Ask HN: How much equity in SaaS partnership? | Hacker News Reader

Ask HN: How much equity in SaaS partnership?

8 pointsnoobaloob6 comments

I run a web development agency and recently was contracted to build an SaaS MVP for a client. The MVP has performed well and validates their idea. The client has a recurring sales stream that appears to have potential to scale up pending additional development work.

They are now interested in partnering with us to provide future development in exchange for part ownership and equity. I'm interested in the proposition, but have never been through this process before (neither has the client). I've talked to an attorney about contract details, but I'm not sure what a "fair" share of equity is.

They bring the idea, about 6 months spent validating and refining and designing it, the initial investment in the MVP, and a sales and marketing team. We bring everything on the tech side. At the moment, sales is done 100% over the phone by their team.

I'm leaning towards an arrangement where we start with a smaller piece of the pie and earn equity based on pre-determined milestones (product features).

At what percentage should I start the negotiation?

Not to sound like a douche, but without the full context of the SaaS business and idea (or at least information on the target market and market size, traction thus far, potential, resources available to the other company, etc), I don't see how anyone here is going to be able to help you.

If this other company are a couple of guys that make some calls from their bedroom that are the 'sales/marketing' team, etc and the product is yet another CRM solution then you'll want a much larger percentage than if you're dealing with a company that has a number of staff, millions of dollars, etc to throw at this project, in which case you'd likely be proposing to take on a much smaller stake.

More info needed. :-)

The market is huge (local businesses). They can sell (and deliver on their pitch) at a higher price point (~$130/month per user). Potential is tough, but it is reasonable to believe that, at the current rate, it could be generating $1M+/yr in a year or two. As far as resources, they are a small company, but have access to a sales force that is very inexpensive and can close on cold-calls, both in the US and internationally.

I believe they are looking to partner because they either can't afford, or don't want to pay upfront for development. They are non-technical for the most part and need consulting/advice in that regard.

Okay, a few more questions:

What are the SaaS company's founder(s)'s backgrounds? Have they launched and run a successful business before? Are you sure they really know what they're doing?

It sounds like you don't really stand to lose anything - you can continue your agency business whilst siphoning some of your teams hours off onto this project. On the other hand, if this other company has the 'vision' and all their needs catered for, except development, that leaves you in a somewhat weaker position (in my opinion) as they could pick any decent agency to do their development. Is their anything unique about your relationship/agency to them, other than having developed the MVP?

I'm not going to be able to advise you on a starting percentage since I have zero experience in negotiating these kinds of things, but I imagine this is all information anyone here would need to even take a vague stab-in-the-dark guess at a starting point for your negotiations.

How does equity work in SaaS? Does accounting just cut you a check for your percent of the profits each quarter, in the form of a dividend? Or do you only get a percent ownership that you may not see materialize until exit, in the form of a capital gain?

  > They bring the idea, about 6 months spent validating 
  > and refining and designing it, the initial investment 
  > in the MVP, and a sales and marketing team. 
  > We bring everything on the tech side. At the moment, 
  > sales is done 100% over the phone by their team.

Is there a particular reason that they aren't seeking investors, and then just hiring your firm for the work they need, or hiring their own employees?

(edit: This seems like a good question to ask on http://answers.onstartups.com)

I think it's easier. They already have the relationship with us, we are familiar with the product, we fill in all the existing gaps, etc.

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