Should startup company give away % of gross revenue to product developer?

Have an idea for a product and I’m in talks with a product developer who will help me bring product to market for a reduced fee and 3% of gross revenue for 5 years. Has anyone done a deal similar to this and is it a good idea?

    • Lol 3% equity would be a hell of a deal. This is an idea with no employees, revenue, or investment. You wouldn’t be willing to give up 3% for someone to build your dream?

      3% GROSS revenue is huge for a SAAS company. I don’t even think you’re a troll, I think you’re stupid. Can you imagine 4 years from now if OP is spending $50 million on marketing to bring in $75 million in sales? 3% of that goes to the first employee, lol what a deal !!! Idiot.

      • What class. I guess you’re a genius.

        Obviously if the OP thinks he’s going to bring in $75M in 4 years he’s not going to even consider the deal. You must think the OP is stupid too then huh?

        And you’re obviously bad a math. If OP is bringing in $75M in sales, the company is obviously going to be worth a LOT more than $75M. Therefor 3% of sales would be CHEAP compared to 3% of equity.

        Did you get your MBA from a community college?

        • You realize this is STARTUPS anonymous right? Startups. What founder wouldn’t think he’s going to bring in 75 million in 4 years? That’s the entire idea behind startups, especially if you’re a SAAS company where every dollar you earn gets reinvested in the company and you raise tens of millions from VCs once you’ve hit product market fit and pour it all out to grow as fast as possible.

          You should learn about equity, 3% is absolute peanuts for someone who should essentially be a partner in the business. That equity will be diluted by all future rounds, not to mention the 1 year cliff and vesting schedule. I bet you’re a 13 year old who just read his first business book, anyone who advocates any royalty for anyone at a startup is just too dumb to bother with beyond this.

            • That’s why 9/10 startups fail because people like you don’t dream big enough, why would I want to invest in someone who doesn’t want to hit 100 million in 5 years? what’s the point? wheres my upside?

  • Great idea but there must be a trial period of some sort with stipulations and ongoing requirements. There must also be a time line of options – for example if after 3 years the deal isn’t working due to any number of reasons then a stipulation must be pre-set to reduce or hopefully eliminate legal issues and make for an amicable parting. It’s quite a serious contract especially if the project is successful. There should also be a bonus stipulation to create more passion and ownership from the developer. For example if it’s successful – receive something extra or if sells within 5 years for more than $x then developer receives y%.

  • Ripoff. Everything takes longer, including making money, so last thing you need is shaving revenue out of the company. Squeeze your pennies together and pay outright, do equity (in exchange for part/fulltime presence) or get out your credit cards/loans….

    • That’s even better for you. If you start to ramp up revenue AFTER 5 years you developer has successfully screwed him/herself. I’d take the deal if it were me assuming he/she’s bringing a lot of value.

  • What could be worse for a startup than giving away cash that you need to reinvest in the business? No investor would touch you if you had this arrangement with someone.

    Lol at anyone who asks for or tells you that having a royalty is a good idea for your business! Hilarious.

  • This would be an unusually good deal for a developer, and I would not recommend it. He would be no taking no risk at all (he gets a small fee) but still get an upside (3% of gross revenues) regardless of the expenses that the company will incur to generate the revenue. The standard for a developer is to get equity, which means a share of profits, or get paid.

    I suggest you look for other options. The best would be to find a co-founder that can develop the product for equity. If you need to outsource the development, you will easily find developers on oDesk or Elance that will work for cash. If you pick someone from India or Pakistan, I bet it will cost you less that the “small fee” that this guy is asking.

  • Instead of going on a pissing match about whether this is a great or bad idea. The real answer is it depends. Without actual numbers nobody can give you a good answer.

    If there developer was going to charge you 100K to build it, and offered to build it for 50K with some upside, you need to figure out what that means.

    If you feel confident you’ll generate a total of 10M revenue over the next 5 years, that 3% will cost you 300K. Is that worthwhile for you? If you end up generating only 1M, that 3% will cost you 30K – you end up ahead.

    At the end of the day, its simple math, projections and risk tolerance.

    • Yeah you’ll also end up with a 5 year old company with a total of 1 million in sales. This isn’t a risk tolerance issue, it’s a horrible deal for any SAAS company. Royalties are for products, not for companies!

      • OP here. My startup is actually not an SAAS company. I am developing a retail product. Sorry if that wasn’t clear.

        • OP ignore that troll. He’ll send you to the poorhouse. Perpetual royalty is bad. This is not it. This guy knows nothing.

  • Seriously. Everybody thinks they’re a genius. The only decent answer here so far is from the person who said “it depends.” This could potentially be a fantastic opportunity. Or a horrible one. Before pulling the trigger, another concept to explore might be an opportunity where you offer a percentage of net revenue while allowing the developer to put some limitations on the definition of net.

  • Let me chime in for the “it depends” camp, offering my view as multiple startup founder and developer. First, note that there are a lot of missing variables in the OP, way too many to even think of starting a deplorable pissing contest over royalty vs. equity. In fact, the only figures we have are the 3% for 5 years…

    Generally, as a prospective developer I consider monetizing my work in terms of up-front fee, royalty and equity. Usually is boils down to a mix of up-front and royalty, or upfront and equity.

    It is interesting to realize that each of the three has its own raison d’etre and dynamics, and implications. For example, from the developer point of view, monetization is immediate and safe with up-front, deferred and risky with royalty, and very risky/volatile/nebulous with equity.

    A normal startup feels the most pain with upfront, less with royalty, and even less with equity. These factors need to be balanced, and in the course of negotiations I tend to acquire the feel for the optimum balance point. I can also say that over the years, I learned that some amount of pain suffered by the startup can be highly beneficial to the project.

    What is the developer bringing to the table? Potentially, her/his contribution can mean success or failure. Especially with hardware/firmware based products, the developer’s contribution can often translate to huge differentials in gross margin. Case in point, with one client I was able to cost-reduce his product from 32$ to 7$ while significantly increasing quality and performance. Keeping the average selling price at around 65$, the client almost doubled gross margin. Would a 2$ royalty have made any significant difference?

    Come to think of it, for a startup it can be instructive to look at “royalty” as a fixed dollar amount, effectively part of a product’s Bill of Materials. It then gets “cost-optimized” over time (in the OP example after 5 years). Bundling it with the BOM also avoids potentially problematic definitions of “net” or “gross”.

    Equity is a different beast. Before agreeing to an equity position, no matter how large, I want to be sure about the startup’s overall sanity and solidity. Its present level of funding is really immaterial. This means having to do my due diligence, interviews, reading their business plan etc.

    In two recent cases I politely refused equity from two clients, because they did not pass my muster; instead, I went for full fee.

    In some ways, equity can be treacherous: to the startup, it means essentially nothing, but it creates expectations for the developer. Many serious developers don’t need that kind of motivational-emotional burden.

    On the other hand, you do not want to over-pamper a developer with full fees and unlimited time budget, unless you want to test his ethics 

    Concluding this already long post with the most important factor of all, which also happens to be the most difficult to assess, the factor of trust. Let’s start a pissing contest over that!

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