Ask HN: Opportunity to earn a cut on every transaction. How big should my cut be? | Hacker News Reader

Ask HN: Opportunity to earn a cut on every transaction. How big should my cut be?

37 pointsalrex02122 comments

I have been asked to put a quote together for developing and maintaining a public web based application for a promising new startup.

Yesterday, I presented a "no strings attached" time and cost estimation for developing the initial version of the app. I took into account that the estimated cost might not fall into their budget and presented two alternatives. Their business model is primarily a transaction based one and is very sound. They have sole rights to distributing the virtual product/service and key retail vendors have come on board with letters of intent. As I suspected, the quote did fall out of their budget range and at that moment I decided to bring forward the alternative somewhat "informal" proposals.

Option B. My business owns the IP on the software. They use it and pay just for maintenance costs.

Option C. They pay less for the system and I get a piece of every transaction.

Today I found out that they really liked the Option C. Now that the two alternative proposals where informal, they want to see something on paper and then we can come back to the table thereafter.

As per Option C, what do you fellow hackers think would be a good deal? What would be a realistic percentage, per transaction, to ask for? (Taking into account that their business very strongly depends on the system I will build and maintain. Also I was very highly recommend for the job by one of their current business partners. :)) Also, how much less should I charge for building the system in relation to taking a cut in the transaction costs? (Is there maybe a ratio as a rule of thumb?)

Any suggestions greatly appreciated.

A couple of thoughts:

(1) as a business owner I would be very wary of a perpetual cut, so I would cap it.

(2) since you're capping it you can demand a larger cut to ensure that you're repaid faster.

I would propose something that would enable you to earn ~2-3x your initial proposal cost over a period of approximately 1-2 years. Ultimately you're giving them a loan. This is "owner financed software development". Think about it in terms of interest rates and the cost of money, not in terms of becoming their partner.

Furthermore, you might find that you can secure collateral for your loan. For example, they agree to pay you over time and secure that opportunity with you by making you a secured creditor on their books.

Good advice. Make sure you recoupe your costs - unless you are prepared to carry some of the cost as a strategic decision for your company.

I am wary of the fact you say 'promising new startup'. I would err on the side of caution and assume it isn't the giant success they(/you) hope it will be.

As a result, I would spread the risk: - Ask for a 'normal' payment, within their budget, trying to cover at least 50% of your cost estimate. - Then be as daring as you may negotiating your transaction cut on the gross.

So, I would reduce my risk as much as possible - who knows if it will take off?

Whatever you do, try and get a (small, depending on volume) percentage of the gross, not net, on each transaction. Maintaining their margins is their job, not yours.

Most industries are not this bad, but reportedly, Hollywood is set up so that no motion picture ever produced is ever profitable. This was originally a corporate practice invented to screw over people contractually due a percentage of the net, but everyone went back to negotiating based on gross.

A less weasely example might be the company simply deciding to take a loss or very low margin at low volumes to enable faster growth.

That might make sense for them because they have an open ended upside. It doesn't for whoever makes a cut.

Any time you take a percentage of the net, you've set up a perverse incentive for the company to spend more money up to the exact point where they're not paying you anything. After all, for them, it's "free" money!

Factors to consider: (or, why nobody here can give you an answer)

1. How much do you need?

2. How much of a cut do you want?

3. What is their established sales volume? (You can lower the percentage if sales volumes are high.)

4. If none, what's their expected sales volume?

5. What's their expected sales growth rate?

6. What is your estimate of their numbers being accurate? (i.e. Cut their expectations by 30% and see if it still works for you.)

7. How much time (in actual $ per your hourly rate) are you expecting to put in on this project?

8. How much time x 30% are you expected to put in?

9. How much is that IP worth to you?

10. How much is it worth to them?

11. How much is it worth to others?

Answer those questions, and then it's just a matter of relative comfort. There's no set formula here, your cut is as big as you want, and as big as they want it to be. IMO, set properly, Option C is the best for you, because eventually, you'll have income for no work. That's the reward for the risk you're taking in not being compensated up front. Make sure that reward exists.

If you give them ownership of the IP with Option C, then you should ask for a bigger piece of each transaction in your contract, ... keeping in mind they may choose not to renew with the same terms at the end of the contract term (1 year?).

If the software is so integral to the success of the project, you might negotiate shared ownership of the IP, so you get something if they sell it.

There's two ways to do it:

1) Go simple - affiliate fees in ecommerce range from 4-8%. Pick a number you're comfortable with and use that.

2) Do the math - estimate their revenue per year/month/week, do a Net Present Value calculation, using a discount rate based on the fact you're getting paid over time, and the fact that you may never get paid. Divide your quote for option A by the NPV, and that's your % to ask for.

i would charge something that "should" recoup your "no strings attached" cost estimate within the 1 to 3 years range. and if that doesn't include maintenance, tack that in there too.

might require you to get them to provide you some data and growth estimations.

I haven't done this myself, so I may be wrong; but wouldn't it make sense to also figure in some cost inflation due to the fact that he is now assuming their risk as well?

If this was an existing company with solid financials, what you are saying makes 100% sense... But this is a startup; there is a reasonably high chance that they won't be around after a year. Like I said; this is way outside of the realm of things I have experience with, so I could be totally off base.

definitely true. which is why i said 1 to 3 years, and i never said anything about stopping charging that rate after you recoup the costs.

there's quite a difference in the rate if you're aiming to recoup the cost in 1 year as opposed to 3.

on the one hand, you want to get paid. on the other, if you're going to be getting paid by a % cut, you don't want your % to be so high that it drives a new, possibly fragile startup into the ground. if you ask too much too fast and they die, you'll never get the full total, instead of getting the full total and possibly more if you were comfortable with a slower rate.

That makes a ton of sense; thanks for following up. (It seems like pretty good advice, as well.)

Another question that now comes to mind is dollar vs percentage? Would it be more beneficial to put flat dollar figure or go with a percentage? Percentage seems a bit riskier if evaluated against net profit. They could potentially right off large portion of the income as a cost to company. Especially that the company is a startup and needs t grow. Just to through another spanner in the works. :)

With Option C, do they own the IP? If so, what prevents them from cutting you out of transactions once they are convinced it is working, and they don't need you anymore?

If you own the IP, then you should think of yourself as a partner. Take a big enough piece of the action to keep you motivated to work hard on the project, ... but you also want to make sure their piece of the action keeps them happy and motivated to grow the business (and you get a piece of a growing pie of transactions).

I don't think you've told us enough to know which rule of thumb to apply.

With Option C, do they own the IP? If so, what prevents them from cutting you out of transactions once they are convinced it is working, and they don't need you anymore?

Presumably a contract!

To confirm. Yes, they are leaning more towards a contract option (outsource) rather than IP. However they haven't written off the IP option fully yet. (If strong enough case, I could perhaps still turn this.)

Ask your self how much you want a year.

Lets say 50k a year for your self = Z. So then ask your self how many sales are expected on the site within a given year = X.

And Y is your amount you should charge per item.

z/x = y. Shoot just a little low unless they are very happy with the idea. Tell them that over a certain period of time, if X exceeds your personal number, you will reduce your costs...

Seems fair and if they sell more, you get more... Each party wins.

It really depends on what their profit margin and volume on the product is. If they make $0 in sales, then you get screwed even if they give 100%

It should be a % of their gross, not their net. Don't make the mistake of letting their profit margin determine how much you get paid.

Be careful. You should either be part of this company or get paid a set fee as a developer. Any other solution isn't stable. A company can't really survive with someone else owning its core IP (Option B), nor would they want to keep paying a perpetual cut for a product that you'll presumably complete/deliver at some point. If you want to go down Option C, take an equity stake.

Maybe a tiered payment approach would also be good. Keep it cheap for them to market the system initially then once they get more transactions you can increase the cut.

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