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  1. #1
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    Working for equity / percentage of profits thoughts

    I've been noticing that there are numerous requests not only on this board, but at many job sites and discussion boards of people asking for a programmer to work for them on an "equity sharing" or "profit sharing" basis.

    I just wanted to post a thread that touches on some of the concerns and benefits of such an arrangement.

    Benefits of profit sharing / equity stake

    First off, let's look at the benefits. Partnering up with someone that has a great idea can be very advantageous for a programmer. It gives you the opportunity not only to make some serious cash if the idea is successful, but also to generate the holy grail of any business - residual income. Meaning that if a company makes $100,000 / yr, and you have a 10% equity, you get $10,000 /yr for as long as the company is around.

    That can be a very lucrative draw, and many programmers like the idea of write it once, use it over an over - see OOP

    Risks of profit sharing / equity stake

    Unfortunately, there are also significant risks involved. Some of the big risks are:

    1) Will the company be successful?
    Every business owner will tell you they have a great business model. Some of them do, many of them don't. You'll need to stay as objective as possible with any potential work. Make sure to ask tough questions. If your partner starts to flinch, odds are even though they may have a good idea, they don't have the capacity to see it through and make the company successful. If you're going to work in such an arrangment, get as much info as possible up front. Be prepared to sign a Non-Disclosure / Non-Compete agreement though.

    2) Is the market saturated? Is there competition?
    They may have a great idea, but someone else may have already done it. To successfully duplicate an idea, you need to have a better approach. Whether this is better marketing, better user interface, more features, simply making the "next myspace" isn't going to do. The business owner needs to have a new spin on something to be successful.

    How to separate the wheat from the chaff

    How can you as a programmer know if this business will be the right one to partner with? Well, to be honest, you don't. It's going to rely on instinct and gut reaction. But here are some tips to help you.

    1) Ask the tough questions. Some of these include:
    Do you have a business plan?
    What is your revenue model?
    Are you doing this on the side? or full time?
    What type of experience do you have in this field?
    What are your short term (6 month / 1 year) and long term (3 - 5 year) goals for the site?
    What's your target demographic?
    What's your marketing plan?
    What is your exit strategy?
    Would you be willing to take out a small business loan to make this idea work?

    If they answer "no" or "don't have one" to any of the above, it should raise a red flag.

    2) Get it in writing.
    Make sure that if you do come to an agreement, that you have everything in writing. I'd suggest at least having a legal professional review any agreement as well. The last thing you want is to partner with someone then have them leave you high and dry when the money does come in.

    3) Ask for and check references.
    I like to think of these types of agreements as "reverse employment" agreements. You're actually interviewing them, because in my opinion, you're taking on as much, if not more, risk then the business owner.

    4) Is it a start up? Or an existing business?
    Start ups are inherently more risky. I'm not sure on the exact numbers, but something like 80% of all businesses fail within the first year. Someone who's been running a business for say 3 or 4 years has been through the grinder and knows what it takes to stay afloat. IMO - stay away from a start up unless everything else just clicks perfectly. The best opportunities IMO will be a business that's been running almost exclusively Brick and Morter for 2+years and wants to expand online.


    Final Thoughts
    I think it's a good idea in general to at least consider these offers and set your web development business to include a small percentage of over all projects as an equity stake / percentage of profit arrangement. What percent of your projects that is is up to you. Me personally, I try to keep between 10 and 15 percent of all new projects as an equity / percentage type of project. The bulk of my business model requires the project to be paid in full. But I do work with some people who meet the criteria above on an equity stake.

  • #2
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    Practical questions about working for equity

    The main question I have about working for an equity position or share of the profits is how do I know what that share is?

    Do I get to look at the books?

    If it's a large company, where they hand out shares of the company, that's one thing, but what about if it's a small company, and you're working for a check?

    How do you know what you are really deserving of?

    Have you done this?

    I would want to know the financials before I got started, but is this something most business owners would be willing to share?

  • #3
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    Quote Originally Posted by MargaretBartley View Post
    I would want to know the financials before I got started, but is this something most business owners would be willing to share?
    Well, if you're working for "equity", you're actually an owner. Equity in a business is ownership interest. IMO, any equity arrangement which does not allow you to see the financials is a bad move.

    That said, (1) there's no guarantee that the "financials" are accurate - to put it politely; and (2) it's not just about the finances - there's more to consider such as business decisions - who makes them and how much of a say do you have?

  • #4
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    Another important point, is if you are given a share in the companies profits:

    Does that make or construe you as having ownership?

    One dangerous part of having an "ownership interest" is:

    LIABILITY

    If those running the company break a law, fail to pay a tax or any number of things, you can find yourself on the wrong end of a law enforcement investigations and or civil suit resulting in this great opportunity turning into a nightmare at worst landing you in jail with a felony or having a tax lien or civil judgment in the millions of dollars.


    CYA (You know what this means !! )

  • #5
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    Working for a "percentage of profits" does not, necessarily mean an ownership interest; working for "equity" does.


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