kodemaster — 2011-06-11T06:50:20-04:00 — #1
Recently I got a JV offer from one of my clients. I am a consultant from India and my client resides in Canada and has an INC with some online website to get orders and business. The offer is about building a new site for the client that according to him will fetch more business using his new idea. However the client does not want to invest on any kind of consulting fee to me now or later but promises to give % share from profit earned from the new website once its up and running. He is ready to invest money on servers, hosting, marketing, customer support etc. but doesnot want to give a fixed consulting fee. He wants to have a long term relationship. I am bit confused about how to approach this opportunity. Should i accept this JV? If I accept this JV will I become his partner in his business and therefore partner in everything good and bad the company does (like debts). What legalities I should take care about should I agree with the offer.
Any guidance in this matter from you all is much appreciated.
ted_s — 2011-06-11T14:35:02-04:00 — #2
There's lots to think about here, not the least of which is your belief in their venture.... investing a few grand does not mean a successful business will coming.
If you decide to move forward you will certainly have to go over the legal structuring. There's no requirement that you become a full fledged partner, you may simply be entitled to a portion of profits for a fixed time or have some equity in the company.
Personally I avoid equity based projects unless I have a direct path in the outcome. When you're building the backend and profiting off the front you run the risk of making nothing because the sales guy doesn't put effort forward or the marketing guy isn't that good, etc. Exceptions are of course when you enter into a joint venture and bring a specific skillset for an intended long term project.
At this point it's worth thinking about the offer and having him sell to you. If you check out this thread you'll see a good discussion about what someone should be "selling" to get a business partner in. Reverse the equation and ask yourself if you've been given the right pitch to consider this... and then what compensation it will take for you to move ahead -- you can always counter with what you want and see where it goes.
sagewing — 2011-06-11T15:38:53-04:00 — #3
I like equity-only projects, and I'm really only looking for equity deals these days. However, I would shy away from a deal that was literally zero cash and 100% equity. That suggests that they are either in a poor cash position, or aren't willing to invest some cash into keeping their new partner happy and afloat. After all, I don't want to enter into a venture with anyone who is having cash problems, nor do I want them to lose motivation.
So, yes a bit of a weaker offer with absolutely zero cash. At least some kind of token cash offer, a small amount per month, etc. is usually effective at making the deal more mutually beneficial for everyone.
That is, unless the business idea is SO GOOD and the potential partner is SO EXPERIENCED and WELL FUNDED that you are very confident that you'll make tons of cash in the end. But, that's rarely the case
votrechien1 — 2011-06-12T15:10:47-04:00 — #4
How well do you know the client?
If you know him well as well as his business fantastic. If the relationship is new I would proceed with caution.
As much flack as companies from developing countries get for having shady business ethics I've unfortunately seen it turned the other way too: companies from developed nations taking advantage of those from developing countries. They figure their level of conduct and ethics is lowered when dealing with international cients.
The fact the client hasn't offered some sort of monthly living allowance is a red flag for me. It gives me the impression the customer doesn't have a lot of confidence in the idea (or the necessary capital and experience to take advantage of it) but is keen to have someone else do the majority of the work and take a 'if it works out, great, if not, so be it' attitude.
I'd personally ask for a small monthly allowance just to make sure the customer has some dedication and commitment to the business idea.
kodemaster — 2011-06-12T21:31:37-04:00 — #5
Thanks everyone for responding to my question. Your thoughts has opened up some options for me and caution too. I have been working with the client since last few months on couple of projects. So far he appears to be good. He has already a business and an online website for which I have worked every time so I can say that website plays an important role in his business. Based on that he wants to make a new website that promotes the same business but with better interface, processes and some advanced technology so that his current ordering and shipping process gets faster than before though he does not want to invest much on it initially.
Based on what you all have suggested it would be a kind of risk that I would be undertaking if I go with the project. Apart from this risk, what could be the possible dangers especially when @votrechien1 says about companies taking an undue advantage. In such agreements which points should be covered to keep my interests safe and keeping myself safe from undesired obligations like debts etc.
sagewing — 2011-06-12T22:20:35-04:00 — #6
But, you are missing one thing: what is the expected value of the business you are helping him build? You said that he already has a business and a website, but that the new site will essentially promote that same business, right? So what you are getting equity in?
And if this person is making money with his business now, why not pay you something? My guess would be that he isn't making much with the existing business, and you are getting equity in <what??>.
So, instead of worrying about the possible 'dangers' involved with the deal, I would be wondering if you are doing deal that will never make you any money. If I were doing an equity deal, I would want to see some hard evidence that there was a great plan that was going to make LOTS of money for me in the future.
kodemaster — 2011-06-12T22:48:06-04:00 — #7
Sagewing I understand what you and others said, and I have already proposed to my client a small allowance on monthly basis as I think that will keep us motivated. I am awaiting his response on this. Other than that what should be I taking care of?
Thanks for your help and prompt responses.
votrechien1 — 2011-06-12T22:58:24-04:00 — #8
It's important that you have a rock solid understanding of your return on the project and that it's clearly laid out in the contract you assume. It's too easy for an individual or company to make a claim along the lines of 'If the company does well I will give you a fair share of the company.' What is defined as doing well? What percentage share?
I've seen folks from developing countries overlook the need for well laid out agreements because they seem to assume there are no unscrupolous business dealings that happen in the west.
Businesses in the west may also feel a certain degree of protection against contract enforcment when dealing with a company from a developing country. They know you likely don't have the tens of thousands of dollars it would entail to enforce a contract if you ever needed to.
With that in mind, I would also entertain the idea that the client pay for the lawyer fees in having a lawyer put together a contract, again, just to show his commitment to the project.
Long story short, make sure you can determine the client is devoted to this business which he legitimately thinks can make you both money and not just taking advantage of the Indian thousands of miles away.
kodemaster — 2011-06-13T01:23:33-04:00 — #9
Thanks votrechien1 for explaining me further. All this will definitely help me evaluate and negotiate the offer.
I love this forum and an excellent place to seek advice. I thank you all for sharing your knowledge and experience. I am still open to more responses, views and keeping this thread open.
sagewing — 2011-06-13T12:58:30-04:00 — #10
I'm still missing the part about why this is a good idea
Where's the big payoff in the end that you are working for???
kodemaster — 2011-06-13T13:57:24-04:00 — #11
Frankly, for me its a good idea because it gives me an opportunity that would be hard to get any other way i think. Second, this is my first experience doing a business this way after I started as freelance consultant since 1 year and it provides me what I wanted to do since so long, so I am quite excited about it and willing to take a risk. The problem is the opportunity has come from a person who is very far from me and its difficult for me to keep a eye over what he does. Regarding the payoff, if the project succeeds the client promises a 50% share in the net profit in return of the continuous development/coding/management of the website. If it succeeds it can be a stable source of income.
So not sure how to deal with this opportunity.
sagewing — 2011-06-13T14:03:46-04:00 — #12
Not to be difficult, but I'm still waiting for what that opportunity really is.
Your client is offering your 50% of the profits from an already existing business in return for continuous coding of the website. But, how much coding are we talking about? How many hours? And, how profitable is the website today? What is the current profit, in actual dollars? What is the projected profit? And what if you stop coding, are you to keep coding forever to get the 50%? How many months until you expect to see profit?
Mostly, I'm concerned that you'll be working like crazy to get 50% of very little. Also, to offer someone a zero-cash equity deal seems unprofessional so I would want to see REAL financial statements from the company. Really this isn't an equity deal at all, it's a profit sharing deal.
votrechien1 — 2011-06-13T14:42:55-04:00 — #13
As Sagewing has stated, I'm in doubt of what your being offered a % share of. Surely he's not offering you 50% of his current business yet this new venture is likely going to be part of the current corporation so the division isn't clear. He's offering you a percentage of the profit- who's determining what exactly constitutes profits from the existing business and that from the new venture?
And again, who's defining success? It should be defined by objective criteria.
zehar — 2011-06-13T14:53:13-04:00 — #14
No Risk No Gain is the basic line of the Business. In the life everybody have to take some chances to grow. So dear friend take your chances now.
sagewing — 2011-06-13T17:52:15-04:00 — #15
clearly that is the definitive business advice of the day
kodemaster — 2011-06-13T22:14:29-04:00 — #16
The profit share is from only the orders generated from the new website hosted under a new domain, but the product that he sells remains the same. Profit would be determined after deducting all expenses such as manufacturing, hosting fees, customer support etc etc. He promises to remain transparent in all these numbers.
BTW i want to more understand about whats the difference between equity sharing and profit sharing.
ted_s — 2011-06-14T02:25:48-04:00 — #17
At a very high level [I am going to grossly oversimplify here] it's ownership in the company to a degree versus a portion of profits. If I have 50% profit rights but 0% equity and the sells tomorrow for a million dollars I am entitled to nothing. On the other hand if it makes a million in sales after costs I get half. The exact terms as well as your jurisdiction have a huge impact on this of course; there are many ways to hybrid so you have some equity, some profit, etc.
When you're making money off of NET sales it's important to mitigate external decisions in your process. What I mean is you need to control what is considered profits. If he's paying you after taxes, bonuses and salaries you will, not only see dramatically smaller figures, but it's easy to cut you out by simply hiring more people in or increasing his own salary. On the other hand you may take a much lower percent to be paid after the specific variable costs [product, fulfillment, marketing, support].
Generally I like to structure deals a little higher in the chain to areas that seem reasonable. If you get too far down it stops being profit sharing and really should become more of equity ownership as you are taking a risk with every investment, new hire or dollar spent.
INAL and really suggest that as you structure a deal with someone who may have one sitting by that you at least consult one of your own. You can do the whole deal up until the signing the docs... but at some point you want more than forum opinion
kodemaster — 2011-06-14T02:42:15-04:00 — #18
Ted thanks for making me understand the difference. What if I make a deal where I keep the website (and related source codes, db structure etc) under my ownership or claim it as my own Intellectual Property and cannot be sold without my consent. Will it be my equity?
ted_s — 2011-06-14T02:52:29-04:00 — #19
If he agrees [which would be strange and/ or a warning sign if he just said yes without countering] then kind of - you'd own the site but not the business.
Say the business brings in enough money to be worth really selling and he gets an offer of oh, 250,000. Even if you put 3 or 4 months of solid code in that can be duplicated for a small part of the selling price, thus it's possible, if your deal had no other ownership clauses, that you kept a site but he sold a business... with a new site in place.
What's more likely is that he'd suggest a buy-out option on the site. i.e. you own it but he can buy it at any point for X dollars or %,, perhaps on a sliding scale based on success.
If you think enough of the business to get equity why not ask for it as a part of your deal? It's fair to say that you're forgoing guaranteed payment and want more than revenue to really "be invested".
kodemaster — 2011-06-14T03:02:34-04:00 — #20
Thanks for the information. I learn't so much out of this, I think now it all depends how I form the deal knowing all these factors.
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