Equity Advice??

[ribble]

Right,

I am going to be working on a new plan B for a mate and need some advice on how to structure my compensation. Basically we have had initial discussions and I will be developing some bespoke software to manage his company in return for some equity of around 10%. Obviously I want to make some money out of this so if he is making £100k profit in a couple of years then I will expect £10k. At the same time if we resell the software he will have a profit share in any sales.

My question is how I tailor the agreement so I get a guaranteed return as the way I understand it I will only make money if he takes dividends etc. Has anybody else got experience / suggestions on the best way to structure this kind of thing?

Cheers,

Dan

[moorfield]

Why not just agree a contract and invoice through your own ltdco ?

Then you have complete control over your own dosh and are not reliant on the board of another company deciding whether you may or may not get a divi payout in future.

[HappyOnHoliday]

Correct, 10% of shares does not guarantee 10% of profit.

If you want 'guaranteed' returns, based on company profit or revenue, you will need to have a shareholders agreement in place that sets in place the various protections to make sure it happens.

[GreenerGrass]

The guy who wants the software written probably doesn't have the money to pay him, and won't until the business takes off. As such offering equity is the only option, and although a gamble (you may end up with nothing) if the business is a roaring success you could end up with passive income for a long time, or equity worth more than the amount of work originally warranted.

I would suggest they set up a limited co. and make you the holder of 10% of the company shares from the outset, or award you them once the software is completed. Also get a solicitor to draw up some papers to make the whole thing binding and get an agreement.
IMO it's still a gamble and you'd have to have a high degree of trust to invest a great deal of time in the venture, but "he who dares Rodney".
If the owner has no plans to ever sell the business on eventually (or buy out your shares) it will be hard to ever realise the equity apart from over time through dividend income.

[XLMonkey]

My question is how I tailor the agreement so I get a guaranteed return as the way I understand it I will only make money if he takes dividends etc. Has anybody else got experience / suggestions on the best way to structure this kind of thing?

You're options are:
- service contract. He just pays. You might agree to defer the payment until the company achieves an agreed total level of turnover or profit
- licence agreement. You retain the IPR in the software you develop, and then he pays a licence fee based on sales/revenue through the company.
- equity stake. You only get the money when the company takes dividends. But, bear in mind that if you own 10% of the shares, then you should be entitled to appoint a director and have a say in whether and when dividends are taken.