Structuring a "build this for us - for free" deal

[newstart]

Lemme start with I've tried googling for about 30 minutes, and searched this site for a bit, but just came up empty. If there are some links I'd be happy to read them.

Background:

I've recently launched my own startup, and a client of mine would like me to do some related work for them on the side, so they can resell it to their customers. It's all custom and it's nothing I could turn around and sell to anyone in the future.

They are offering a commission or percentage type of deal, with no money up front and are estimating it's gonna take about 3 months to develop. (I don't have all the reqs. yet but want to be prepared with some options)

They say they will resell this to all of their clients, although I don't know them well, and don't have many details.

I can't sustain myself on savings for 3 months, and just hoping that they might sell some in the future and give me some nice recurring income sounds like a really bad plan that's been tried a million times before.

Question:

Any ideas on how I could structure a deal with them? Say a $xx per hour (minimum tech wage???) with x% revenue share when the product is sold? Maybe a deadline saying "free if you sell xx units by 2/2/2011 or you owe me $20,000."

All thoughts and ideas are welcome. I'd like to go into the meeting sounding like I know what the hell I'm doing on the business side. The tech part is no issue.

Thanks!

[njl]

Why would you do a deal with somebody who doesn't have any skin in the game? You're going to burn runway while you work on a product that you can't sell personally. They are going to have the right to sell it and not put any money in? I don't see any upside for you.

If I were in your position I would structure your take as a percentage of the gross sale price. They should pay you an advance[1]. That gives them some skin in the game, and keeps you from eating up your runway making money for somebody else.

[1] Be careful that things are constructed such that you keep the advance if they screw up in any way.

[newstart]

That's why I was suggesting a sort of penalty clause like "you must sell x units or you owe (large dollar figure here) by this date."

This would force them to have some skin in the game, no?

[hga]

Only if you're willing and able to sue them to collect, if it comes down to that. Assuming they have any assets by that point ... after all, they don't have enough to pay you for the three months of work.

[newstart]

Great point. The last thing I need is payment that requires legal action.

[hansel]

1) get them to show you a big list of pre-sold clients....then discount that by 10x 2) contact a few of these clients and see if they would be hooked on it like crack 3) use 1 and 3 to estimate the value 4) demand control of the price at the end. if the service is a loss leader for your partner, you can make them pay the price. remember that value created does not equate to value captured. 5) create milestones: ie 'you sell $X in Y months OR you give me your client list and I KEEP all rights to the tech and brand'

[newstart]

Great ideas, thanks!

[joelhaus]

Generally love these types of arrangements (i.e. partnering with someone who brings domain expertise and connections), but are there are a lot details that you shouldn't overlook:

  1) Do the numbers make sense to you? Learn enough about 
  the margins and the market that you are comfortable 
  with the business opportunity.

  2) Get the terms right. Be sure to address any equity 
  stake, timing of payments, expenses and record 
  keeping/trakcing. Take a look at Amazons affiliate 
  program agreement for examples of the kinds of issues to 
  keep in mind.

  3) Greater Risk = Greater Reward. If you expect a 
  "minimum tech wage", do not expect to reap the full 
  fruits of your efforts.

Good luck.

P.S. Depending on your level of trust/confidence/req'd investment in this project and your partner, consider having a legal document drawn up to address your biggest concerns (but I wouldn't even bring this up until talks get much more serious).

[newstart]

Thanks for the insights, will have a look at affiliate programs to see what types of safeguards are built in. Thanks!

[brudgers]

This won't be the last deal you ever get offered.

There is nothing to suggest that the same opportunity won't be here in a year...particularly with a developer at risk approach. And the fact that they're not throwing a little cash at it upfront means maybe it's not a critical issue (or they don't have the cash).

Based on the idea that you don't have cash in hand, it's hard to see how it meets your immediate needs or allows you to develop your current enterprise.

Just structuring and enforcing a no money down deal itself is going to take time, energy and lawyers. Could those resources be better invested in your startup?

There's nothing wrong with passing on a deal due to timing.

[newstart]

I think you're right. Based on your opinion and the others here, I starting to think structuring it will be more hassle and cost (time and money) than it will be worth.

Might consider just a billable rate to get some cash reserves and build the relationship, but may just pass and cite bad timing. Thanks for your input!

[brudgers]

There's a lot to be said for just sticking to your standard form of agreement.

Taking a project on spec is basically making a loan. Makes sense when there's collateral (or if you're a bank).

When your work product has no value to you, then there's no collateral.

There's no reason to formally "pass." Just propose on terms that meet your goals.

If they take it, you'll be happy.

If they don't, you have still been responsive and that will leave the door open.

Good luck.

[Flemlord]

If you think their idea is better than yours, then maybe you could scrap your original startup idea and instead build their product. You would own the company/product and they would be your first client. They could prepay for the product which would cover your initial expenses, or even invest money in your startup if your R&D costs exceed their initial license fee or if they want the chance of a payoff if the idea sells well.

If their idea isn't better than yours and they're not willing to pay you, then why are you spending time on it.

[newstart]

Thanks Flemlord,

So they are using my standard product services already, but would like me to develop this for them as sort of a joint-venture since they trust my expertise in this area.

The idea isn't better or worse, it's related but it's custom. So I can't scrap my startup for this product - it's very much a unique design that only will work for them and their clients. No reselling opportunity but possible money while I build my business.

I'm considering working on it because during these lean months it might be nice to have a side gig that can turn into another revenue stream while I continue to build my primary business.