Re: Payment by percent ownership

Subject: Re: Payment by percent ownership
From: Andrew Plato <intrepid_es -at- YAHOO -dot- COM>
Date: Tue, 2 Feb 1999 19:04:14 -0800

One option I use routinely with small companies such is the
"cash-stake option". Here is how it works:

1) Negotiate a rate with the client. Say $50.00 an hour. This should
be a fair rate for your work that you would bill any client.

2) Bill the client for all time worked on a bimonthly or monthly
basis, as you would normally. Make sure to include the terms of
payment. Net30 is industry standard.

3) However, the client is only responsible for paying a percentage of
each invoice on your payment terms Say 25%. The remaining 75% goes
into an option account. In a sense, you are extending credit to the
client.

For example, you work 100 hours on a project in one month. You bill
the client $5000.00. However, they are only responsible for paying
$1250.00, the remaining $3750.00 is credited to an "option" or "credit
account.

4) At a pre-determined date, say six months later or three months
after first customer ship, you have an option to exercise the credit
account in either partial ownership in the company or cash. In a
sense, on this date the client needs to sit down with you and
negotiate how he/she wishes to settle the account.

5) GET ALL OF THIS IN WRITING BEFORE YOU WORK ONE MINUTE on the
project. Have a lawyer read it if necessary. Make sure that the
client SIGNS and DATES the agreement. Get the agreement notarized.
No matter how good a friend your client may be, business is business.
If your client is not willing to sign a contract, then they are
probably not going to pay you.

I would strongly encourage you to NOT take a stake in the company
without SOME cash compensation up-front. Working for free is an very
risky precedent . I contract with lots of friends, but I am always
clean with them: I'll cut them a deal, but they still have to pay
something for my services.

If the client's product is as great as they say, then investing in
good documentation is well worth it to them. Part of developing a new
product is investing money in that development. This is why many
startups do not hire consultants. They can't afford them.

If your client tells you they have no money to pay you - do not do the
work. Companies without some money to invest in the development of
their products should:

A) Not be marketing products.
B) Should do the work themselves. OR
C) Should be willing to give you a percentage of the profits and
ownership in the company.

This is how the startup world works. Either you get money or a stake
in the company. If your client wants you to do more, ask him what he
wants. Whatever you do, do not work for free.

Lastly, if you do take a stake in the company, make absolutely 100%
sure it is CLEARLY documented what your stake and role in the company
is. If you take a 25% stake in the company, you deserve a title and
some authority in the company's business. Moreover, you deserve part
of the profits the company makes. This should all be written down and
signed by both parties.

As much fun as the project might be, it is always good to be clear
with clients. I have seen many people get screwed over in these kinds
of deals. They work for free expecting some reward. When the company
and the product fizzles, the company officers run for cover and leave
you with nothing.

Good luck.

Andrew Plato
President / Principal Consultant
Anitian Consulting, Inc.
www.anitian.com



---Beth Kane <Beth -dot- Kane -at- VENTANA -dot- COM> wrote:
>
> I have a situation I've never seen discussed here in my seven years of
> Techwr-l membership. I'm about to take on a moonlighting job that
I'm really
> excited about, documenting an outdoors-oriented software program. The
> owner/engineer thinks it has terrific market potential and has
mentioned the
> possibility of paying me not hourly, not by the job, not exactly by
royalty
> either, but by giving me a percentage of ownership in the product.
>
> I'm so interested in this product I would almost document it for
free. It
> would be fun, and I think the product can make millions.
>
> We are now discussing how I should be compensated and I have to give
him
> some kind of answer. He has asked me what percent I would expect,
but he has
> also said that he doesn't think I should have any ownership unless I
do more
> than "merely" document the product. I don't know what else I could
do when I
> have to maintain my full-time job. I do have plenty of knowledge
from years
> of experience with this outdoor-oriented subject, so in addition to
"merely"
> documenting, I'm also a ready-made subject matter expert and would
add my
> own ideas to those he already has.
>
> Does anyone have any thoughts on this odd situation?
> Obviously, I'd rather take a chance to make a million bucks than to
get a
> thousand bucks for hourly pay. But I don't know just how to propose
going
> about getting a share. This is a privately held company, a new
venture.
>
> Thanks,
> Beth Kane in Tucson
> kane -at- ventana -dot- com
>
>


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