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Ask HN: How Would You Negotiate This Deal?

14 points by slindstr ↗ HN
Last Friday was a pretty interesting day. A friend of a friend's dad whom I have never met randomly called me out of the blue and said he wanted to have lunch with me to discuss some potential web development work. I went and had lunch with him and he's a great guy - we both went to the same school, same major, captain of the same sport, etc.

I can't really get too detailed, but long story short, he and a friend of his have an idea that will satisfy a fairly boring need for a fairly boring industry and as far as they can tell this idea has never been done before. I was skeptical, so I did my own research and it looks like they might be right. What makes this venture so interesting is that they legitimately know all of the key players in the industry and can probably rally them all to use this product.

He wants a prototype built (which will be pretty simple to do given the requirements he gave me) and eventually it came time to talk about compensation. He said that I could submit a quote, but he also started to mention that I could do it for "free" and have a vested interest (I assume a percentage of ownership) in the venture. That's about when we parted ways.

Here's my question: How would you negotiate this? As far as I can tell it's never been done before and I'm confident that they know the right people and would most likely be able to convince them to use this product/service. I'll be doing most of the grunt work (design, development, deployment) and his friend will be contacting his connections to use the product. As far as I can tell, my friend's friend's dad is more or less the middle man that happened to come up with the idea. Any help would be greatly appreciated!

21 comments

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sportsTAKES
Sounds like an intriguing offer.

I'm not sure where you are in life (job, family, et al), so let's just assume you are in a position with nothing to lose besides your time in this situation...

I would consider the vested interest.

If it's as seamless as it sounds with these connections, it sounds like you are set up for success (it's rarely as seamless as it seems but all things considered, this sounds pretty good).

Just make sure they give you a decent cut -

slindstr
Yeah that's kind of what really sparked my interest. 24 years old, no debt, no real financial responsibility (except keeping the 'ol cat fed), etc.

What would you consider to be a decent cut? That's really where I'm stuck...

jaspalsawhney
Another way to look at it can to ask yourself the question

"What do you stand to loose?" - Worst case scenario you would have spend time on creating something which gets failed or they cut you off - In any situation you'll be learning invaluable lessons.

Of course if you end up taking up resources in form of people or material you can ask them to take the costs up for that. Try to position yourself a technical co founder on the team.

slindstr
This is kind of the way I was looking at it. I think if nothing else it'll be a decent way to get my name out there since this guy seems to know a whole bunch of people in the area. Thanks for the insight!
maxawaytoolong
I would take the record producer approach and get paid a lot up front. Only because I've been in the EXACT same position once and took a tiny (near-free) salary for "a vested interest" and got fucked. Equity in a private concern like this is worth nothing. You should get paid in dollars (or whatever your local currency is).
qq66
Or a combination that is very heavily weighted to cash. Instead of $120 an hour, $100 an hour and 1% of the company. That way, if it becomes Google, your (eventual 0.01%) stake is worth something.
slindstr
Hmmm, I hadn't considered a combo deal like that. That'd be nice too because then I could continue to put food on the table and claim a stake in the venture. Thanks for your insight!
lukevdp
I would draw up a quote on how much you would charge for the work, submit that to him and say that you're open to discuss equity arrangements.

Then you can make a decision based on how much you want to risk.

Without knowing the whole situation, I personally would lean towards taking cash. Offers like this are a dime a dozen. If you want to work for equity, there's tons of people looking for a technical co-founder. I would reserve taking equity for situations where you play a more active part in the direction of the business.

aamar
Good plan.

I'd add that a mix of (vesting) equity and cash may be a good outcome of the discussion if you can spend a significant amount of time on the project for a while (1+ years). If you don't want to spend that kind of time on this, then the equity doesn't seem like a great idea.

dools
If you're going to be "doing it for free" you want to make sure what "it" is. Software NEVER ENDS. Say you do the prototype, they talk to a few people, they come back with another list of features - how do you tell them no at that point? Even a fixed quote on this sort of project is risky unless you really nail down what you're building.

Quote them on the prototype and do the bare minimum they'll need to sell it into the market. Don't sign over your IP for the code (remember - if you write it, you own it).

Once they've got some runs on the board, then negotiate equity in the product because at that point you have equal power - they have the clients, you have the product.

I would strongly advise against working for free in exchange for equity - it's a common story and not one that I've ever heard positive stories about from those involved.

lachyg
If they're paying for the software, don't you think they should be signed over the IP?
dools
Depends how much they're paying ;)
slindstr
I've got a list of software requirements and together they do essentially create a MVP. I'm not well versed on the whole intellectual property legalities of this scenario. Do you know of any good resources I could use to learn more about it?

Thanks for your help!

[dead] hotmind
I get these kind of offers all the time and I hate them. To me, what they're essentially asking is "will you work for free and assume part risk in our venture?"

That is the only thing I hear when I get approached with one of these proposals.

Take the cash. Don't even think twice about it. Who cares if you think he's a nice guy or connected or whatever. You need to get paid asap.

rakkhi
Was in a very similar position first year out of university. Had just started in a consulting firm but a friend who was a graphic designer who I did some web app and database coding for at Uni approached me with a business idea. His friend who was a tradesman but had built business and now had some cash that he was looking to invest.

This tradesman was single and just started using some of the then "newish" on-line dating sites in Australia. His idea was this was a growing market and why could we not build a site also. He would provide the funds for hosting, legal etc, my other friend would do the design and graphics and me and another friend from Uni would do the backend code.

We were each offered a deal where would not get paid but get 5% each in the new company. The graphics guy would get 20% and the money guy 60%. I think this is where the problems originally started. We agreed to this but we were not happy with the deal and felt that since we were doing a lot of the work we should get a larger percentage of equity although we were not putting up any cash.

Anyways we wrote the entire thing in cold fusion, then re-wrote it in .Net, because we decided halway through it was better [Duke Nukem problem]. The scope kept expanding, we had a major problem with the fact that we had no idea how to get a database of people to start with, who wants to be the first one on a a dating site? Also the real killer was that the day job was getting increasingly busy and it was hard to find time to work on this project and again motivation was a major factor. We gave up with the site about 80% complete, lost the relationships with the graphics friend and his benefactor (he lost his about $1-2k invested in hosting, domain name and legal feeds in setting up the company). Never know if the site would have been a hit or we would have lost the house getting hacked due to the multiple SQL injection vulnerabilities that existed in the code.

So some lessons I would suggest: A) Get a good deal that you are going to be happy with and what will motivate you (whether real or not even on the social network Zuckerburg got a 70-30 split for technical vs financial input). A split of a discounted daily rate as well some equity I think is a good balance. That way if you do believe in the site there is a skin in the game and access to possible future returns. If it goes no where you have some cash for your work and lessons learnt B) Make sure you write down and agree the requirements and scope and both parties have to agree in writing for any variation - agree upfront what you will launch with and try very hard not to change this. Agree what the warranty period will be to fix bugs, and what will be an enhancement that will require additional fee / equity.

C) Make sure you realistically have the time to work on this.

Good luck wish you all the best!

slindstr
Thanks for the anecdote - sorry to hear things turned out that way! I agree that a split of a discounted daily rate and equity is a good balance, and I do have concrete requirements. Do you know of any good resources for writing contracts? I know the other guy's got a lawyer to help him with trademarking and stuff, but since I don't have a lot of cash to throw around I'll probably have to do it myself...
rakkhi
In the UK you can get a free 30 minutes consulting at most law firms if you are a small business. I did that: http://www.lawsociety.org.uk/home.law

See if they have something similar in the US (assuming thats where you are from). Ask them for a template contract, some may give it to you for free or maybe couple $100. Remember though a contract is just a piece of paper: http://bit.ly/bHuFAK

Also I don't mind sharing a base contract I got from my lawyer for software development, hell I paid so much money for it the more people that get use the better. Drop me an email rakkhi.s@gmail.com

My blog on some lessons I have learnt on my current go at a web startup, some things may help: http://bit.ly/d23Dzp

gallerytungsten
First decide what you want out of the deal. Do you want to get into business with a couple guys that seem legit, but on the other hand, you've just met them? If you wound up with a minority piece of the equity, they might see you only as a "service provider" who can be bossed around. What if their idea is good, but their execution sucks? It doesn't sound like they have any track record in web sites.

Whenever anyone suggests you work for "free," that's a giant red flag. Try asking for 50% of the equity. If they balk, quote some numbers. Or use the hybrid approach as others suggested.

Remember this old saying about "spec work." Don't "spec" to get paid.

brudgers
My gut says first treat it as strictly a service contract.

Equity is a potential bonus, but also a distraction and should not substitute for initial work with people you barely know...structuring the deal right is complex and expensive.

Finally, there may be a good reason that it "has never been done before." Knowing the key players isn't the same as getting them to fall over themselves to pay you.