Partnership brings value but possible partner values their worth more than they can bring to the party.

We have a 3 man team that has seen limited success in B2B mobile development. Cashflow is headed in the right direction but all 3 members continue to “moonlight” and we are bootstrapped by the lead founder (majority share holder.) We have recently expanded our services in our clients industry with a product that has a much greater ROI for our customers than anything we have produced before. In fact the new product is so unique that our first customer has aggressively pursued a partnership in which they would provide “leads” and relationships that we couldn’t achieve nearly as quickly if we attempted to do so on our own. (Bascially they provide some cash and are the gate keepers to a very lucrative “old boys club.”)

While I could arrogantly say we could expand quickly in this new arena fairly quickly on the merits of the product alone, their partnership would be a shot of addrealine that could help us capitalze a relatively untouched market at record speed. But here is the rub….

They value their front loaded work (early product pricing, early product development ideas and relationships) to the tune of 30% gross profit. Their latest offer essentially asks for 12% gross on the first sale, and that percentage grows until the we reach near market cap when they receive 30%. Granted we are a SAAS company and we could conceivably make a healthy margin but it’s too early in the game to say we could make a 30% after operational costs.

I am unable to find any examples of parternships that even come close to 30% for such limited work, net or gross. Even if we were able to sustain over 30% margins, it’s not hard to be realistic and gather that others will enter this market quickly once they understand the game. At which point we could end up operating at a loss even though we have a 20% profit margin.

How do I let them down easy and help them understand that it’s just not possible to operate with such a large “tax” on the lifeblood of a small startup? Are there any examples of other SAAS companies that have participated in such parternships and more importantly survived it? What is a reasonable percentage “royalty” for lead generation, referals and industry knowledge that we would be able to acquire afer 10 conversations with other potential clients?

 


  • Change the discussion into a percentage of net profit. You can offer even over 50 % on net profit, but do not agree to sharing gross profit.

    If you offer them a lucrative majority of the gross profit (even 70 %) and they decline, then they are not even planning to support you, but to rip you off. If you get the deal, you maybe get valuable first reference customers from which you can learn fast, and get to keep some of the profit. Try to create a win-win formula, my % suggestion may be off base since I (probably) come from another industry. But small percentage of something is better than huge percentage of 0, no matter which business you are in.

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