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consider working for a % of profit
consider working for a % of profit
ThatGirlBytes




msg:781123
 12:34 pm on Mar 27, 2004 (gmt 0)

I have a new client with a great new concept that has offered me 2% of the profit in exchange for reducing my rate by 50% to reduce the startup costs. They expect 12 million in the first year (don't they all) and would want me to relocate.

The rate I bill them is already half of my normal billing rate. I low-balled the proposal in order to build my monthly clientele up. I'm afraid they're just wanting a way to get work done for less.

I've been freelancing for years and have always billed hourly or set a flat rate for the standard brochure site, or 50 product ecommerce site, etc. Other than affiliate commissions, the concept of working for a percentage of the clients' profit hasn't really crossed my mind.

I would like to know how many others do this and what kind of things I should make sure get put in the contract? Other than the company never making a profit, what other pitfalls do I need to take into consideration?

 

jimbo_mac




msg:781124
 1:57 pm on Mar 27, 2004 (gmt 0)

welcome to WebmasterWorld ThatGirlBytes.

why not go for something higher for the first year and decrease the percentage as sales increase?
depends on the product obviously and what you think the client will accept-start high and you can always negotiate from there)
Client is not paying any money and the better you perform the more both parties make.
its a win-win situation for both sides.

I am sure you will get other opinions from other members here.

Silly question - but why would you have to relocate?

ThatGirlBytes




msg:781125
 3:58 pm on Mar 27, 2004 (gmt 0)

I didn't really ask about why relocating would be necessary. The only thing I can think of now is the contracts that they have with their local counties would mean that I could get CDs faster to convert and upload the info. I know there's still snail mail, I'll ask about why relocating next time we meet.

digitalv




msg:781126
 4:22 pm on Mar 27, 2004 (gmt 0)

Stay FAR, FAR AWAY from this client - they're either stupid or lying. First off, any business person that is capable of making that much money KNOWS BETTER than to pay people in percentages/profit sharing.

Second ... why on EARTH would a company capable of making that much money want to give away $240,000 on something that I'm sure you're charing MUCH less for. They want a price break now because they can't afford it now, and won't be able to afford it later. Also, no company will make $12 Million the first year without some kind of outside financing, be it a bank or venture capital. And if they have that, they can afford to pay your normal rate.

Promising a percentage of the company is something that is only done by complete amateurs who for the most part will never make it to the numbers they dream up in their head.

Stay firm on your normal rate - if they whine about it, tell them you're confused why a company in their position who is going to be making as much as they say is having such a hard time coming up with the money to pay you your normal rate.

humpo




msg:781127
 10:08 pm on Mar 28, 2004 (gmt 0)

Thats a huge difference in price, but then again we donít know how much you charge per hour ;). Seems like they have a cash flow problem or know they are taking a gamble as giving you % will cost them more

Personally I would hold of relocating for 3 or 4 months especially as this is a new concept. Wait and see if they are going to be a success or a flop.

Maybe you could have a minimum built into the contract, if they are so confident this shouldnít be a problem.

I was recently asked to do some work for client who didnít really want to pay for the website. They had no idea if the site would be a success or not, so i built it for free(50 static pages) and get % of the profit. In two months Iíve made 5X what i would of charged them normally. Have tried 2 other similar ideas with them that have both flopped.

digitalv




msg:781128
 10:15 pm on Mar 28, 2004 (gmt 0)

Humpo, what you're saying is a little bit different of a situation. It doesn't sound like there were any false pretenses ... they had no idea if it would be successful or not, and asked if you were willing to take the gamble & do some work, and if it WAS successful you would benefit.

The original poster's situation is a little different ... they're clearly being mislead by someone who knows they can't afford to pay the normal rate and is trying to score something for free.

Also - any professional who DID for some odd reason want to cut you into profit sharing in the original scenario would do it by offering you shares in the company, not a "percentage of the profit". No real business person making $12 Million a year talks like that :)

sweet_ali




msg:781129
 10:31 pm on Mar 28, 2004 (gmt 0)

I am successfully working for a company for a percentage of the profit, but I approached them with the proposal, not the other way around.

In this case, if they expect $12 mill like they say but are yet trying to chew you down in upfront price, - that just smells fishy. Sounds like they are trying to make you an affiliate and/or don't have actual confidence in reaching that $12 million.

If I were you, I would have built the site for them under the condition you own the domain. If they cheat you, you can always move the domain to their competitor or jack it out from under them.

danieljean




msg:781130
 11:22 pm on Mar 28, 2004 (gmt 0)

Like sweet_ali, I work for commission with customers I approach. I chose the approach after seeing it work extremely well for another local company.

If someone approached me with that kind of deal, I would have to study it carefully, because my gut feeling is they're smoking stuff that shouldn't be legal.

As to moving... that's a huge commitment. What are they committing in this deal?

ThatGirlBytes




msg:781131
 12:30 am on Mar 29, 2004 (gmt 0)

Thanks you all for your responses! This forum is really great and I wish I had found it long before now. I really need to rethink the way I do business.

Regarding the relocating... it didn't get put on the table until I became defensive about working for 1/4 of my normal rate and 2% of profit. It would mean relocating me and my family from the east coast to the west coast -- a 30% increase in the cost of living. After our conversation, I thought maybe my reaction was uncalled for and perhaps this is what other webmasters do. I'm glad to know it's not necessarily how others handle it.

I hooked up with this client from one of the freelance sites. We have no contract. As a matter of fact, I don't have a contract with any of my clients. If they don't pay I take my work down. I've only had to do this once in five years, and by that afternoon I had payment in hand.

I like sweet_ali's idea of having control over the domain in this situation. My next step will be to have them sign a contract before proceeding with any more work. They already have about $3K worth of work lined up for me to do in the next couple of weeks, and more coming soon thereafter. At this point I don't have the luxury of turning away a paying client, but I can't afford to give my time away either.

Thanks again you all!

ThatGirlBytes




msg:781132
 12:33 am on Mar 29, 2004 (gmt 0)

One more thing that bothered me was that the 2% came from profit, not sales. If it was sales I would be able to verify this from the site orders. But profit can be made to look like anything -- I know I worked a few years as a staff accountant before getting into web development.

digitalv




msg:781133
 4:13 am on Mar 29, 2004 (gmt 0)

I have a feeling you're really getting into a bad situation with this ... sometimes turning down a client, even if you think you can't afford it, is the best thing to do.

Forget about relocating for a minute. For one, you have bills to pay - can you really afford to work for 1/4th of your normal rate anyway? Pretend that the 2% is NEVER going to happen, because it most likely isn't. Can you afford to TAKE this job? That's going to take up time that you could be using to find (and DO) other projects in place of this one. Do the math and figure out what you're going to make per hour taking a 75% pay cut, and you might find you could make more money working at McDonalds. One of the biggest mistakes webmasters (and heck, MOST small business owners) make is they fail to factor in what their time is worth - they look at the total income from the project, and not the human cost it took to get there.

I would really hate to see you take this job and be in here in a month or two posting a question about finding a collection agency or how to sue a client who violated a contract :P

As for relocation ... I would never relocate for a company unless it was somewhere I wanted to live ANYWAY and would have moved there on my own circumstances permitting. My guess is they're only saying that to make you think they're a real company. Have you ever spoken to more than one person there? Can you verify this isn't a garage/basement operation? If they wanted someone local they could GET someone local - I think they WANT someone remote because (1) you don't know who THEY are, and (2) It's easier to screw someone who can't walk a couple blocks and kick your ***. :)

The whole thing sounds really fishy, and I think you feel that way too - you wouldn't have posted here otherwise. Just be careful. There are always other clients, don't sell yourself out because you think you need them.

Shane




msg:781134
 8:37 pm on Mar 29, 2004 (gmt 0)


Ask them for a copy of their business plan.

..... Shane

wackal




msg:781135
 11:06 pm on Mar 29, 2004 (gmt 0)

I was in this exact same situation and it was not a pleasant experience. Sure, everything sounded good in the beginnning and I intially accepted the offer out of a combination of trying to help someone and a little greed on my part. Yes, I had the dollar signs in my eyes.

Well, to make a long story short, I kept up my end of the bargain, but I had to watch as the owner made one boneheaded decision after another, completely ignored my advice, and I was left with nothing because I had agreed to be paid a percentage of the profit. In my case, 20% of zero.

AlastoR




msg:781136
 10:17 am on Mar 31, 2004 (gmt 0)

Simply do a little "HomeWork".
1.Check the company's statistics,ask around to learn information about them(if they pay up to time,what is their present budget,in this case what kind of investment are they interested in doing).All these WITHOUT them knowing you sniff around them.
2.What THEY ask of you is an "investment" of time and a loss of profit,even if they make it appear temporary or even mask it as profitable.Simply judge if they're investment has a future or not!
3.The lestrich 2% of their business can't be enough for you.I'm not talking about Greed,i'm talking about the law,which in this occasion here in Greece exceeds the amount of 5,4% and should be even more for your country,considering the seasonal economy of my country.
4.For whatever you do,SIGN a contract and READ it before you sign it.Best way is having a lwyer help you.
5.Imagine this, you do accept and the whole thing is actually a total f* up.Not only you have unpaid bills.Now People that can't pay you Ow you AND you have unpaied bills.Which is worse?

Hope i helped

Undead Hunter




msg:781137
 3:49 am on Apr 8, 2004 (gmt 0)

Run away! Any company that can make $12 million in the first year (sure) can get funding / loans / grants to pay whatever your salary would be worth. It would be a BAD business decision on their part to let you have that kind of money if you're not a shareholder / business partner of some kind. I smell a rat. Didn't the dotcom years have this kind of thing over and over again?
There's no way! It would be ridiculous for them to pay you 2%, or $240,000 or whatever for website design... they can just hold off the major design work until they have some positive cash flow, and hire you then at your full rate. No, I know a LOT of enterpreneurs, and have worked for a few, and no one turns a profit in their first year, let alone $12 million in sales. If they do that much in sales, then there's way more bills to pay... no, no, no. Lots of other good paying work out there to find.

ginagina




msg:781138
 7:09 pm on Apr 8, 2004 (gmt 0)

I would not do this assignment. I certainly would not relocate. If you still want to take a chance on the "percent of profit", propose to them that you would do the site remotely. If you see that the company actually is being straight up with you and you start receiving significant profit-sharing checks, then you can make an "informed" decision at that time to relocate or not.

mcguffin




msg:781139
 7:29 pm on Apr 8, 2004 (gmt 0)

digitalv wrote:
Also - any professional who DID for some odd reason want to cut you into profit sharing in the original scenario would do it by offering you shares in the company, not a "percentage of the profit". No real business person making $12 Million a year talks like that :)

Digitalv, I completely understand your concerns about the offer and the company's ability to achieve its goal of $12M in first-year revenue without outside financing.

However, I can think of two circumstances where I've seen offers written as "a percentage of the profits" rather than equity through shares.

  • The business is incorporated (in the U.S.) as a Limited Liability Partnership. Partners own a percentage of the company and draw a "percentage of the profits" based off the terms of the partnership's operating agreement. LLPs do not have shares to distribute.

  • A closely-held (private) business (regardless of how it is incorporated) may offer a "percentage of profits" as part of a contract incentive to an executive officer who does not hold an equity interest in the company. I have seen examples of this type of offer before, and I even discussed a real contract in a mid-size business ($4M annual rev) that contained this clause yesterday.

So, it's not impossible for a credible business to have this type of clause; however, as always check the business model--especially with start-up companies that can't show you their financial records for past years.

Also about the $12M, be sure you have a good idea of the expected profitability of the company. What profit margins are common for companies in that sector. Some companies squeak by with razor thin margins while others enjoy 15% or greater margins of profitablity on revenue.

If you're offered a percentage of the company's profits, know how profitable the company might be. Don't discuss revenue, discuss margins, and ask the owners to justify their estimate.

If the company makes 10% profit on $12M, that would be $1.2M in profit, and your 2% would be worth 24,000.

If the company makes $75,000 on $12M, then your 2% would be worth $1500.

As you can see, it's not revenue that matters; it's profitability.

Compare the amount you would receive to what you would normally invoice.

watercrazed




msg:781140
 10:11 am on Apr 11, 2004 (gmt 0)

it is fishy, but do your homework, bank ref, how much they have invested in hard cash so far etc.. % deals can work. but do not work very often. never do a percentage deal on anything other then gross sales (unless you have a team of accountants and attorneys), if you can tap in to their shopping cart stats directly you can tell your cut day to day. I can't imagine a reason to relocate. well let me reconsider that, buy my house at 10% over apraised value, 10k to 30K relocate expense and 6 months fees upfront or a contract with assets to collect on as surety then maybe. I am a business owner and have brought people in on a % basis. only when I consider them as a key player generally there is some history first. good faith money should be acceptable, **** amount for development of a prototype for an example.

it is time to call it a night, good luck.

blacknwhiteboy




msg:781141
 9:47 pm on Apr 22, 2004 (gmt 0)

In the US if you own less than 5% of the business, you may not demand an audit of the books. Been there done that and lost quite a few bucks.

Taking profit form the business instead of a salary means you pay capital gains taxes on whatever you get. Trust me, I've seen a guy write off two cars, and a house on his business and than tell the employees the bad news about profit sharing. Closely held firms are the worst when it comes to this issue.

I suggest you structure a contract so that you retain ownership of all intellectual property until salary/contact is paid.

Drop me a line if you want a copy of a very tough professional services agreement.

Easy_Coder




msg:781142
 1:14 am on Apr 23, 2004 (gmt 0)

My Business Model is transaction oriented and it was a great decision for me. Since going that route my sites routinely provide me with anywhere from 4-8K per month. However, 2% of margin might not be enough.

I only partner with high margin product sellers and I take 5% of each transaction subtotal (before tax & freight). I control the system becuase I completely take over the web operation and move the application to my server. I even get ownership of the domains. Otherwise I would turn down the business and work at an hourly rate.

Chris_D




msg:781143
 1:58 am on Apr 23, 2004 (gmt 0)

Walk away thatgirlbytes. Don't run - just walk.

And the $3K job? Ask for cash up front.

Otherwise - accept that you are doing it for free (well - at 1/4 of your 'normal' rate - you are).

:) Walk.

coffeguy76




msg:781144
 2:05 am on Apr 24, 2004 (gmt 0)

OH Boy! Sounds like a snowjob! Remember that management book that was popular in the early 70's - 'Management By Objectives', well this is awful close to the 'management' book called 'experience' that is titled 'Management By Whose Objectives'. Since it is 'easy' to say, it does not mean it will be easy to calibrate or collect on. The relo zinger pretty well confirms the go away . . . go way far away from this deal.

On the other hand, nail down ownership of what you put in, work for a few months in your present location, then re-assess. Sometimes (but not that often) profit-sharing deals work out.

j_h_maccann




msg:781145
 2:50 am on Apr 24, 2004 (gmt 0)

People who won't entertain a percentage deal obviously haven't seen the T-shirts handed out at entrepreneurs' meetings reading "Cash is worth more than your mother." Even the best new idea, the best startup, should try to conserve liquid cash by giving early contributors small percentages of the eventual success. You'll find excellent startups, with excellent venture investors, who won't spend cash.

The percentage, as has been pointed out, should be on some number which is very close to the top line (gross sales net of discounts and returns, say). You don't want to argue about whether the founders should or should not take a trip to Vegas; you just want a measure of gross sales success. The percentage should be high enough that it would result in (say) 2x to 5x ordinary compensation if the idea flies.

paybacksa




msg:781146
 4:27 am on Apr 24, 2004 (gmt 0)

Get a contract that states you own the domains, and that they have a value, and sign an agreement to sell them to the business owners upon completion of your term (for an agreed price) if the contract terms are met. Be sure to have a lawyer who understands domain mames draft the agreement.

You may want reserve a set of domain names and do your best to make them all valuable in this endeavor (so as to increase their value as a portoflio supporting the business).

That's your insurance against being cheated. You all share the risk, and hopefully the rewards.

Leosghost




msg:781147
 10:09 am on Apr 24, 2004 (gmt 0)

"That girl" should learn to "sniff" and smell a rat quicker ...this would reduce the need to "bite" ....

they obviously left the sign with "scam" written on it in the car when you met ......

Don't go there unless you really want to be writing here in reply to a post like yours "Dear ****** this happened to me.............."

My 2cts ...calculated on the profits

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