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Ask HN: A friend introduced me to a client, now he wants a 25% cut
26 points by thrwwwy123 28 days ago | hide | past | web | favorite | 39 comments
I work as an independent software consultant in a somewhat specialized area. A friend recently introduced me to the founders of a company that are looking for help in this area. It's interesting work and I want to pursue it. However, my friend is insisting that I bill his company at my rate of $X/hr, and he bill them at $1.25X/hr. The client appears to be fine with the rate he quoted them.

I understand that business is all about relationships, and I want my friend to be compensated for the value that he's provided. However, this seems pretty steep to me, especially if it turns into a long term engagement. In my experience, recruiters usually charge a one time fee, but his reasoning is that he's more of a staffing agency than a recruiter.

While theoretically I should be content with earning my rate, this has also made me realize that I should be charging more.

One possibility I'm thinking about is that we engage under his terms for a short term initial contract, after which point I start billing the client directly, either at my current rate or at his. However, I'm not sure how this might be received by both the client and my friend, nor what the norms are in this type of situation.

What does HN think? What is the value that a staffing agency provides to justify their cut? Is my friend being reasonable?




If you're getting your full rate, let your friend enjoy marking up your services. Make sure he's paying you promptly though, not paying you after he waits for the final client to pay his invoice, so specify he's your client in the contract and that he's comfortable paying your invoices in a time frame you expect not dependent on the final client paying his invoice.

Maybe he will bring you other engagements, you could even outline this in your contract with him that he will actively market you to his network.

Finding projects isn't trivial, it's mainly relationships and who you know. If he can keep bringing you projects I'd enjoy the ride.

Maybe let him know that for future engagements like this you're increasing your rate if you think you need to increase it.


The standard rate doesn’t include a premium for the nonstandard conditions.


If he's the one managing the relationship, doing the end-customer billing, it's perfectly normal to have a markup, especially if it's for a short-term engagement. He owns the relationship and is subcontracting you to perform your service. A referral fee would be appropriate if he was handing the customer off to you for direct billing and leaving you to manage your relationship directly. In essence, he's also warranting your work (which means he's bearing risk). Don't be so quick to say that this means you should raise your rates. If you did, he might not sub work out to you anymore and you'd lose the advantage of having people like him finding you work (which is a cost you'd need to bear). We have worked with subcontractors like this where they see us marking up their service and think they should raise their rates to what we're billing. That's the wrong response, because I can't then mark that up further. It just means we're going to find someone else to do the work for the rate we need. Ultimately, maybe it would be good to consider a higher bill rate for direct engagements and a lower bill rate for subcontracting jobs, and in the meantime try and move more of your business into direct engagements. But again, this takes work and will cost you, but at least you derisk the approach by continuing to get business (and build reputation) through subcontracting.


I have built two successful consulting groups, while some people here are saying 25% cut is normal that is astronomical in my experience for what he is providing. I would never agree to that rate just for an introduction, 8-12% is more reasonable for an intro and payable only when the client pays their invoice.

If your friend is doing some work and on-going management or something than that's a different story and this may all be very fair. But if he is literally just making an intro and then now saying you have to sub-contract from him that is odd to me and for me and has red flags all over the place. Essentially it seems like he wants to control the client relationship and just have you do the work, there are a lot of potential downfalls here. For example, if you aren't talking directly to the client and instead he is playing middle man you may get a bad wrap from the client because your friend doesn't understand something properly. That client then talks to other potential clients and next thing you know you are taking a hit for your friends behavior. If he is letting you have direct access to the client and he literally is just billing, his 25% is insane. Other downfall is if you don't control the client relationship how are change requests going to go? Is he going to properly represent them? How is billing going to be handled, they pay him net 30 and you wait again to get paid so you now risk 45-60 days of non-payment? Is his company big enough you can feel confident he'll pay you timely and properly? If things go south, is his company large enough to compensate or protect you during a legal suit? Is he carrying all the proper insurance? This just has so many red flags to me.

Essentially IMO your friend is taking advantage of you by introducing you to a client he knows (maybe does business with regularly) and he knowing you charge too little is jacking your rate to something more reasonable and taking the difference. With friends like that you don't need any enemies for sure. I usually introduce friends to clients for free because it is good business to make sure clients stay happy and my friends find work. Plus if a friend fucks up I am not on the hook for their screw up, just for the intro which I can manage around. For people I don't know or that are just acquittances, I'll do intros but I do take a referral fee paid as they are paid from the client. Only time I take money for an intro when a friend is involved is if I need to get involved or the value of the contract would be such they can afford to pay a fair referral, but I'd never ask for 1/4 of the value even if I told them to charge 1.25x more.

Don't compare to staffing agencies, that isn't an accurate representation unless that is the business your friend is in.


Thank you very much for the detailed response, this is extremely helpful.

> But if he is literally just making an intro and then now saying you have to sub-contract from him that is odd to me and for me and has red flags all over the place.

This is indeed the case. But the work is interesting, and I believe my friend is just inexperienced. How do you suggest I proceed?

> Is his company big enough you can feel confident he'll pay you timely and properly?

As far as I know this is among his company's first engagements of this kind. I don't believe he is able to pay until the client pays him.

> If things go south, is his company large enough to compensate or protect you during a legal suit? Is he carrying all the proper insurance?

These are great questions, thanks. I will follow up with him regarding legal and insurance.

> For people I don't know or that are just acquittances, I'll do intros but I do take a referral fee paid as they are paid from the client.

I think this kind of arrangement would make more sense under the circumstances. What is the fee you normally take? Do you have any advice for how I can convince my friend that this is the better option for both of us?

> Don't compare to staffing agencies, that isn't an accurate representation unless that is the business your friend is in.

I believe that is the business he wants to be in. Can you please clarify why this isn't an accurate representation?

Thanks again, you've been very helpful already!


> I believe that is the business he wants to be in. Can you please clarify why this isn't an accurate representation?

Not the parent, but: a staffing agency typically handles lots of administrative stuff for its workers. They handle billing the client, they make sure taxes are withheld and give you the documentation you need at tax time, they may provide group benefits like health insurance. They also provide the legal entity the client contracts with, so the workers don't all have to incorporate individually. This is the ongoing value they add, they shield their workers from all the messy and complicated hassles that come with entrepreneurship.

If the idea is you're an independent contractor who's still expected to handle all that stuff yourself, your friend isn't acting as a staffing agency. They're just bringing you on as a subcontractor.

As to whether the amount they're asking for is reasonable, anything's reasonable if all the parties involved agree that it is. It sounds like you don't, and are looking for some justification you can hang that objection off of. But you don't need a justification, you're two parties trying to strike a deal, it's perfectly within your rights to say "I think this deal sucks" and make a counter-offer you like better or even walk away. That may not be smart, depending on how badly you need this work -- remember though, he needs you to make this deal happen as much as you need him! -- but it's absolutely something you can do.


Thank you!


Your friend’s inexperience makes the odds of things going badly much much higher.


First, please understand I am not bashing your friend or anything, just trying to give you some advice. And it could all work out great if you ignore everything I am saying, but those aren't the times you worry about, it is when things are rough you have to plan for.

As for why I said don't compare this to a staffing agency. Technically that was probably wrong or maybe just too strong, you could compare it but I just think that is a mistake.

To me outside of all the rules around agencies the key difference is this: If you were introduced and went through a series of interviews just like an employee would then that is a typical agency placement. If instead, you sold your services through either writing up a proposal, or estimates and a timeline etc then you are an independent contractor. For me when I refer a friend they are going to have to do all the work, such as, write their proposal, and sell/close the client. My referral is just to get them to the right person who can make a decision, but they have to do the work to "win" the client. In the case I help them win the client then that is where I do expect more of a one time referral fee.

In your case if your friend already had the client under contract and just said hey, I have a good candidate for your open position (you), then yea the agency model fits. If instead you were introduced to the client and had to write up a proposal and sell or close the client then that is a referral and is not an agency model. Hopefully that makes more sense.

So with that in mind, here are my follow up's to your questions/comments

---

1. The work might be interesting but if your friend is only making an intro it isn't a fair deal. As for how to proceed, you have to approach him and be honest and say the deal is highly one sided with 0 risk for him and all the risk for you which is not fair.

2. Let's assume the following: His company is small and unable to guarantee your pay. Your contract is with his company not the client. Given that, you have 0 recourse against the real client but are expected to do all the work. So you would be screwed if the client disputed any invoice, failed to pay etc. In the end you'd be left holding the bag and bills without getting a check, not your friend. Sure your friend loses his 25% cut, but you lose actual time spent and hours you could've been working on a direct client where at least you could sue them for recourse, or settle for less than the full amount or whatever.

3. I will make intros for people, and I do it pretty regularly. For friends I don't ask for a penny because they are a friend (with an exception for high dollar contracts >$100k generally). For acquittances, if all I do is an intro and nothing else, than depending on the person and the client I have charged nothing to the max of 12%. Generally if I am asking for a referral fee, I have done some work to help you land the deal not just get a phone call back. The more work I do to help you land a gig the higher percentage I want. But after that initial gig, the client is yours to sell to without paying me a dime because I wouldn't be doing anything after that, you keep or lose the client on your own merit.

As for talking with your friend. I'd have a chat with him about the liabilities, the needs and about the risks for everyone. If he only sees it his way then he might be a good friend but not a good person to do business with (I have a few of those myself). I do think you should offer him a fair referral fee, say 10% or so depending on the contract value. It sounds like he is trying to establish his business and doesn't have the necessary skill to fulfill this contract so wanted to bring you in but still have his name established with this business. There isn't any issue with this honestly, but he is taking no risk so his demands are out of line with what is reasonable. If he was PM'ing the project and staying involved etc then his idea is much more fair.

If you want to chat offline you can find my personal email in my profile and I am always happy to jump on a call to just give you my 2 cents. Doesn't mean I am right all the time, but I do have a lot of experience around building consulting groups.


Consultant here. 20% cut is pretty normal. 25% is a bit high, but not excessive.

Also, no, recruiters often don't charge a one-time fee anymore - they will often get an initial fee plus a percentage of the employee's salary if they stay for a full year.

To your next point, what you're describing about going direct to the client is not only likely a breach of contract, but also generally a dick move. If you want to get 100% of billable with no sales/subcontracting commission, find your own client.


> To your next point, what you're describing about going direct to the client is not only likely a breach of contract, but also generally a dick move.

We haven't signed anything yet. I wouldn't go direct to the client immediately, but rather let him have his cut on the initial engagement. After that point, I feel like I would have more of a relationship with them than he does.

> Also, no, recruiters often don't charge a one-time fee anymore - they will often get an initial fee plus a percentage of the employee's salary if they stay for a full year.

Just to clarify: this isn't a full time engagement, but a short term hourly contract, with potential to extend to long term if things work out.

> If you want to get 100% of billable with no sales/subcontracting commission, find your own client.

This is what I'm struggling with. What does it mean to find a client? Is it the case that as soon as there is someone performing an introduction of any sort, they are entitled to an ongoing fee?


It seems like you're thinking about this in terms of perceived value fairness instead of objective if/then outcomes. If your friend hadn't brought the client to you, you would get exactly $0 from them. Ever. 80% of a profitable amount is a hell of a lot more than 80% of nothing.

If you've never actually landed a client yourself, it's a lot more difficult than you're likely thinking it is. I highly doubt this is merely an introduction based on nothing - more likely your friend has been working his network for a long time, vetting potential people who need work done, ruling out the ones that can't or won't pay a decent rate, setting up a business and all the contracts you need beforehand to make it easy to get started, etc. You're also probably not accounting for the fact that being a subcontractor has a lot of benefits. You're not that one that needs to chase POs, AP payments, renewals, etc. on a regular basis.

To your last question, it tends to be a spectrum in practice. A casual introduction that leads to a deal with no actual involvement from the salesperson will have a lower rate (possibly one-time) than one where the person is setting up the whole deal and subbing it to you. In your case, your friend already quoted the company a rate and they're ok with it, so this isn't a casual intro - he basically did the hard part for you.


The promised outcome of accepting poor terms in hope of future work is more work under poor terms.


Your standard rate does not include the overhead created by the more complex relationships. Your standard rate doesn’t apply a discount for the lower probability of future work when you don’t own the client relationship. Your standard rate does not include a risk premium for the increased chance of payment problems, law suits, and misunderstandings.

If you think it’s bullshit, then it’s costing you. Here you are on HN fooling with “the deal” instead of doing billable work. And it’s just the honeymoon.

It takes a while to learn to trust your gut. It takes a while to learn avoiding bad projects is important.

If your friend can find someone else should you take a pass, then your friend can find someone else for the client’s next project, too.

My gut is “the deal” isn’t in the client’s interest. But I could be wrong. The test is your friend getting the client to sign a contract paying 25% of whatever the client pays you. That’s the test of a win-win-win.

Good luck.


In my market, most consultants bill the customer directly and pay 20% of the first 2 years to each other as finding fee for introducing a new customer.

When they subcontract in the fashion you suggest, it is more about keeping the relationship and looking like more of a one stop shop. It's really not a good way for them in terms of numbers and responsibility.

I would raise my prices on future business to 1.25x or try 1.5x given the indication the market supports it, and so I could pay fees and costs of finding new customers from my standard rates.

I would look to negotiate something that would work in future business in both directions (assuming your friend also does some consulting) making it clear that the more the deal looks like subcontracting the more likely it is a one off deal.


> it is more about keeping the relationship and looking like more of a one stop shop.

IME, it's often about the customer trust relationship and convenience. The customer doesn't want to deal with 10 W-9s and managed 10 new vendor relationships, and they trust us to source the other work and warranty it. A good analogy would be a GC in construction.


> A good analogy would be a GC in construction.

Yes, and a GC is very much on the hook, dealing with communication and looking to make as much as any subcontractor on the project even if that is by taking a small percentage from each. If a project amounts to work by one subcontractor, I think a busy GC doesn't make an offer.


Everything is fair in business. Your friend has a right to ask you for whatever cut he thinks is reasonable. You have the right to negotiate that. It is simple. But make sure you don't undercut/undermine your friend. I would just say "Hey 25% is a bit high and I would like to give you x% instead".

You may now think that your friend is not really adding a lot of value by a simple introduction but if he had not introduced you to the client who probably are going with you due to the referral, you would make $0. That is how business works. Referral and Networks is the key and try not to burn bridges with anyone.


Consultant here, some data points:

30+ years experience, consulting prob 10+ years

If they are paying you on a timely basis (not waiting until they get paid, pay you even they don’t get paid). * Yes, OK even if they take up to 100%+

Intro and nothing else: I try to give these away. Your “friend” is trying to exploit you in my view.

Intro and nothing else: If he won’t let me take nothing. (He’s stretched or otherwise needs financial help) I’d give him 20%.


I've done an 80% cut from someone who intro'ed me to a major telco. Sometimes the value of the job is not just the money, but also the connections. He charged them a ludicrous price, but also paid me well.

It depends a lot on his role. I'd be happy to pay up to 50% to someone who acts as a full time agent, dealing with negotiations, client filtering, writing and proofreading contracts, harassing them for payment. They have to eat too. Unfortunately, most people who take this role don't do it very well.

But as a pure referral fee, 10% seems fair.


While you could increase your rate, I feel it's fair as your friend company is billing his client for the entire period. For me it feel like your are employed by your friend company. 1.25x is really low then. If he just introduced you to the client then it's not his company who should bill the client but yours. In this case it's your client and your friend just get a commission, 25% seems then pretty high. I usually give 15%. But what I understand is that the business relationship is between the client and your friend, it's not your client.


Regarding who the business relationship is between: I've never worked with the client before. But as far as I know, neither has he, beyond introducing me to them.


I think that his cut is about normal, I have heard of higher and lower. Both short and long term...

I think you are going for a world of hurt, if you try to cut him out later.

My advise, in the contract with your friend make sure, that HE is listed as your customer (and not the end customer) and hence that HE has to pay you regardless of what the end customer does (i.e. he cannot say "I didn't get paid, so neither will you"). If he barks, then you have some room for negotiation...

Also for a long term engagement 25% is a rather cheap sale (which is even free (in monetary terms) for you)!


This:

>My advise, in the contract with your friend make sure, that HE is listed as your customer

That is a reasonable margin, but only when your friend is willing to earn it. Paying for value now will serve you later.

Then, yes! Up your rates for work you source. Leave the margin there for work brought to you.

Find enough, and form a firm. That is where the real money is for both of you. Seems like your friend is already thinking along those lines.

Join him, bring others to the party and make similar deals.

This will leave you and your friend as peers, a great basis for establishing a firm.

Invest in your networking with your time freed up by other people taking on work. Bank some money so you can offer similar value to others.


> That is a reasonable margin, but only when your friend is willing to earn it.

Can you please clarify what you mean by this? Are you saying that his 25% is reasonable as long as he takes on the risk of paying me, regardless of whether the client pays or not?

> Paying for value now will serve you later.

Can you please also clarify what you mean by this?


Yes. If it was just an introduction, that does not warrant an ongoing 25 percent. That kind of thing is what finders fees or referral fees are for.

However, if your friend is leveraging his relationship with the customer, and he is carrying the risk, that does warrant an ongoing percentage.

What I mean by both recognizing and paying for value serving you later is you will be participating in and learning from and how to do business at a higher level than just a simple client relationship. You too can cultivate relationships and you too can leverage them and carry risk and profit.

Value takes many forms. And when you learn to see it, pay for it, later you also can do it, and ask for payment.

Just the negotiation on this will benefit you.

Make the case referral vs ongoing customer relationship and carried risk.

You are happy to pay for the latter, otherwise there needs to be a cap on things as you will be doing the work, taking the risk and building the relationship. You should get all the income.

Everything costs something.

If he wants 25 percent, fine! You need to come to an agreement on what that pays for and all is well.

And you need to make sure those things are real, so that your own time, appetite for risk and resources are otherwise free. If they are not, then your friend is not adding value and the 25 percent is a freebie, unreasonable.

And maybe he can only add some value. That is fine too, maybe he takes 20 percent. That is the basis of negotiation right there.

Think in these terms and more deals get made with better terms and fewer hard feelings, everyone adding value, doing work, making money.

Make sense?

Also, do raise your rates. Get a client that will pay them and then find a friend with whom you can make a similar arrangement. Take care of this friend to get your percentage cut.

Does that also make sense as a future possibility?

If it does, then you now have a basis for placing value on time you free up that goes beyond billable hours. That is the next step beyond mere contracting.


Also, by carrying the risk for you, there is an obligation for you to do solid work so that risk is minimized for everyone. Be prepared to make that commitment.

It is all about balance.


Thank you for the perspective, and for the suggestion regarding terms!

Regarding 25% being cheap, can you clarify what is standard in this type of situation?


I don't know of enough to know "standards", but I have heard percentages around 25% before. It might be a little on the high side, but everything is a negotiation ...

And I know what it cost my company to sell long term consultancy contracts...

Don't get blinded with what he earns. If he consistently gives you work for the next decade or so, be happy :)

(That happen to a acquaintance of mine)


I did something like this once and was able to have the middleman pay me upon customer acceptance of the time card. I benefited from not having to deal with the receivable. There was also the ability to push off business issues to the middleman and avoid mixing money with the technical work — which was hard for me at that stage of my career.

If you think this may turn into longer term work, negotiate a compromise. Maybe you pay your friend for a year, for a particular project, or something similar.


I don’t understand why you care if you are Still getting full billing? E.g. list is $100/hr and you are still getting $100/hr net...


I give a 25% referral fee standard and bake it in on the backend. Value based projects have plenty of "margin" where I am happy to share the profit. That business wouldn't have happened otherwise.

Does his company regularly practice "finder" services?


Your friend is in the wrong here for not discussing terms up front. Maybe an honest mistake by him. Tell him whatever you’re comfortable with and walk otherwise. But this “friendship” is likely over regardless of the outcome.


If he's marking up by 1.25x, he's actually only taking 20% of the total (0.25, his cut, divided by 1.25, the total charged, is 20%). Dunno, it's probably not too bad. And it is his client after all...


Value depends on the user, and the ones that benefit from the arrangement imho. Counter offer with something lower? Make sure contracts are signed when an agreement is made.


Just to clarify, are you suggesting that I offer the client to bill them directly at a lower rate right off the bat?

My friend would not receive this well, since he would get nothing from the introduction, and he probably not refer me to something similar in the future.

Do you think my friend is being unreasonable?


You're being unreasonable.


I have a hard time understanding how does his rate affect exactly your situation.


how much time have you wasted thinking about this? Is it worth it? after over 20 yrs of being independent, any engagement that starts out with drama will end in drama.




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