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Equity Stake for Consulting
Fortune Hunter




msg:3958362
 7:47 pm on Jul 23, 2009 (gmt 0)

I had an interesting situation arise recently. I re-connected with some old acquaintances whom I highly respect for their business savvy. Since I last caught up with them they are in the early stages of starting an importing company that brings in food items. At the moment they are only bringing in partial containers and store it at a warehouse in PA. Right now they are unloading products to small ethnic food stores, but would like to move to the web.

This is where I come in. They want to start an eCommerce operation and start going straight to the consumer and possibly getting to retailers through the web as well. The problem is that why they are good business people they aren't Internet savvy or eCommerce trained and they don't have a large budget to get this going since they are in the early days of this company.

I suggested an arrangement where I will set up the eCommerce and build up that entire channel in return for a percentage of all online sales and an equity stake in case they decide to sell the company down the road. My concern is that I would build up this great eCommerce operation and they would sell out and I would get nothing. Therefore, I said I wanted some type of equity stake that if they sold out I got a pay day.

My question is what is a fair percentage of sales and what is a fair equity stake given that building the site and building up the entire eCommerce channel will be on me?

 

LifeinAsia




msg:3958401
 8:41 pm on Jul 23, 2009 (gmt 0)

Anything short of setting up a legal Partnership is just setting yourself (and them) up for trouble later on. The terms of the Partnership should explicitly state ownership, compensation, etc. of all partners.

One way of figuring out equity distribution in the setup phase is to price out the e-commerce project as if you were building it for a client. Compare that "cost" against whatever money they have already put into the project, and that will give all of you a starting point for negotiations.

As far as what's a fair percentage of sales? I don't have an answer for that. That's most likely something you'll have to negotiate with them and come to some sort of trade-off between higher equity or higher percentage of sales.

Fortune Hunter




msg:3958459
 10:33 pm on Jul 23, 2009 (gmt 0)

Anything short of setting up a legal Partnership is just setting yourself (and them) up for trouble later on.

Couldn't agree more. This will be a fully written agreement and I will hold the stock certificates for any equity stake. Professional from the word go.

One way of figuring out equity distribution in the setup phase is to price out the e-commerce project as if you were building it for a client.

I have thought about this route, but the issue is not building it, but running it. Building an eCommerce site is one thing, but building and eCommerce channel/business is another. I am doing the later and for that I just don't have a clue what that is worth in the end. It could be worth a ton it could be worth very little. I guess it depends on how well we do.

For example, say Best Buy called you up when they were a new start up and asked you to build up their eCommerce channel, which you did. Today that channel is probably a significant piece of their revenue, but at the time you started you didn't know that.

That's most likely something you'll have to negotiate with them and come to some sort of trade-off between higher equity or higher percentage of sales.

Yes, that is the tough part, I just don't know where to even start on this one. From a negotiating stand point I am going to try and get them to throw out the first number, heck I might be surprised at what it is either a good or bad way. However the first rule of most negotiations is to not be the first one to say a starting number.

HugeNerd




msg:3962062
 10:04 pm on Jul 29, 2009 (gmt 0)

That's most likely something you'll have to negotiate with them and come to some sort of trade-off between higher equity or higher percentage of sales.

I'd forego a percentage of sales and go for like 20-25% of gross profit off of internet sales -- in addition to any negotiated equity. Here's my reasoning: During the early days, you won't make much, but then again they aren't going to be rolling in the cash either. If you take a % of profit, you still allow them to cover the Cost of Goods Sold (COGS) i.e. their 75% of the take will let them buy new inventory. It also lowers their risk -- if you mis-price something or sell at a loss, have large returns, etc. they aren't paying you. Pretty standard commission arrangement there, I feel.

This could give you some security at a later date, too. Going this route puts you on the level of a salesman -- even if they sell the company, new ownership would not likely shut-down a developed income stream (though people commit acts of stupidity all the time). If you work the agreement out correctly, you could be listed as a wholly owned subsidiary, which could be your equity stake. That way, in the event the "parent" company is sold, you would be able to negotiate the sale of the website indepedently and could not be left out in the cold -- if they want the website and its sales, they have to buy YOU out, too, or you could choose to stay on. My terminology may be wrong, but I am sure this is feasible set-up.

vincevincevince




msg:3962302
 6:26 am on Jul 30, 2009 (gmt 0)

Go for a percentage of the sale rather than a percentage of the profit! They cannot escape from a percentage of sales; but there are plentiful ways to minimise the apparent profit.

Regarding equity, get real equity with dividend rights the same as all other shareholders.

HugeNerd




msg:3962779
 10:20 pm on Jul 30, 2009 (gmt 0)

They cannot escape from a percentage of sales; but there are plentiful ways to minimise the apparent profit.

I disagree -- you should, as an equity partner, be able to see their invoices and books. It'd be hard to hide the profit if you know what they are buying at! Besides, if you are an equity partner, wouldn't you get the benefit of any profit in the end? I sure hope you would...

Have them "sell" to you at a negotiated price. Then you can put your sales price at any margin you choose and keep the entire profit. Essentially, they become your drop-shipper.

Or you could implement the Amazon system -- take a pre-arranged percentage of each transaction, but make them decide upon all prices and freight charges, etc.

LifeinAsia




msg:3962805
 10:41 pm on Jul 30, 2009 (gmt 0)

They cannot escape from a percentage of sales; but there are plentiful ways to minimise the apparent profit.
I disagree -- you should, as an equity partner, be able to see their invoices and books. It'd be hard to hide the profit if you know what they are buying at!

Seeing the books has nothing to do with it. If the other partners give themselves a salary bonus that happens to be 100% of the profit, that leaves 0% of the profit left to share with FH. It's perfectly legal, perfectly legit, and not "hidden" anywhere in the books. Another way- the partnership contributes to the 401K plan for the other 2 partners- oh, FH is not an employee, so can't participate.

I agree- make it a percentage of sales, not profit.

MrHard




msg:3962860
 1:34 am on Jul 31, 2009 (gmt 0)

What you are asking is to become a business partner, using the ecommerce stuff as a negotiation tool.

Most places would not stand for this. It would be like an employee asking for part of the company profits over and above the salary they were making.

It's a nice idea if you are that good, if you had multiple partners the profits could skyrocket over time. But most places would just find someone else who would get paid normally to do the job.

Fortune Hunter




msg:3981598
 11:41 pm on Aug 31, 2009 (gmt 0)

What you are asking is to become a business partner, using the ecommerce stuff as a negotiation tool.

That is exactly what I am doing. This is a very small company and the owners don't want to hire or manage employees. They also don't know how to run an eCommerce business. They don't know how to generate traffic, market on the web, etc. That is where I come in. I manage the entire web channel, build it up, improve it, etc. For that ongoing effort I get a percentage of sales and an equity stake if or when they sell the business, since I have created and built up a now valuable web channel, email list, etc.

I agree- make it a percentage of sales, not profit.

That actually looks like how this is going together. It appears we are settling at 10% of all online sales, but nothing for products sold to retailers via our wholesale sales. I only get 10% of retail sales to end using customers sold via the web. I will also have a 20% stake in the business if/when they ever sell it.

In return I am responsible for not only building the eCommerce site, but also managing all the online marketing. I send the orders to our warehouse in PA and someone there fills them. I am pretty happy with the arrangement. I think everyone wins in this deal.

LifeinAsia




msg:3981615
 12:09 am on Sep 1, 2009 (gmt 0)

I think everyone wins in this deal.

We don't. Where are our "consulting fees" in helping you set this up?! ;)

vincevincevince




msg:3982415
 1:59 am on Sep 2, 2009 (gmt 0)

Don't forget to check other sites in the industry and see what they offer as an affiliate scheme. If they are in the region of 10% (remember they are usually paying agency fees as well) then your offer looks a bit thin. After all, you are taking responsibility for web sales, not just getting a commission on traffic you happen to drive.

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