What percentage of the profits should I be asking for?
July 22, 2006 11:25 AM   Subscribe

Through a mutual friend, I've been approached to develop the back end of a website. My compensation for my work will be a percentage of the profits this website brings in. I have no idea what percentage to ask for, or what's fair.

A friend-of-a-friend has an idea for a website, one he thinks could be profitable. I don't disagree - it seems to fit a hole that exists in the current market, and I can definitely see it being sucessfull. He's designed the site, has done all the layout/graphical work, and will be entirely responsible for the promotion and marketing of the site and finding the client base. What he needs, however, is someone to write the backend php/mysql portion of the site. (I'm more than qualified to do the work.) He's already tried himself, but wasn't sucessfull. As he doesn't haven't any money right now, he's offered to pay for the work with a percentage of any profits that site brings in. That's ok with me - I've been looking for a side project to take on, and i'm willing to take the gamble. My only question is this - what percentage of the profits is fair? I have no idea what to ask for, and I have no idea what number he has in his mind, either. Does anyone have any experience with this kind of contract work?
posted by cgg to Work & Money (14 answers total)
 
The earlier you get in the bigger the risk. I would ask for no less than 30%.
posted by JpMaxMan at 11:37 AM on July 22, 2006


how many hours of work will it take you? Will this be a legal agreement, is it a corporation/LLC? Do you have to support it after developing it, and for how long?
posted by neustile at 12:07 PM on July 22, 2006


In my opinion, if it's truly a killer idea, and this friend-of-a-friend has what it takes to bring it to the market... he'd have some sort of funding already and could afford to pay for specialists to complete parts of it.

I would say that if you really believe in the idea, and/or it's not a huge piece of work and you're OK with never seeing any return on the effort you put in, then what the heck, take a chance. Percentage - gross? net? Really hard to say.

Otherwise, just estimate the work and give him a quote, and let him decide to invest in his own idea by paying you.
posted by Artful Codger at 12:29 PM on July 22, 2006


At least 25%. Get it in writing.
posted by Optimus Chyme at 12:35 PM on July 22, 2006


Sorry, 25% of the equity in the company. Hope that's clear.
posted by Optimus Chyme at 12:35 PM on July 22, 2006


How can any of you give any estimates without knowing how much work it is? What if it took cgg 2 hours but the marketing, design, content for his partner will be a full time job for a year and a half? Should cgg still get "at least 25%"?
posted by neustile at 12:52 PM on July 22, 2006


Indeed; remember Hollywood: There are people who can prove to you that Gone With The Wind never made a profit.

Be careful what you're getting a percentage *of*...
posted by baylink at 1:52 PM on July 22, 2006


Keep track of your hours, set a reasonable hourly rate, and request that you be paid a multiple of that (like five times) to be taken out as a percentage of gross or net income.

You could also ask for an ongoing percentage of profits. More than 5 or 10 percent committed to a founding member who is no longer active will cripple the business.
posted by StickyCarpet at 2:24 PM on July 22, 2006


I'd calculate the percentage using the following formula:

percentage = (your hourly rate * number of hours the project takes) / (the profit the site will make * chance the site will make the bucks)

for example if you would charge an hourly rate of 50$ for 100 hours of work, and the site would have a 30% chance of making $100000, the percentage would be

(50*100) / (100000*0.3) = 0.16

so you'd take 16%.
posted by Herr Fahrstuhl at 2:52 PM on July 22, 2006


Response by poster: I guess I should clarify a bit. We're both working full time in other tech-related industries; this is a side project for both of us. He has an established customer base to sell the site's services to. We're not looking to get rich quick or make a career out of this, but some extra change on the side would be great. We're both fully aware that we may make nothing, but it's a gamble we're willing to take.

I like the formula you Herr Fahrstuhl suggested - is that something you came up with off the top of your head, or is there some basis to it thats documented anywhere (i.e somewhere i can point the other guy to it as a starting point for negotiations?)
posted by cgg at 3:00 PM on July 22, 2006


Nope, I just made it up, but since it's not too complicated, chances are that someone came up with something similar before.
posted by Herr Fahrstuhl at 3:07 PM on July 22, 2006


"He has an established customer base to sell the site's services to..."

Make sure he's not double-dipping from his day-job. If he's using his position to build a customer base for his on-the-side project, you could be in trouble when his employer finds out.

Also, get everything in writing. As early as possible. Get a lawyer if you can, if not write it down and get both of you to sign it. That's better than nothing.
posted by heresiarch at 5:18 PM on July 22, 2006


I'd avoid "percentage of the profits" deals.

What you want is a percentage of revenue. Its easy for a company to have no 'profit' with a bit of not-even-very-creative accounting.
posted by cornflake at 3:08 AM on July 23, 2006


To echo everyone else, get it all in writing. I'd seen that here many times before, but didn't really pay attention to it until it was (dum dum dummm) too late.
posted by Alt F4 at 7:21 PM on July 24, 2006


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