A friend of my ask me to join him to start an new online business, and it’s a big project can take 1 or 2 months to complete, and I also need to provide the ongoing maintenance, Maybe Hosting is one of another service I need to provide(if site gets minimum traffic, I’m ok, but if it’s generating huge traffic, hosting cost can be a lot). and he offered me 5% of the shares instead of paying me any money to do the work.
Since it’s an online business, should the web developer get more shares? Disregard it will or won’t make any money in the future, 5% shares might be too little? Because another of my friend works in a big company, usually 15% to 25% of the budget goes to the Web Development.
Has your friend shared his business plan and financial forecasts with you? Marketing strategy? Is he getting loans from a bank to cover his start up fees? Why is he not simply paying for the web development costs upfront? What % of his start up costs does web development contribute to? Why are you having to ‘provide’ web hosting, can he not just rent a server as an going business cost?
In a nutshell, if you are going to risk all your time and resources into this, you need to know what you may actually gain from it and how likely that there is actually going to be some gain (at any point). You also need to assess just how serious your friend is about this. What is he committing financially to this?
If you do have faith in the company, I would ask to become a full partner, not just a shareholder - get some say in the business decisions and also get a wage for all the ongoing work you’ll be performing.
Well I would say it is a risky offer. Like say if you are planning on spending close to 2 months in development time that would mean a few thousand dollars in terms of money and time spent. I guess it would be better taking something upfront rather than a share. Like you clearly mentioned, for a web based business, the total outflow in terms of web development fees is high and can be upward of 10%. Add to that hosting costs and we are talking a lot of money.
Also other than the points discussed above, how would you the splitting of money be done even if there is a share? Would it be on gross sale basis or net sale basis. Mind you there is a huge difference in both. If its gross sale basis then say if product sells for $100 then say at 5% its $5. But if its net sale basis it could even be negative money! You usually make gross profits, but based on how business is modeled, it can initially be negative net profits, so you need to think over that too.
Also a non-compete clause needs to be added. Just incase the business really picks up, then the partner could duplicate the site and might start parallel marketing too, which should not happen.
Given all of the above, I would suggest you take upfront development fees and leave it at that. A couple of years back I worked and promoted a site for two full years (close to 6 months went into development) and then included regular site maintenance, adding regular content, helping users add new products, everything and at the end of the day though the site made gross money, the partner said there were no net profits and hence I got nothing out of it! So it was a total waste of time and effort at my end.
There’s no real formula on whether to or whether not to take part in a startup, the only thing you can do is gather as much information as possible and try to make a decision as to whether you think this startup could work - if you’re confident that it can generate revenue you can start looking into percentages: 5% might not seem like a lot if you’re genuinely doing all the work but it comes down to your gut feeling. Personally, I probably wouldn’t want to settle for 5% unless prospects are so good that 5% will in fact pay off my standard fee for doing the work required, I’m guessing the reason he’s offering you shares is that he cannot at this point simply pay you for development - if possible you could try to make an estimation of how much you think your work will be worth, and agree that as soon as the revenue of the company is large enough you get that pay without holding any shares. That would mean that regardless of how the company does, as long as it does well enough to pay off your services you get your money. It also means that if 5% of the company eventually exceeds your service-cost you don’t make that profit, it’s a gamble just like any start up
