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Revenue-splitting arragements; tips, experience?

Anyone have experience setting up a revenue-splitting partnership?  We've been developing an application for a client for about 2 months, and they now wish to license the code from us so the application can be sold into their markets.  They've proposed a 20% split for us on the revenue of such sales (after the initial development costs are paid for).  How does this compare with "typical" splits in the market today (this would be our first deal of this nature, so we're at a loss as to whether this is good or bad).  Are there any common pitfalls that we should be on the lookout for if we do go ahead with their proposal?

Thanks!

Don't hurt the gerbils
Thursday, October 09, 2003

Well, we offer our affiliates a 30-40% cut, depending on how many sales they generate.

MindMaster
Thursday, October 09, 2003

This isn't an affiliate situation; the client will be doing the selling of the application we're developing.  They will be splitting the revenue with us.  We won't be dealing with the end-users at all.

Don't hurt the gerbils
Thursday, October 09, 2003

I would approach the situation with the following non-exclusive guidelines:

1. Keep in mind the cost of providing continued upgrades, technical support, and overhead (theirs and yours).

Make sure you clearly define in your contract (you do have a contract, right?) whether expenses come out of separate profits, aggregate profits, etc.

This is a sticky issue as it can cover employee pay, benefits, advertising, and a number of other open ended issues. Make sure to set expense limits if you decide to share the expenses and have expenses above a certain amount require clearance from a board that you are on.

2. Make sure that you have a contract that defines your liability to your partners and their customers. If you are going to be required to upgrade and provide technical support for this, make sure to state your terms.

3. Clearly define the ownership of derivative intellectual and technological work. You don't want your work further down the road subject to IP issues with this company, nor do you want them reselling your IP to competitors or creating derivative products of their own.

4. Build in an exit path. If you are having trouble getting along with your partner, no longer want to work on the project, or it simply is not profitable for you, you're going to want a step-wise plan for removing yourself from the equation. This can be done with a time limited contract that has a renewal process.

5. Set up a regular meeting to discuss general issues.

6. Build an amendment process that allows for growth into the contract for things you haven't considered and new situations that come up along the way.

7. Make sure to determine when and how checks are going to get paid to you and penalties for delays in the process.

8. Make sure to define ownership of customer information, trademarks, etc. Is your name going to be on the marketing material?

9. Also remember to set bounds for means of advertising so that your good name cannot be affected by actions on the part of your customer. If your partner decides to spam your product to the alt.binaries.erotica mailing lists, you want to be able to veto this.

10. Get your lawyers invovled. A lot of people say not to do this because it will kill a deal, but if you don't, you will regret it in the future.

Those are just a few ideas I've had. We've looked at this type of arrangement before and found them to be much more complex than initial analysis tends to suggest.

Dustin Alexander
Thursday, October 09, 2003

Just watch out to make sure you're getting a percentage of the sale, not of the profit.  If they're trying to weasel you out of money that's a common place for it to occur. 

Money Matters
Thursday, October 09, 2003

Some great points, Dustin.  We thankfully won't be sharing expenses, just revenues.  The points about IP haven't yet been resolved, although we will definitely address them.  I really appreciate your suggestion about making the contract eligible for amendment.

As for the time-limit, that's a great option.  We were going to be setting the contract to be valid for only a certain version of the software, but a time period is better.

Anyone want to comment on 'typical' (if there is such a thing) percentage for splitting revenues in a deal like this?

Don't hurt the gerbils
Thursday, October 09, 2003

I would say it depends on the work, both rendered and future work. If you are going to be continually expanding the product or providing technical support and your customer has simply provided an initial set of business rules, then you should be charging close to 50%. However, if this is a one shot deal that requires no further technical work, 20-30% is more reasonable. This is also dependent on sales volume. If your partner is going to be selling a lot of product and sales is a more significant business role than development, they have a right to more of the revenue.

Dustin Alexander
Thursday, October 09, 2003

The question goes back to how profitable you want the partnership to be. This depends on your running costs and ongoing financial commitment to the project, as well as your estimated and required NPV and ROI figures.

In the sofware field when we first go into it, it was not uncommon for external sales organizations to receive 50-75% of sales revenue on commission. This was when software products were average $1,000+ in sales and required 20k to develop.

Dustin Alexander
Thursday, October 09, 2003

If you simply used a dealer/sales organization to sell the thing for you, the dealer/sales outfit would buy each copy from you anywhere from 50% off your "list" price to 20% of the list.  This means you would keep 50% to 80% of each list price sale, depending on how well you negotiate.  You would be expected to send some money back to the sales org for marketing (usually buying ads in their catalog) and you would have to handle technical support.

Use these figures as a guide and adjust accordingly to your own particular situation and hassle factor.  Get it all in writing, and don't feel you have to accept the first offer.  Make sure you get in writing how often you get paid after a sale or a month's sale - collections can be one of the most difficult and least appreciated aspects to running a business.

Mitch & Murray (from downtown)
Thursday, October 09, 2003

Why do they want the code rather than the product? I would say you're being set up. Work to licence the product and you will have much better prospects.

Also, in these arrangements, be very wary of giving anyone exclusive licencing rights. If you do that and they don't sell it, deliberately or otherwise, they've stuffed your business. (By the way, this does occur.)

.
Saturday, October 11, 2003

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