Reducing risks for all three parties when developing software on commission?


1

I am comissioned to set up and manage a team to develop a custom software
component for a one-off event. My client is in talks with investors for
securing prefinancing, and so he asked me to write a business plan for my part.

In such a scenario, how do we increase chances that all three parties get what
they want? Should I better found a Ltd.?
Needs by party

Client:

  • Get something great finished on time.
Investor (providing prefinancing to client):
  • Budget should be used responsively.
I (consultant, possibly later Ltd.):
  • I don't want to lose IP rights to the client or to investors, especially
    since the underlying idea was mine, and there may be further uses outside
    that one-off event. In fact, software and know-how could be the basis for
    me building a future company.
  • Freedom during execution.
  • No tiring fights over budget.
  • Decent income.
Ideas for risk-minimization

So far:

  • Capped but generous budget. (proposal by client)
  • Profit sharing, bonuses. (proposal by client)
  • Agile development: basic working version ASAP, weekly releases
  • As development involves R&D: support by publicly funded research
    institutions (already secured by me)
  • Open Source development: 1. reduces dependency on me and my team (thus
    forces us to do good work), 2. allows anyone, incl. me, to later repurpose
    the software, 3. allows easy collaboration (for R&D, see above), 4.
    attractive to some very good developers

Especially unclear to me is how to give me and my team access to budget.

Software Contract Consulting Business Plan Budget

asked Sep 29 '13 at 19:23
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Feklee
148 points
  • I would make sure that you make the requirements VERY clear. Crystal clear. Make the client explain them back to you. At least three times. Make sure the investor(s) are very clear on the software requirements. Then if you deliver what they asked for, you're golden. It gets a lot sketchier in software development when you haven't nailed the requirements down up front. – Theao 4 years ago
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1 Answer


1

The real question is who will own the software at the end.

Will you own the software? In this case, the client becomes a customer, and pays you for a license for the software for their case. You can get a budget by setting up some sort of contingent sale, where the customer promises in writing to pay you for software which allows them to satisfy the basic needs they lay out in the contract. It would be normal to get an advance of, e.g., 30% of the total contract, with the rest payable on delivery. Note: you may (and don't have to) end up being paid less than your total cost to develop the software, and will develop it anyway, because you own something you can resell to other customers as well. Will the client own the software? In this case, you are working for hire, and you become an employee. In this case, the client is getting all the benefit of the software, and to reduce your risk, you should be paid like an employee: fixed contract with regular payments as you go, whether the product works as expected/hoped or not.

Is the client trying to have their cake and eat it too? Do they want to have their money be an investment in your company, where they get the software, and you split shares in a new company that owns the software? In this case, try to separate things between a contract of what they should pay for the software in a commercial transaction: which they pay you as a sale, with the extra cash they give you being an investment in the company, at a 'standard valuation' for an early stage company (this is negotiable).

The business plan is really none of their business unless they're picking this last option, but you may share it to be nice, as part of building the relationship.

answered Sep 30 '13 at 07:13
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Kamal Hassan
1,275 points
  • Thanks, Kamal! Thinking along similar lines made me seriously consider an Open Source software development model - see my question. Note that cost for software is estimated to be only one-tenth of the total cost of my client's project (one-off event). What follows are arguments against each of your suggestions, from the perspective of the client and from my perspective. – Feklee 4 years ago
  • **Case 1 (I own software):** Client cannot easily change development team mid way (source code is mine). I may not get paid at the end if client is unhappy, and fully spec'ing everything in advance is impossible (R&D aspect). **Case 2 (client owns software, I work as employee/freelancer):** Client has no experience directing a software project, thus may end up wasting money and missing the deadline. I cannot freely use know-how and software later. **Case 3 (client or investor invests):** We would need a promising business case for the software outside the one-off event, and that is uncertain. – Feklee 4 years ago
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Software Contract Consulting Business Plan Budget