
Early stage startup, first customer wants equity? - wheresmycraisin
We&#x27;re a team of 2 building a SaaS service for a niche industry. The product&#x2F;service is subscription-based SaaS -- we have hopes of charging $10k-$20k per year. (We&#x27;ve validated this price-range). We&#x27;ve not taken any funding from anyone, but both have savings to last for a while.<p>We have been working with company X to develop our beta. So far, it has been very productive, but no money has exchanged hands and only NDA&#x27;s have been signed. There was a handshake-level agreement that our product would be tailor made to their exact situation, and they&#x27;d be our first customer.<p>Now that we&#x27;re closing in on an initial beta release, company X suggests out of the blue that, in order for us to keep working together, they&#x27;d want a piece of our company. (No specifics yet, but we&#x27;re expecting the discussion to be 5-10 points). The equity would be vesting over a few years, and would have no &#x27;privileges&#x27; like voting&#x2F;etc (only value will be at exit). In exchange, they&#x27;d continue working with us to develop our core product, be our first paying customers, and also work as our sales team. And, in their, words, &quot;align our interests&quot;.<p>The last part, helping us sell, is compelling to us because we don&#x27;t have many connections in the industry, whereas the company is multifaceted and deals with many of our potential customers.<p>The crux of the matter is: if we do go through with such an arrangement, how do we structure such a contract? Company X has assured us that if they don&#x27;t meet certain &#x27;benchmarks&#x27;, they&#x27;d return our shares. What would these benchmarks look like? For example, is it appropriate to ask that they help us sell to, say, X leads per year? agree to commit to purchase Y licenses per year directly? Help us launch ancillary services? Provide us with access to certain sensitive data?<p>And, in exchange, what do we offer them, besides developing the services to their needs?<p>Sorry for rambling on, but all of this is new to us and any insight is appreciated.
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mbalex99
My startup was offered this by a very well known large enterprise. We said no
because they would have insight on what we do with our other customers (their
competitors). We sought the council of several lawyers and law firms in the
valley and every single one told us to walk away immediately. An infant
startup should do whatever it takes to keep the legalities as clean as
possible. If your situation was similar to ours, your customer is bound to try
to put IP ownership language in the contract. If you are seeking future
investment, this can quickly make potential investors run away.

Take it as a compliment that they want your technology very badly to make such
an offer. You should try to talk to their competitors immediately to get some
validation and try to sell to them at the same time. Never indicate that they
are your only customer. If you're a startup, try to win a market. Do not
develop bespoke technology for a handful of major players. You will quickly
find out that you are beholden to them.

I'd be happy to tell you more of our experience if you'd like (email me)

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tixocloud
That's an interesting scenario. Does the well known large enterprise have a
venture arm? We see a plethora of corporate venture firms who are intrigued by
what we're working on. For us to work with them to get access to a larger
customer base seems appealing but I wonder if it would create issues later
down the line.

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mbalex99
A late response. They do not have a corporate venture arm.

------
_ah
"Thank you for your offer. We are not looking to sell any portion of the
company at this time. However, in order to further align our interests, _after
your successful onboarding with the beta release_ we are willing to consider
offering a commission to your sales team for new customers."

~~~
codegeek
This. Interests cannot be aligned if they get equity. That changes the game
completely.

I run a SAAS and some of our very early customers have become almost a sales
person for our company. They recommend us all the time to people they think
could be good fit for us and they also are more than happy to be a reference
for new prospects. We are happy to give them additional discounts, free
customizations (our saas is customizable) etc and keep them happy.

I would focus on making this early customer very happy and keeping the focus
on solving their problem. It seems like they are trying to kill 2 birds with 1
stone and that would mess things up. Never mix customer and equity.

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brudgers
If they are not paying you they are not a customer.

The equity requirement is a version of "if you do it for free, I will tell all
my friends about you."

At best, that is an offer to tell all their friends about how you did it for
free.

To put it another way, the _potential_ client ran you around in circles
instead of being forthright.

Is that who you want to bring on as a partner?

Good luck

~~~
wheresmycraisin
I don't know why you are so pessimistic, they are going to pay our standard
annual fee once out of beta. It would not benefit them to spent so much time
helping us develop things to their spec and not be able to use it.

~~~
brudgers
Ordinarily, companies pay for someone to develop software bespoke to their
needs. They hire consultants to do it. Hell, ordinarily companies pay
consultants just for the process of figuring out what the needs are, never
mind the solution.

From the information provided, it does not appear the potential customer has
paid for the value already provided. In fact, the potential customer is now
requiring you to pay them.

And your company is over a barrel. In much of the world, 10-20k per year is a
small fraction of what a business needs to be sustainable. Even a small
consultancy needs between 10x and 100x that turnover to be a minimally viable
business.

Outsourcing sales doesn't make it any better because the potential client does
not have a significant incentive to go out and sell your product because
selling your product is not their primary business. Selling your product is
your primary business.

The dependency on outside sales means that your business does not control
staffing, pricing, and customer relations.

Why am I pessimistic? Red flags in your potential client's behavior. The
behavior is win-lose not win-win. Every piece of it is at your loss and the
potential client's gain. None of it is to insure the stability of your
business.

Assuming the potential client isn't stupid, that means that their strategy
does not require your business to stay in business. The simplest explanation
for that strategy is that the potential client doesn't actually need your
product or that the potential client expects to acquire your product in whole
when your non-viable business liquidates.

I could be wrong. I hope I am. And I admit that I am stupid enough to have
come to my conclusions by my own hard and sad experience. I paid the dumb tax
to learn to recognize bad clients. I learned human behavior unprofitably. Your
experience may be different. Again I hope so. Good luck.

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leon_sbt
I'd stay far away from company X. If they are randomly trying to change the
deal out of the blue, would you want to be in a deeper relationship with them?

Like the other commenter said, treat this as an incredible compliment. They
see the value of your product and want a slice of the pie. Please approach
your other potential customers (ie their competitors), and start removing
their leverage on you.

Best of luck! Good problems to have!

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djyaz1200
I feel for you, that's an unfortunate situation. We are around that price
point and selling into a niche industry and also got these types of
offers/demands earlier in our journey. I am very thankful we declined them
although they were tempting. Part of building a company is building a customer
acquisition process that is repeatable and scalable and bribery doesn't
qualify. If you build a product without a repeatable and scalable sales system
you will fail. If anything the customer acquisition is more important than the
product. This is why companies like Dropbox famously faked the product demo
video, got a big waitlist of customers and then made the product. You can
solve just about any problem a company has so long as it has scalable +
repeatable system for profitable customer acquisition.

There are other problems with this...

1\. People who actually have connections and power typically also have money,
and understand the rules of investing. Respectfully, I think you're dealing
with lower-level people who may not be able to deliver on their promises.

2\. Once you start bribing it's never enough. People who extort bribes from
you in any form will always ask for more. In my experience, this is rooted
both in their greed and desire to conceal their inability to actually add
value. Rather than saying... "sorry I can't actually make valuable
connections" they will ask for bigger incentives.

3\. It will hinder your company long term, other investors and/or clients who
become aware that someone got equity for free will then be anchored at free.
Be confident, you're worth something.

4\. There are rules around this, blame the rules. Laugh it off with them and
say unless they are accredited investors individually and/or their company
wants to pay $70K for the legal it's a no go. Say this nicely and they may
back off. The "shit sandwich" is a great way to deliver bad news like this...
say something nice, say no, say something else nice.

5\. I handle most the sales for our company and you can take heart that you
are probably onto something valuable, congrats. Most people have a logic flaw
I exploit as a salesperson that when they want something they want it
completely. Humans are very bad at indexing desire, further if you have
something unique they can't get anywhere else then you are in charge. That's
great, part of what you're going to have to learn is how to get customers
excited enough to try/use/buy your product without being so crazed with it
they insist on owning it.

6\. If you can't beat back people's desire to own a piece of your company
stall. Tell them you'd love to have them as a partner but all the legal
details would cost a fortune. Make it clear to them that you can't "paper" a
deal of any kind without money. This might make it their idea to get you some
money.

I hope some/all of that is helpful. Sorry I didn't distill it better. Others
may disagree with some or all of this and they are entitled to their view.
Best of luck!

