Structuring a FOSS Support Contract

November 15, 2007 11:59 AM

A very successful business has just decided to build their next mission critical application using free open source tools developed by my small little consulting company. They want to contract with us for ongoing support and improvements. How should we structure the deal?

Our tools are highly complex and represent decades of development. This isn't something they could duplicate, and it would be difficult for them to find other people to maintain it.

If their product is successful, they will make hundreds of millions of dollars or billions of dollars. This is not an exaggeration.

That said, we don't expect to get rich and don't want to gouge them. I'm more wondering how structure the deal. How do you factor in (a) actual work, (b) guaranteed response time, (c) commitment to keep people around who know how to do this stuff, etc? What's the overall shape, and what details should we include? I'd appreciate any pointers to other similar situations, as well.

By the way, we aren't interested in being acquired. It doesn't make sense for a number of reasons. We want to continue our general consulting and FOSS development, and have this gig be part of our business, helping sustain us.

posted by anonymous to Work & Money (7 answers total)

You could structure it either as fixed-price (highly risky) or on a retainer basis. For fixed-price, you would want to dedicate the services of one or more people (or even a fraction of an FTE), and then use them for other projects when they weren't actually being used for the other company's work. Recognize that those people may spend enough time in the other company's house that you could lose them and the other company wouldn't have to find other people--they could just take yours, so you'll need a proprietary, non-compete clause in that regard (with the other company--it's generally unenforceaeble with individuals).

The preferable approach is to charge a retainer for a year at a time (with options for additional years) much as you probably do an attorney, and then charge additionally for either all time spent or for that amount spent above the retainer. It's wise to have multiple people trained to perform the work so the loss of one or several to another company or to set up their own business doesn't destroy your ability to service your clients or that you lose them to the new startup/new employer.
posted by jke310 at 12:35 PM on November 15, 2007

Hire professionals to advise you on this deal and represent you through it. Nothing says "take advantage of me!" like not having pros guiding you through the process. Plus they have an idea of what you are talking about and know the market place.

Ask MeFi isn't the place for complexbusinessrelationshipfilter.
posted by Ironmouth at 12:38 PM on November 15, 2007

(c) is the hard part, in my experience, for reasons jke mentions, but can I humbly suggest that legal advice on a $100M+ deal might be a bit beyond the wise or reasonable use of AskMeFi?
posted by rokusan at 12:50 PM on November 15, 2007

Both of the previous comments raise very good points.

I'd suggest talking to your client about the structure and attempting to come up with an arrangement which both of you consider fair.

You'll need to be on top of your numbers and your negotiating skills need to be pretty sharp. However, you are more likely to walk away with a fair deal and a reputation for being a reasonable partner.
posted by dantodd at 12:53 PM on November 15, 2007

I work for an Enterprise Software company that executes projects in the 7 figure range. Our Statements-of-work (SoW's) are pseudo-legal agreements that commit us to the 1.) scope of our deliverables 2.) schedule for delivery & 3.) hourly rates.

Every detail that is ratified in the SoW increases our chances for success. However, SoW's are forged in a thorough analysis of the client's requirements over weeks and sometimes months. We often lack the time and resources for this sort of analysis. Our SoW's then become more general and we open the floodgates to cost over-runs, exaggerated expectations, poor margins and so on.

The challenge is working with partial information. As such, never, never sign a fixed-bid agreement. If your client is insisting on something more firm like a fixed-bid agreement, give yourself some "out's": SoW clauses for scope increases, client-managed project dependencies (our clients always overestimate their ability to delivery) and opportunities to re-asses your terms.

Ultimately, be conservative with your first set of deliverables / schedule. Don't bite-off more than you can chew.
posted by meifool at 3:15 PM on November 15, 2007

Way over my level of experience really, but my thoughts would be that the most important aspect for you is that you need to be able to maintain the staff necessary to support the client's need, so you need to figure out what additional cost that really incurs to you (do you need to increase someone's pay to ensure they are comfortable and feel commited to your company, maybe you need to hire a new staffer to develop a focus on this product).

The cost and structure to the client has to represent what you need to be able to support them (and obviously ensure a margin for yourself).

Ideally you need to know what they're expecting to pay for the support so you know what kind of ballpark you're working in.
posted by sycophant at 4:47 PM on November 15, 2007

Follow-up from the OP.

Thanks for these responses. They confirm the general direction we've been heading (including finding competent professional counsel). That's a very helpful reality check.

posted by jessamyn at 7:03 AM on November 16, 2007