Business proposal: good or bad?


1

The situation is this. I am a software developer that, in his free time, has developed a software library for a specific purpose. I use it to write custom applications that I sell or sell directly the library (which is a much more complex thing, because of licenses, documentation and so on...).

I planned to license the library to a number of different clients, but for the moment I have only 2-3 buyers and only one is a licensee of the software library. All this is at an amateurish level (that is, they send me the money, I send them the software, with a rough license written by me if needed). One of this companies wants to protect his business and want my sofware to be exclusively used by them. They want to buy the new software library version (which improves a lot some important aspects), but I found exclusiveness a too strong requirement. I want to be paid much more for blocking my library for 2-3 years. So, to block me selling it to other companies, they offered me 1.5% equity plus some other things that I will not mention. Now, i would like to understand better how to proceed.

What is an equity? Is it simply a percentage of the company income? Roughly speaking, are they saying that if in the year 2013 they have a net income of 1000, I would earn 1.5% of 1000?

And what happens if the company get debts? I have to cover 1.5% of them, too?

What information about the company do I need to know before making a decision? I would say: their Financial statement. But I want to know also if they have debts, for example (99% that they don't have, but better be sure...).

Another thing: consider the fact that I would bring in the company the core technology. I found that 1.5% of equity (provided that it is a percentage on the earnings) is really too low. I would ask them at least 10% or more (15% seems much more reasonable) of the earnings.

Finally, keep in mind that this is a really small company (three founders and I don't know if there are other employed or so) and is really a start-up. They have been always respectful with me and have a vision and a lot of ideas, but they need my software to go on (I think that starting over with another software developer would be not so simple, because I have done a lot of work in the direction of their business).

Software Equity Partnerships

asked Mar 12 '12 at 22:11
Blank
Lukeluke
8 points

1 Answer


0

  1. Equity is the amount of the company stock owned (the number of shares). Owning shares doesn't mean you get a percentage of the company's profits (revenue after salaries, expenses, and taxes) but some classes of stock allow you to collect dividends if the management decides to do that. The share class also affects your payout at the time when the company is sold (e.g., investors get preferential treatment). The percent ownership may be diluted (reduced) over time if the company issues more shares. For example, MyCo has a total of 100 shares issued and the owners grant 10 of those shares to John who now owns 10% of the company. A few years down the road, an investor comes who wants to help the company grow. This means that instead of buying shares of stock from the existing owners (company founders, employees, and John) the investor puts cash into MyCo's bank account, which requires MyCo to issue additional shares. They create another 20 shares, so the total is 120 shares, of which 10 belong to John and 20 belong to the investor. However, John now owns 8.33% of the company, which is worth more than what he got originally.
  2. If the company has debts, most likely you aren't liable for them. In most jurisdictions around the world, the purpose of a corporate entity is to protect your personal assets from your company's creditors. However, if you steal from your company, that corporate protection won't help you.
  3. You need to do a whole lot of due diligence: you need to know that the team can execute their idea, that the company's financials are in order, and that the market has potential for the company to grow & generate value. This is a very broad topic and it's best to find a lawyer to represent you.
  4. If your technology is so vital to their business, then you can ask for more equity. Though, keep in mind the more equity you ask the less cash you'll get up-front.

Other general things to keep in mind:

  • Exclusive licensing agreements must be written by lawyers. Such a license cripples the activities of the grantor (IP owner) and, thus, requires very specific definitions of scope.
  • When you grant someone an exclusive license, you effectively make them your sole source of revenue in the defined scope for the duration of the licensing agreement. Therefore, the licensing fees and/or royalties should account for the majority of the potential business you give up for the duration of the license.
  • There are many ways to pay for a license: up-front, royalties, equity, barter, etc. All of them can be mixed and matched to make the value attractive to the grantor and the terms attractive to the grantee. Don't be afraid to ask for a change in the conditions.
  • Be ready to walk away from the deal. If you get too emotionally attached or too desperate, the other side will take advantage of you and will make you sell cheaper than the fair market value.
answered Mar 13 '12 at 00:47
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Dnbrv
1,963 points
  • Thank you for your long answer. I'll read it more carefully later, but i would like to ask you now about equity. You say that "Owning shares doesn't mean you get a percentage of the company's profits". But then, what is the purpose of owning an equity/share? I suppose that the baic idea :"you bring your tech here, we work togheter with you to push our business, when we start making profits we will redistribuite them (when? at the end of each year? every 2 years?) proportianally to the shares owned"...Sorry if i express myself in a rough way, but i am not educated at all in this field. – Lukeluke 8 years ago
  • The purpose of owning equity is to receive some proceeds from the company's sale. You *may* receive dividends in certain situationsn as explained in my answer. If you provide technology and you want to profit from it, you need to set up a licensing agreement that fits your wishes. – Dnbrv 8 years ago
  • Hi, i have another question about your point 4. What do you mean when you say "If your technology is so vital to their business, then you can ask for more equity. Though, keep in mind the more equity you ask the less cash you'll get up-front."? The technology is vital in the sense that without it, they simply can't do anything. Obviously, i am not the only software developer able to do that, but we 'worked togheter' to improve the software in order to suit their needs. Probably they do not want to change their technology provider. Can you define better what is this 'cash up-front'? Thank you. – Lukeluke 8 years ago
  • @lukeluke: If you've customized your product for them and it took long enough so that they now don't want to change vendors, you have an upper hand in negotiations but don't abuse it. Up-front cash is the liquid money given at contract signing as opposed to equity positions that can be made liquid only over time. (If you don't understand any of the terms I'm using, please look them up in a dictionary first - I just don't have time to write out the definitions.) – Dnbrv 8 years ago
  • Ok, thank you very much. I am speaking with a friend of mine that is running a start-up. Now things are more clear, even if i have only scratched the surface of this (large) field. Thank you very much dnbrv! – Lukeluke 8 years ago

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Software Equity Partnerships