Web design or development profit share agreements

I had this post in mind for a while, prompted by Neil Dixon’s post on the same subject, however the recent post over at Carsonified and the responses to it reminded me of this subject, and that is might be a good time to add my thoughts to the debate having been on the receiving end of many such offers over the last 7 years.

At edgeofmyseat.com we build web applications, so we chat to people about their potential projects all the time. Every so often I’ll get an email or phone call from someone who is trying to get us to work under some kind of profit share agreement. I find that very rarely do they mention profit share up front, and the fact that someone isn’t honest from the outset is always the first alarm bell for me! We have a discussion about the project, I ask some questions so I can give a ballpark cost, and usually at that point they will say, “I was really hoping you would agree to be a partner in this business”. By which they mean, “I was really hoping you would develop this for free and I’ll pay you if it makes me any money”.

As Neil points out, most of the time with these offers, the entrepreneur has no business plan to speak of. They have an idea and think that if they can just find someone to build it, they’ll be rich! If the entrepreneur manages to find themselves a developer who is willing to entertain this idea they think they have themselves a real win-win situation, they lose the big cost of their venture, and only have to pay anything out if it makes money.

However, it might not be such a great situation for the entrepreneur as they think. Without payment they are really relying on the goodwill of the company or individual they have approached. They will probably find their project at the back of the queue behind any paid work that might come in. Without a well thought through business plan that both parties are excited about, it seems likely that both the entrepreneur and the designer or developer will be left feeling hard done by when the application either never gets built, or gets built but fails due to lack of marketing or simply because it wasn’t that great an idea in the first place. Without the market research, planning and forecasts that should go into a business plan you just don’t know.

That isn’t to say that such an agreement could never work. It could work really well in a situation where both parties are excited about the project, act as partners in the business rather than the developer just doing their usual job that they are normally paid for without the pay, and have a good contract drawn up to explain both parties obligations. It has to be said I’ve never been approached with a tempting enough opportunity yet, and if I were tempted it would probably be with a company or person I already knew and trusted.

The below are the points I would consider if I were tempted by any profit share opportunity.

Does the opportunity have a proper business plan?

By asking someone to work for free you are essentially asking them to invest in your business. Any investor will want to assess your business plan and ask questions. Treat investments of time and skills in the same way that you would treat an investment of money.

Are you happy to accept that I will want to have a say in how the business is run?

As an investor I would want to be able to help the business become a success, not just build what we are told to build. If you want someone to be quiet and just do what you say then you definitely wouldn’t want me as a partner. Any opportunity I was excited enough about to want to be part of, I’d want to be properly part of it.

Is this something I’m excited about?

I would want to enjoy being part of the business, not just see it as another job, so anything I partnered in I would need to be really excited by and keen to see do well.

Is this something I can be of benefit to?

I’d have to feel that my involvement would be more than just my ability to write code – am I the perfect person to be a partner in this business because of my other skills and knowledge?

Is this going to be interesting to develop?

I like building interesting things and I’d be far more likely to take on a project on a profit share basis if the work itself was going to be interesting, would show me and my company in a good light, and would increase my abilities.

Do I like, trust and respect the other partner(s)?

If I am going to partner without someone or another company I need to like an trust these people. I try to avoid having clients that I don’t trust – that goes much more so for those who I am going to enter into partnership with.

I would expect to be happy with all of the above before it even got down to contracts and breakdown of who gets what and when. Then it goes without saying I would expect to be involved in discussions about those contracts and that all parties were happy with the agreement before it was finalized and work started.

As to the comments over at Carsonified that Elliott knows and trusts Ryan, in my view that makes it even more important to have all of the exit possibilities mapped out in a contract. Contracts shouldn’t be seen as a means to beat the other party over the head if it all goes wrong. They should be a means to protect a relationship by spelling out exactly what happens in any given situation. So if either party needs to terminate the agreement for whatever reason, the steps are mapped out and a conclusion can happen without any wrangling or argument, and the relationship stays intact.

I wish Carsonified and Elliott Kember the best of luck, and I’ll be interested to see how their app turns out. This post isn’t really a reaction to Ryan’s post, as other than the details posted there we don’t know anything about the plans that have gone into this. However I’d love to hear your stories of partnerships, or of proposals you have received that you decided to turn down.

Paul Williams on the 19 Dec 2008:

Hi Rachel,
This post reminds me of a job I did for a friend a few years ago. It had a fully fledged business plan, and some money behind it. I was interested but unable to put my full energy behind it, since I was contracted part-time elsewhere. However, there was no contract between us, and I had no real input into the business. (My Bad, and I acknowledge that – a learning experience!) Needless to say, the whole thing fizzled with no marketing budget to speak of, and a lack of decent artwork for the products he was selling. I learnt a lot (new language and startup business experience) but it cost me a lot of time with no money heading in my direction at all. I don’t regret doing it – the knowledge has stood me in good stead since – but if I had the chance again, you can bet there would be a contract in there, and I would have some say in the company direction! So, basically, backing up what you’ve said above!
Cheers
Paul

Ryan Carson on the 19 Dec 2008:

Thanks for the amazing tips Rachel! Great insight.

Relly on the 19 Dec 2008:

All very valid points.
For me, it runs the other way round as well. About once or twice a month, I get someone with a web app they are developing looking for me to write their copy and do some PR/Marketing work for them in exchange for a profit share.
Often these people underestimate what I charge for these services and how long they take to do, so they labour under the false assumption that I’ll be biting their hand off for 10% of their profit in exchange for ‘doing a bit of writing’.

My favourite example was a student who had no budget but wanted me to sign a contract to say I wouldn’t ever sue him to get more than 7% (!!!) of the profits when his idea went stellar and that – and that the maximum profit I could earn was capped at £750. Needless to say I politely declined.

Ben Kerpe on the 07 Jan 2009:

Well my situation is one of perfect harmony… Well at least so far. Our development and marketing company wants to engage into a profit sharing agreement with a very profitable business. All owners including myself is excited but there is one thing missing… A GOOD PROFIT SHARING AGREEMENT. I know the value of a good contract that spells out everything in detail… I am looking for an agreement that is structured for the developers to retain exclusive rights to the site while distributing 50% to the business we are interested in. We maintain the site, collect the money, and pay the business. I need a contract… Anyone know of a good source besides an overpriced attorney?

Ody on the 26 Jan 2009:

Rachel ur da boomb.Ur book The CSS anth.. really really helped me.
Cheers…

Elham on the 13 Feb 2009:

Hi Rachel!
Thanx for your useful book,The css Anthology.

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