

Ask HN: Negotiating and licensing software - anona-mouse

Hi guys and gals,<p>I could use your insights on how to price my software for a unique (to me) situation. In the past I have charged by the hour or rarely by the job for desktop applications. This time I&#x27;m thinking of trying something different.<p>Background: I have a contract coming up that involves software for an embedded product. I haven’t spoken directly to the company yet but I have an internal champion at the company who is pitching me to come in  to save a critical project that is going to miss its deadline. I&#x27;ve already started writing the software in anticipation and intend to have it finished before I talk to them.<p>The company currently has a non-software engineer working on this project and it is apparent that he will not be able to meet their deadline. Because of the inexperience of their in-house engineer, they will need to use faster more expensive hardware than they might otherwise. Frankly, I don’t think their current approach will work – they just don’t realize what they don’t know. Their deadline is in a couple of months.<p><i>Value proposition: On top of delivering something that actually works, I could save them ~$24K a year, year after year, because my more efficient code will allow them to use a base version of the hardware they are spec’ing instead of the more expensive one.</i><p>Normally, I charge $150&#x2F;hr. I think this job will end up taking around 100hrs ($15K). Since I think this solution is more valuable to them than $15K I’m exploring other options such as:<p>Thanks in advance.<p>(rest of question is continued in comment below)
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anona-mouse
OP here, my whole question wouldn't fit in 2000 characters so here is the
rest:

1\. I could charge them more by the hour. My champion at the company thinks
they would balk if I told them $250/hr. - even though I would be saving them
that much in the first year.

2\. Since I intend to have the product finished by the time I negotiate, I
could give them a fixed price with very low risk to me – say $25K-35K.

3\. I could demo a working version when I talk to them. Having something that
demonstrably works from Day One should be worth a premium over “I think I can
get this done in time.” right? The risk is that part of my Secret Sauce would
be revealed by the demo.

4\. What is a good way to point out how much I’d be saving them? I imagine I
can use that to set/justify my price somehow but I’m a little fuzzy on the
approach.

5\. Licensing the software to them (including source) on a yearly basis – say
$15k a year. I would have to trust them as this is embedded software and they
would have the source. This is the Big Question. I've never done something
like this before. I probably won’t be licensing this to anyone else. Can I
charge more for an “exclusive” license?

6\. The counter person at a junk yard once told me “How much have you got?”
when I asked the price of a part that I needed for my car. Is there a less
obvious way of asking this of a client? :-)

Thanks in advance.

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karambahh
I see two problems: * They don't know yet that their approach will fail * If
you come to them with an already finished, they will realise it took you a
very short time to build it: hence, they'll consider your solution is worth
less

I don't think you can put a yearly cost of 15k$, if they already think 25k$ is
too much. In their eyes, for the first 3 years (standard license duration in
my field...), the TCO will be 45k$+hardware, which is even more unacceptable.

For the "exclusive" license, it all depends if your source code is actually
re-usable by a third party...

What you can probably do is come up with a two-fold contract: _15k$ for 100hrs
at 150$ /h _If the software delivered can run on the low-end hardware, company
will save $24k/year. Developper is then entitled to a yearly payment of 12k$
for the first 3 years....

It's a win-win situation: if you fail, you still get the 15k$ and they still
have a solution. If you can make it, you win 15 +(12 _3) and they save (12_ 3)

~~~
anona-mouse
Thanks!

I think their resistance to the _idea_ or paying someone $250hr not to paying
for a solution costing $25K.

I was thinking of licensing the solution as a library. I.e. "I can license you
a library that does exactly what you need." They wouldn't know if I spent 10
or 1000 hours creating it.

They won't be able to ship their product without this problem being solved and
their deadline is only a couple of months away.

With the above in mind, would you change your approach?

Thanks again for taking the time to help me out.

~~~
karambahh
See comment by brudgers in this thread that's great

They will know you spent a small amount of time, because your champion has
championned you as being able to solve the problem, not "having a ready made
solution".

They won't be able to ship, but unfortunately, they don't know it yet. They
might fear it, but the management probably won't admit it, because if they
did, they wouldn't have set themselves in this trap in the first place...

The $250hr vs $25k makes think of an anecdote about Picasso (found no credible
source online about it, sorry): During an event, he scribbled a figure on a
napkin. The napkin was instanly worth serious $$$. "This will pay for my
dinner" he said. The restaurant manager objected, saying "But it only took a
few seconds to draw this!". No, he said, it took me my whole life.

I don't know if it's apocryphical or not, but I try to keep that in mind.

~~~
anona-mouse
Thanks.

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brudgers
The justification for a fee of $15,000 is saving $24,000 a year. If there's a
licence fee of $15,000 then the savings is only $9,000 per year and the first
year has a negative cash flow of $6,000 and there is only $3,000 positive cash
flow in year two [not accounting for the time value of money].

None of which consider a the legal fees associated with drafting a licencing
agreement or the administrative costs of managing such an agreement.

The thing is, you see, that BoB is all about helping other people make money.
B2C is more about 've much money have you got?'

~~~
anona-mouse
$24K saving minus $15K license fee is "only" a $6K savings per year.

OK, I think I see what you are saying: $24K savings sounds good - but not so
great if my license fee eats most of the savings on them.

Thanks! P.S. What does "BoB" stand for? My google fu is weak...

~~~
brudgers
1\. B2B + autocorrect.

2\. First year outlay: $15k for 100 hours + $15k for license. First year
return $24k. Net negative cash flow $6k in first year.Only $3k net cash
overall after 2years on a $45k outlay.

------
taprun
Ask you champion the following questions:

* How much money will the company lose if the project is significantly late / cancelled?

* Who at the company will have the most egg on his face if the project is late / cancelled?

* How much competition do you have from other vendors?

* How risk averse are they (would they pay more for fixed-rate payment?)

~~~
anona-mouse
Those are all great questions. I don't have good data on most of them.

I don't think that I have any competition yet. They've spent a few months on
the problem and I think it is just dawning on them how difficult it is. I
personally can think of one guy who _might_ be willing and able to do this
sort of project but I think he is too smart to get involved by the time they
figure out their project is in trouble. If I don't take the project I will
probably pass it on to him.

It's one of those problems that initially appears fairly simple. I'm in no way
putting them down for not figuring this out, they simply haven't made as many
mistakes in this niche as I have. Heck, it's more complicated than I first
thought as well

------
trcollinson
I'd like to spin this conversation around a bit. Here is where I would be
concerned if I ever wanted to work with you:

You are a contractor who normally charges $150 an hour. You have an inside
lead into a potential contract for a company in distress on a project and you
know how to complete the work. You believe that your time in this case is
actually worth way more than $150 (66% more) and you would like help in
getting additional money for your services.

First, you assume there is no risk in writing the software up front and then
charging for it. I have had many contracts "in the bag" that turned out to be
not so sure after all. You are taking on the risk of writing the software
before talking to the client (read: the person who actually pays you a check).
This is troublesome, especially for something as short as a 100 hour contract.

Second, this is a 100 hour contract, or so you estimate. Is that really worth
the upfront risk of writing it early? I guess you could argue that "it's only
100 hours! Not 10,000, so it's no risk at all." Well, to me that's a $15,000
risk at your rate.

Third, you say that the additional value associated with charging $250 instead
of $150 is in the fact that your solution will save them money on operations
costs for years to come. While you are probably very right, it will save them
money for years to come, isn't that what we all strive for? To make the most
efficient running code possible that ultimately saves the client time and
money? Would you ever say something like this "Well for $250 an hour I can
write code that runs more efficiently, but for $150 an hour I will only write
code that squeaks by on the most expensive hardware possible"?

So, if I were in your spot I would not write the solution up front. I would
definitely go in and sell them on your solution at your normal, $150/hr, rate
with a pleasant but straight forward presentation and good reference. I would
explain to them that you are charging your normal rate because it is fair and
that others might charge them more because of there situation and that you
will be fair and honest with your time and their money. I would estimate the
time needed to complete the project then I would get it done and deliver it on
time. 100 hours is about 2.5 weeks.

Then you will get paid $15,000 AND you will get something more. You will get a
really happy client who will need more work, improvements on what you just
made, and be a fantastic reference for your other clients. If all goes well,
your name will be passed around to their clients all over the place. That is
worth way more than a few $1000 extra in fees.

~~~
anona-mouse
Risk:

Part of my motivation is learning something new so the risk _to me_ isn't is
big as might seem - I would get to apply my expertise in the embedded world
instead of just desktop applications. The stuff I learn on this project will
be applicable to future projects. But agree, speculative work is risky.

The flip side of risk is that the last thing I want to do is take this
contract without _absolutely_ knowing that I can solve their problem. The only
way to do that is to actually solve the problem.

These guys really can't afford to miss their deadline. The last thing I want
to do is be in the position of being blamed for them missing their deadline.
Delivering a solution that saves their big project, saves them money and helps
me put food on the table is win-win by my calculus.

I truly consider myself a partner with my clients. I sincerely want them to be
successful. I also see nothing wrong with capturing some of the value I
generate.

If you partnered up with someone, would you tell them "Nah, you keep the
equity. Just tell your friends what a good job I did."? I know if I leave
money on the table they are not going to turn around and pass the savings on
to their customer or donate it to charity. Instead they will simply add my
"gift" to their bottom line. (And there is nothing wrong with that.)

I think a lot of people are conditioned to be "workers" who sell hours of
labor. A business sells _value_ and I'm a businessman.

~~~
trcollinson
I understand where you are going and I have thought the same way but my
experience has said to treat it otherwise. Absolutely you want to provide a
solution to solve their problem which they created and which puts food on your
table, no doubt. That is what all contract or consulting work is for though,
this is not innovative, this is the nature of the business.

To answer your question, yes I do tell them to keep the equity and to tell
their friends. Now, of course, as my book of business grew so did my ability
to increase my rate, for everyone. This is also why I can charge such a
phenomenal rate and turn down business. For example, in 2013 I did a contact
for a very large, well known organization. I made a tiny fraction of revenue
that they made on the software I wrote for them. They could have easily paid
me many orders of magnitude above my normal rate. But, I charged them by
standard rate, completed the work, was paid on time, and definitely put food
on my table. Now they call me constantly to add more functionality. Their
partners call me. I speak at conferences about that particular project and
people contact me. It has paid dividends. I guess you could say I sell hours
of labor. I see it more as my business sells solutions at a fair market value
for the work put into them.

Now, I have also built products which I have sold or licensed to businesses.
But that is a different beast entirely. I always tell myself "if you are
building it for a single business, it's contracting. If you sell the same
thing to multiple independent business's, it's a product."

