying out of equity arrangements makes a lot of sense as you want to let in many customers who are building in the same space. If your goal is less about consumption/output and more about quality/putting lots of effort into a few projects at a time, than selecting certain deals your passionate about and proposing equity or accepting equity for different reasons may not be a bad route. Just be careful not to overload your plate with varying commitments and taking on too much debt for work vs. income from paying clients. 

I would suggest giving a few companies that do this a call and simply ask the founders how & why ? It's sometimes, just that easy. 

Best of Luck,

R


 


Stephan Orme Principal / Product Lead, Worklogistics

February 25th, 2015

Most of the time equity isn’t worth anything. I do it for friends or in addition to some cash payment if I have time and want to help out, but I don’t have any illusions that my stake will be worth anything.

Kris Young Optop-Mechanical Engineer at Advanced Energy

March 1st, 2015

I find myself in a similar situation all the time Adam.  First off I'd like  saying that my experience has matched what most people have been saying;  I do work and don't see any return 75% of the time.  A few years ago I was on the other side and had a team of up to 10 designers (both physical and web based) working for me; in the end they never saw a dime...

So I think maybe a better place to start is why would you want to engage in anything that isn't a simple work vs money trade?  I can say for me there have been several things that make this type of agreement attractive enough to pursue.
  • It's often more fun and involved than a simple consulting contract because I normally have much more involvement in the larger product, company vision, etc
  • It lets me feel like I'm in a start-up without actually being in one all the way
  • Depending on the contract details the upside can be very large even if my actual work load is relatively small
  • The company or product is something that I truly believe in and feel good about giving my time to
  • The project allows me to develop professional skill that I feel as though I need, and maybe I'm not quite confident to bill out to normal customers yet.
  • I have spare time (this happens often enough as a solo consultant)

If none of the above apply, and you can't think of something similar and very compelling, then maybe you should just stick with normal work for pay scenarios

If there is a strong motivation to take on this kind of work I have a few suggestions about how to approach the contract side:

  • Stock is nice, and could be worth a billion some day, but of all the ways you could be compensated  at a later date is is the least likely to pan out at all, and if it does the chances is ends up looking like you expect it to are even slimmer.  The only way I would ever work for just stock is if the company is already pretty far along and it seems like a sure thing, or I just feel like working for free for other reasons, and the stock is just a needless bonus.
  • Product Based Revenue:  This has it's own accounting challenges, but if you're helping to design a widget of some kind you can have a stipulation that you get either a fixed price per part sold, or a percentage of either net or gross on a per part basis.  Make sure that numbers are reasonable, get them in writing, and then expect to do some negotiation after the product starts selling.
  • Payout upon Funding: Some lump some tided to hours or milestones that is due about a spcified fund raising threshold
  • Differed base rate: For both of the above (and any other variations) I typically also also have a deferred base rate as well as some money up front. I've worked for as little as $15 per hour up front before, and pushed the deferment out months to years.
    • The up front money reminds both you and them that you aren't really free.  This is a huge point psychologically. 
    • The deferred part is really just a way of hedging your bets, I don't insist on this, but it keeps you from feeling as though you did a lot of good free work if the company succeeds, both sides know you helped them get there,  but in the end none of the above payout scenarios actually happened.  This happens all the time

One last thing to keep in mind is that the old adage of you get what you pay for really is a reality most o the time.  When I've been on either end of the full out free labor today million dollar payout before I die scenario the commitment has always been tenuous.  I lost a guy because you he couldn't convince his wife he wasn't wasting his time, and I've blown people off because someone gave me a call and had a $500 project that needed to be done that week.  A start-up that really is in the position to ask the world of you with nothing to offer really needs to make a good case, and be wonderful to work with or else it's just not going to happen.


Jeff Khoury Manager, Infrastructure Engineering at UCLA IT Services

February 25th, 2015

Hi Adam, I don't do them anymore.

On at least 4 occasions I've entered in to these agreements, rendered services and provided equipment, and worked my ass off to get things going - only to have the other parties fail to uphold their end of the deal and do their parts.  The projects ultimately went nowhere and I ended up owning a piece of exactly nothing.

If people want my services now, they pay the going rate.

Anonymous

February 24th, 2015

It's tempting to co-venture, but I recommend avoiding it. Steve Alexander 858-395-0105

Adam Craft Principal Designer

February 25th, 2015

Robert T., the point about "conflict of interest" is a good one and well taken. That makes sense and will consider the potential ramifications before making any deals. 

Like wise Steven S, you make a very good point about working only with people who can execute and have the financial backing to make it happen. It would be pretty painful to spend time on something only to see it shelved due to lack of execution. 

Andrew Lockley

February 27th, 2015

Any structured agreement needs to reflect the fact that almost all of your risk is borne in the first few months. A

Mauricio Hernández Entrepreneur and Angel Investor

February 26th, 2015

99% of the time I would side with people who say it's not a good idea to exchange services in lieu of payment. In the best case scenario you will end up having a very small percentage which would more often than not be diluted shortly after. I have seen the exception that confirms the rule but the odds are stacked up against you and the level of dependency on the executing team complicates things too much.

IMHO: Better spend that time and energy searching for a partner and creating your own MVP.

Kris Young Optop-Mechanical Engineer at Advanced Energy

March 1st, 2015

One more thought since I'm here- I know there were lots of comments on IP and worries about competitors in the market.  I can see why this could be a big deal in the world of software and app development, but it sounds like your a small design company that deals with physical products.  Unless you're already married to a very specific niche I wouldn't worry about this too much.  You should definitely have the conversations, and sign NDA's but as long as they don't try to get you into a non-compete clause I don't think you'll have a problem 90% of the time.

I take all of that back if the company is heavily pushing a patent portfolio as part of their business model. If that is the case you you should have something in your contract that ties any patent developed with your name on it to a payout of some kind.