from Hacker News

Ask HN: Joint statement of profits - have you heard of this type of arrangement?

by calydon on 7/9/12, 11:42 PM with 2 comments

I've been laying some groundwork for a website that I got started on with the understanding (although I may have 'misunderstood') that I was entering into a partnership agreement for 20% of equity. This seemed like a good deal because the principal is assuming most of the risk and they have the experience to get the product line we're selling. Something I could never do. My role is tech.

I know the principals well (they are blood relatives) and so I had no trust issues.

Now that we're ready to really to start grinding into the main part of the work I have not yet seen the articles of incorporation, so I don't know if I'm on the board, and have 20% of shares or not. I asked for a written agreement between us before we go further.

Today I got an email from the principals saying they will sign a 'join statement' to the effect that I will get "20% of all profits from all online sales or sales that are driven by the use of the website".

Have you heard of anything like this? At first I thought it's a bad deal, but then I realized it needs a lot more information for me to make that determination. For example, am I an employee who has to work a certain number of hours to earn that 20%? How are 'profits' defined? Is it even wise for any business to sink 20% of their profits into a single 'individual'? I guess I'm not a partner so I can't call myself that.

What should I come back with in terms of questions and responses?

  • by richardv on 7/10/12, 12:24 AM

    Profit share is always going to be a really bad idea for you in building a new company.

    How can you rightly invest your time in a project, and want to see it succeed if you are always looking out for the short term gain, rather than the long term future of the company.

    The correct decision might be to reinvest everything for a year. But this reinvestment will never ever ever (cannot stress this enough) be returned back to you.

    You will always want to see as much money be removed from the company as you can. Because any costs or reinvestment, immediately hurt your personal bottom line, and, if you are wanting to drain your new company, then it's always going to fail.

    20% Profit share is a really bad deal. Ideas aren't worth anything. It's the execution. What are you bringing to the table? What is your cofounder bringing? Can your partner execute his idea without you? Can you execute without your partner?

    Insist on equity, because otherwise you are a dead weight since you can never allign the companies better interests with your own.

    If your partner does not realise this, then he is stringing you along.

  • by wmf on 7/10/12, 12:08 AM

    A lot has been written on this topic: http://www.google.com/search?q=profit+share+vs+equity

    Note that rapidly-growing companies often have zero profits.