My agreements with my business partner are based on royalties (20% of all sales and renewals). He works in an office and deals with customer support, I work remotely. He covers all business costs. Our agreements included payment for development work, however then I have needed to pay these pay with reductions in royalties -> I was given an interest free loan for my own salary, and eventually he's out of pocket nothing for development costs. Total income for our royalties agreements across time equate to 2 x yearly average salaries in my home country, but spread across the last 6 years.
Now he's discussed selling the business. If sold, I would receive royalties for the balance of our agreement, using the average sales for the last year.I made a mistake in that I agreed to the 20% royalty rate without negotiation initially, I know that much. I have worked many hundreds of hours under these agreements, and he agrees sales have not been as we would like - but of course, with 80% of the income, it's still (roughly for him) 3 -> 3.5 an average salary per year.
I wish to renegotiate our agreements to include a clause that gives me part of the sale value of the company as a cash payout, the reasoning here being that my work has increased substantially the value of the company. At say a valuation of 20 x the average salary, I was thinking of 10% i.e. two years of an average salary. I feel that my value to the company is larger than what is being recognised currently, given my contributions (i.e. every single line of code in the company's products have been written by me).
Am I being unreasonable here?
(edit: And to be clear, a good lawyer is 10% the written details in the contract and laws and regs and 90% understanding the relationship dynamics and your interests, being able to suggest a range of written structures and terms that capture tradeoffs, and being able to negotiate effectively. Ideally, a counselor.)
Some meta thoughts-
* there are all kinds of contracts and all kinds of relationships. Reasonable is in the eyes of the beholders, and depends on what they value (the business vs the person, etc). I have heard of much better (for the developer) terms, and much worse, than yours.
* from business perspective, the question ultimately is one of leverage. The question isn't how much you have contributed to the business- if your partner thinks that way then they value the relationship with you over the value to the business, and the terms you work out are dependent on how you value the relationship with them.
* a business is acquired for the future value it will bring to new owners. The question there is how much is your future contributions are worth to the business. If you are not needed or are easily replaceable and the product is turn key, then your value is zero. If your contributions are needed, then your value is very high and you should try to structure the future relationship accordingly.
Again, these are meta-thoughts only, the most important task is to try to find a good lawyer who is in your area and is familiar with these kinds of situations. Good luck.
I really wish more people would take this to heart.
I can't even begin to comment on the OP, as I am sure there's a lot of stuff left unsaid.
My experience with "My work is the valuable part" is that it is often extremely one-dimensional, and fails to take into account a lot of "soft" factors, like marketing and brand-reinforcement; which are incredibly valuable, and look like "fluff" to hard-core developers.
That said, I do think that "non-people" people can be abused and treated quite badly by slickers and carpetbaggers.
Sounds like this is a very long-term relationship that has benefitted both parties, so I would gently suggest that spraying it all over HN may be adding gasoline to a fairly minor bit of flame.
On a related note, if the prospective buyer is likely to value your future services highly, the lowest friction way of getting decent money is likely to be focusing on ensuring any buyout has a high salary/earnout clause for you [rather than trying to renegotiate the original agreement]. That's especially the case if the buying company is used to paying some of its developers or product managers significantly higher salaries than your current income anyway.
You will probably have a pressure point that you can exploit with respect to the sale. ie you can refuse to work for potential new owners. Even if you are pretty replaceable, I think most potential buyers would be scared off by having to replace the sole software engineer who understands the codebase. eg the small software business sales I'm aware of typically come with commitments around the engineering staff. Be aware that doing this may burn your relationship with the current owner. As in all negotiations, make sure that you are actually willing to live with any options you bring up. Your rights here are so fact dependent that you must get legal counsel in your jurisdiction.
One smart way to approach this negotiation would be to write a contract agreeing to a minimum work period for the potential new owners; as a cost, you would need some percent of the sale price. Again, you must get yourself a local attorney experienced in these types of negotiations.
One point I would bring up though, is that engineers often wildly overestimate how easy it is to turn lines of code into cash. It is quite possible that the business end of this business holds all the leverage. When OP says eg he or she has "worked many hundreds of hours", this sounds like low maintenance software that the business owner can continue to sell for quite a long while without any ongoing engineering.
It wouldn't be easy, I don't believe, and I'm generally quite negative about my own development abilities and values.
One point I couldn't fit into my original post is that I do have what I believe to be a good relationship with my business partner, but I feel he's disconnected from what valuable and capable developers make outside of his business. Also, he may well not be able to sell the business at all, and in that case he's suggested I could take over as manager (for higher pay), however I would be living with the potential sale hanging over my head, and not knowing whether this better-paid role would ever eventuate.
> this sounds like low maintenance software that the business owner can continue to sell for quite a long while without any ongoing engineering.
That's probably a fair statement, although there are normally updates we put out a few times a year due to changing business parameters in our market, and once every year we do a major release with new features.
Regarding the 'soft' side of the business, what I couldn't fit into the original post due to maximum length is that I've been the driver behind improvements to sales and marketing - 2 new company websites, I do all the SEO, and I've suggested strategies like blogging etc in terms of getting new eyeballs to the product.
There’s a book “Never Split the Difference” by Chris Voss that will get you up to speed. His videos on YouTube are also potent.
Ideally, you want to avoid the “I brought this” style of language; what else is someone to do than think, “well I brought this, too!” It gets especially tense if the evidence is too damming, so the protection mechanisms kick over rather than the empathy and cooperation channels.
Good luck - you got this
I totally agree with this part, but I also think it’s valuable to get an option from the strangers because it may give you a different angle to look from or suggest things that you (or your lawyer) might’ve missed.
The reason I would explore a friendly conversation first (and on agreement bring in a lawyer to write this up and sign) is that the amount you want is pretty small and, as the sole technical expert, you leverage is high. New owners will likely want to ensure technical support post-sale and you might have more weight than you think, even to a point of making or breaking the sale.
Thus the interest of the current owner in keeping you on board may be WAY more important than whatever paper you signed 15 years ago. If you really are the only person who knows how the product works under the hood you might get your 10% from the current owner and a retention agreement from the new owner.
Personally, I would probe gently with the current owner before bringing your own lawyer in. Just my 2c.
It completely changes the tone of the conversation, no matter what. A lawyer will gives you a list of all the things that could go wrong, and all the bad behavior your partner could have (because that's what he's used to seeing). This will have an impact on what you're going to tell the other person, and could really cripple the quality of the relationship.
I believe talking to a lawyer should be done before signing anything after an oral agreement was found (just as a precaution), or if no agreement can be reached.
Note: obviously my advice only applies if you already know the general best practices of an industry. If you feel like you know absolutely nothing, then ask people around you that had similar deals, people in the industry, etc, and maybe a lawyer, if he's really specialized in the IT business.
Talking to a lawyer before any contentious business conversation is always advised but what is the experience like?
Depending on your temperament, I think it makes sense to do a quick consult with a lawyer to get a 15-20 minute consult before approaching the owner.
Assuming OP doesn't have legal expertise, they are essentially trying to debug a problem in a domain they don't understand. Having a domain expert on hand could be a good idea.
I'd just tell the lawyer that you really want to work things out with your partner. The lawyer can certainly tell you how to make the situation adversarial, but they can also tell you how to approach win-win negotiation from a position of strength.
Convince your partner that the buyers will need you, and will only get you if you're happy with the terms of the sale. If you can enlist the buyers in this campaign, so much the better.
Don't be surprised if your partner "switches gears" and tries to convince you that you are being unreasonable and selfish and screwing up the possible deal (or future deal) with these "demands." Sometimes people present as friends only because it doesn't cost them to do so, but change their presentation when being asked to reduce the amount of money they may have been counting on receiving.
Be ready for that to happen and understand that your actions are not "ruining a friendship" they are merely illuminating that the friendship was an illusion to begin with.
If the buyer doesn't like your position, they may walk away from the sale - that may upset the business owner, but it also re-establishes your leverage. If the owner wants to sell and buyers need you but won't accept your terms, then you can explain to the owner that in order for you ask for less of a retention bonus from the buyer, you'll need the owner to give you a bigger percentage of the sale price.
20% of royalties is not wages, and implies some sort of IP ownership agreement. Do you have such an agreement in place? Are there any patents with your name on them? The IP is (very likely) one of the assets of the business and will be listed on the net worth balance sheet. If you own a portion of the IP, you are entitled to a portion of the sale value of the company.
If not the IP, then do you own any percentage of the company? You say he's a business partner, but it sounds like a work for hire arrangement (see first para). If the company owns all of the IP and your partner owns all of the company, it's basically his company, and you might be out of luck. You could still try negotiating a fairer payout, but it would be up to your partner's largesse. Furthermore, as you probably realize, the new owners are not obligated to honour a work for hire arrangement.
[IANAL] Labour - yes. My understanding though is that despite wages, etc. the copyright/IP belongs to the engineer until there is an assignment agreement in place - that piece of paper we all sign coming to a new job and every time again when our patents get filed. If it were in the US and the OP doesn't have such assignment signed, i'd think the sale of the company without his cooperation would go nowhere.
The engineer could file a lien in that case. Perhaps that might give the buyer pause, or they could decide its easy enough to fight or pay out and may go through with it anyways. Liens do not block a sale if the buyer is willing to assume the risk.
And I have a "suspicion" assigning full copyright to your partner, of the code you wrote, may have something to do with it.
"hey i thought about our agreement and i'm not that comfortable with it" I would like to discuss it with you.
Edit - looking through OP's commenting history, it appears they are working on the real estate market software. In this case it is very likely that the company is being sold for the list of its customers to a larger competitor, to allow migrating customers to the competitor's platform. In this case the OP has little to no re-negotiating power, because the product is not what being sold here.
Definitely talk to the owner. Maybe start by asking him, how does he expect the process to work? Will you be expected to continue working on the product? (play naive). Then let him talk, see what he’s thinking.
Best to be calm. This is your strong card, but keep it low key. This will emerge during the sales negotiations. The owner is likely to present you with a new contract to sign during the sale process, and this will be your moment to negotiate a fair outcome.
And you definitely want advice from a lawyer, starting now. At a minimum to review your existing contract.
> Your position is stronger than you think. A buyer will want your cooperation as a top priority.
To emphasize this: as the sole developer, the buyer is going to want to retain you (at least for 6-12 months, depending on the complexity of the software). The buyer's tech team is not going to want to reverse engineer software that's 20 years old. The owner of the company knows this if he's talked to any potential buyers so far (and if he hasn't, will learn it.)
> Best to be calm. This is your strong card, but keep it low key.
The owner may resist your initial ask. If you at any point see red and are tempted to raise an ultimatum, step away from the send button / tell him that you'd like to continue the conversation later. The worst thing you can do is back him into a corner where his ego gets involved. You may well run into conflict, but better to leave him aware that you disagree until you pick up the conversation again than to get into a heated dispute (that will incentivize him to think about a solution in the meantime too).
Would you directly ask your personal network? Make a public Twitter announcement asking for recommendations? Just google "good lawyer for tech stuff"?...
And I don't mean fists or violence type of power. It's much more what power do your future actions have to impact the sale value of the company? Those are the things that matter in a negotiation.
When people talk about what's fair or reasonable, as the OP is doing, I think they get lost in arguments that don't hold any water. "I put in so much work" is much weaker than "This is how much money you'll make if you change the deal and how much money you'll lose if you don't change it."
So, looking at it from the perspective of where do you have power, mainly you have power to keep working up to the sale of the company, to keep working after the sale of the company, or to leave right now.
Do any of those things change the value of the sale? If so, you have a pretty clear path to negotiating for a piece of that value.
I've been the business owner giving out a deal like this recently. The deal was that I'd guarantee a minimum amount of money and split the revenue, but I'd maintain 100% ownership. I think I was a bit more up front than this owner about what the implications were.
IMO, even without ownership, it can be a pretty good alternative structure to a flat contracting rate or salary. For the employee/contractor it gives a lot of upside, while still giving the owner some leverage to renegotiate down the road if that upside gets out of control. Given that the future is hard to predict, this allows for some punting on deal terms. I literally told the counterparty, "If this really works, yes, you may live with some anxiety that I will come back and try to squeeze you."
In practice, this deal has made a lot of money for both of us and the counterparty has been protected by my fear of losing continuity or momentum in a business that's doing well.
But this also points to these sorts of contracts only being appropriate for experienced people. If you aren't comfortable that contracts are not permanent and that they can and will be renegotiated as leverage changes then you shouldn't be in these types of deals.
As far as being unreasonable: The sense I get from reading your narrative is that from your perspective, because you wrote the code for the software, you are responsible for a large proportion of the total enterprise value. I think that in general, engineers tend to discount the contributions of the business side of things. Reading between the lines (and correct me if I'm being uncharitable here), your partner is responsible for the idea and overall business strategy, all capital and expenses(!), marketing, branding, sales, contracting, and customer support. So even though you wrote the code for the product, there's a very large gap between that and creating a competitive and profitable product. He probably views you, with some justification, as more easily replaceable, which is why he perceives you as having less leverage. So while you should certainly try to get as much as you can out of the situation, this description of events doesn't strike me as being particularly unfair to you.
Do not approach anything without consulting lawyer first.
Even if you see an advice that sound reasonable, don't follow it without consulting a lawyer. A lot of stuff is dependent on your current position, location, local laws, implicit and explicit clauses. Only lawyer can help you figure this stuff out.
The only other advice I can give you, don't settle on one/first lawyer. Find 3, consult with each and only then make decision with whom you want to proceed. You can use gut feeling at that point. Good luck!
The best thing you can do is ask for 50%, then when they refuse, get out of the partnership. It took me a couple of decades to learn this simple truth, and cost me (I don't even want to think how much) money. I basically worked for less than $1 per hour for YEARS.
If you take the 10%, then treat it like investment income and don't do any more work on the product. It's a big world out there, and the opportunity cost of sticking with it is the income you could be receiving from other projects.
Sorry to be harsh, but this is the #1 thing I wish I would have told myself when I was young and motivated.
> I made a mistake in that I agreed to the 20% royalty rate without negotiation initially, I know that much
This is the root of the problem. You were always hoping some day this would be corrected, and now that day is here.
I'd recommend crunching the numbers and back this up with data. There should be spreadsheets and charts made of sales figures, expenses, salaries, profits, loses, etc. Prove to your partner that you didn't really get a fair deal as the deal doesn't consider a sale. You should get more simply due to the change in risk.
This is far from completely necessary though so it doesn't give you much. You are not being unreasonable but don't be surprised if your partner doesn't respond positively to your attempts at renegotiation.
That sort of advice is hard to provide without thorough context but few things to think about:
1. How key are you the sales process? If technical due diligence is a big part of the sales process then you have leverage. 2. Are you a key employee that the acquirer will want to put under contract for a couple years to ensure continuity? If so, you have leverage. 3. Do you generally get along w your employer? If so, you have soft leverage.
As an earlier commenter said, it’s all about leverage, leverage, leverage. No (or almost no) owner is going to give you a significant portion of his or her windfall because it’s “the nice thing to do”. This will only get done if you have leverage and the courage to use it.
P.s. there are all sorts of expensive tax implications here too when it comes to ownership transfer. Lawyers and accountants will be needed but not until you’ve neared some agreement in principle.
2. Prepare to cut your losses in a worst case scenario. The best time to contractually quantify ownership stake is before you enter into the engagement. By the end, you have neither contractual support for your expected ownership stake, nor the leverage to ink it into a legally binding document.
3. (my $0.02) Practically, the most you may get from this scenario is a very expensive learning experience. Whether or not you have the grounding to enter legal proceedings (or threaten that), the payoff compared to the mental and financial cost of litigating are likely not in your favor.
Sorry this had to happen to you. It happened to me, too. I learned a valuable lesson when it comes to doing this kind of work -- you need to get an airtight legally binding document before you start working, or else you'll be exploited. That your business "partner" never formally entered into a contract with you likely indicates the latter.
If you take that tack you’re going to end up with the short end of the stick.
I realize you’re just asking for info but you should state this more positively. “My value to this company is $XXX as sales went from $A to $B and I can continue to grow it”
Just that simple update changes the power dynamic and also puts you in a better mindset.
Because I can guarantee you’ll crumble in negotiations when the buyer says “20 times a yearly salary! That’s far too high!” And you, as a software dev that probably undervalues your worth, will likely agree. Now you are on the back foot trying to justify your 15x, then 10x, then 5x, then some sort of rev share as they keep on chipping away.
Also, in addition to your contract, think about any emails or even conversations that affected your relationship. Most people don't realize that oral agreements are just as binding as written agreements in nearly all cases (not for transfers of land, or agreements that, by their terms, must take more than a year to complete). The difference is that oral agreements are more likely to be a he-said-she-said, since there is generally no documented proof of the precise terms.
Two Questions:
1. How important are you to the ongoing revenue of the business after it changes hands?
If you're an ongoing key person, you do have some leverage with the current owner. You may have even more leverage negotiating a consulting contract with the buyer. This is a business negotiation and then a lawyer can help you draft a good agreement.
2. Do you believe your 20% royalty continues in the event of a sale?
If your 20% royalty is supposed to survive the sale, maybe you should negotiate a buyout of that royalty. There are lots of factors in valuing this, but your anchoring point would be 20% of the expected sale price, and its a financial discussion not a fairness discussion.
One very unfortunate and many times unfair part of negotiations is they are based on your future work, not your previous work.
Also hundreds of hours of work for 2 years of salary sounds like you are well compensate already.
If your partner doesn't want to entertain renegotiating, then maybe say from this point forward (since he is aiming to sell the business) that any dev work needs to paid for separately from the royalties on existing work. Find other work in the meantime (maybe before this step).
If you can get a good job elsewhere or otherwise monetize your time, you are in a good position. If the company fails without you, you are in a better position. If he’s able to replace you easily you’re in a weaker position.
Also - if he’s covering expenses and you aren’t, it’s not really an 80/20 split. If costs equal half of sales, then it becomes a 30/20 (60/40) split.
But out of interest:
* are your "agreements" a legal contract, or verbal? Are you an employee or a contractor?
* what are the terms wrt duration? was it 20% royalties while you continued as a developer, 20% for the lifetime of the product? Do you have any say in e.g. pricing/offers, which would affect sales/sale price, and hence your %
* you say they "included payment for development work" but that "however then I have needed to pay these pay with reductions in royalties" - if it comes out of your royalties, how does it include payment for dev work? i.e. how does this differ from "not included payment for development work"; Do you mean he gave you an upfront loan to cover living/dev cost, but there is no additional payment for these on top of royalties?
* is your salary 2x avarage salary (in your home), or 2x salary for that job type or industry?
