

Ask HN: How Would You Negotiate This Deal? - slindstr

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.<p>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.<p>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.<p>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!
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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.

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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>

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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.

~~~
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!

~~~
dools
Nope, sorry. I don't even know what MVP stands for. Most Valuable Player?

~~~
slindstr
Minimum Viable Product :)

<http://en.wikipedia.org/wiki/Minimum_viable_product>

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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...

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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!

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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.

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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.

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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!

