I have an opportunity to build a software with a subscription model with my partner who is the domain expert. We found a consulting company who is willing to due the whole development and implementation as well as help market because they are a Microsoft partner.
The consulting company wants 1/3 equity and mentioned that any revenue we capture will be put back to the consulting company for services to break even and expand until we our bought out
I find it bothersome that our revenue is directly related to their services cost and we will only see profit when we, if we ever, get bought out or funding from a venture capitalist.
Is this a good idea or am I headed for disaster?
30% is actually on the low side assuming they do all the development.
However, the idea that they capture all revenue is bonkers. It also indicates that they are very inexperienced in the area of partnerships and have strange ideas on structuring them.
You shouldn't get into a partnership with them without having the rules reviewed by your lawyer specializing in such partnerships but in general, if you retain 70% ownership then you get to decide how profits are distributed. Even if you agree to some rules at a given point in time, the rules can be changed in the future by those who have majority of votes and if you have 70% ownership, you also have majority of votes.
That's why I don't see how they could structure the company the way you describe they want (without also getting the majority of votes, which means they would effectively own it and could fire you from any active participation in the company, so you would have the ownership but zero control).
Even if there is a way to structure the company that way, you shouldn't agree. A very small percentage of companies has an exit.
Furthermore, a VC investment is not an exit. It only gives your company a little bit of capital in exchange for ownership (the fact that they think that VC investment is some kind of a payday is another sign that they are inexperienced/uninformed when it comes to rules governing corporations and business partnerships).
These conditions looks quite hard - but it must be compared with the workload that represents the product development and the marketing. Do they bring other expertise? (btw. the "Microsoft partners" are many - that shouldn't be the main selection point. It is not so hard to become Microsoft Partner - no insult!)
Ask yourself if this worth 1/3 of your company. But the most important: don't create blindly a partnership with the first company that agrees to cooperate! Continue searching, if your idea is good, others will be ready to work with you...
So more candidates you find, more there will be competition and there is a bigger chance that you will obtain better conditions.
And one more thing: don't fear to negotiate!