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.
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.