Sweat Equity

Discussion in 'Growing and Managing a Business' started by kalyanbk, Aug 24, 2010.

  1. kalyanbk

    kalyanbk
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    A colleague of a friend is creating a startup. This person has absolutely no knowledge of the product (Mobile software) he wishes to sell but has a good network of business contacts. He relies completely on me on everything from creating prototypes to booting his computer to marketing with customers to train his developers (who are housewives) working part time. Over time he wishes to gain business and create permanent jobs.

    I gave him two prototypes built on my own time and infrastructure and gained him space to talk to a customer. He now wishes me to release the source code of these prototypes for his developers to reverse engineer and understand. He also wishes me to work for "Sweat Equity" which will be diluted as he gains more engineers also on sweat equity. In effect he wants me to be a partner but at present is unable to clarify how much of the company I will own or how I will be actually compensated for work which may or may not result in business.

    If I ask money he says I will give you once we get some revenue from customers. I wish your advice on what I should look for when accepting such "sweat equity" positions. I am currently employed and this could be an opportunity to start something big but then time is also money and I may not see any for a long time if ever and what happens if he requests my intellectual property? Or asks me to share the travel cost to a customer? or spend two weeks creating prototypes or training his developers?
     
  2. Lingua21

    Lingua21
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    In my opinion, it looks as though this guy is taking you for a bit of a ride and you are broadcasting on this forum the fact that you could be a bit of a soft touch.

    You need to put some kind of value on your efforts and start to gain a bit of respect. Maybe you should put your foot down and ask exactly where you stand. Start the ball rolling by charging for the release of the source code and see what the reaction is.
     
  3. Fergal

    Fergal
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    Welcome to Business Advice Forum kalyanbk, thanks for joining. I'd agree with Lingua21 that you really need greater clarity, if you are going to be doing so much work you need to know what percentage of the company you will own.

    You say that you are developing the product and also playing a leading role in marketing it. From the sound of that you should at least be an equal partner in the venture. You deserve respect and recognition and to have a say in how the business is being managed. You should not allow yourself to be treated as inferior or subservient to him in any way.

    Why do you need this other person, what does he bring to the party?
     
  4. ArcSine

    ArcSine
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    An excellent point, Fergal. In the original post I see he has a "network of business contacts". Yawn.

    Kalyanbk, this chap's refusal to commit the arrangement to a written partnership / joint venture agreement means one thing: As soon as you've voluntarily handed over that source code, and trained his amateur developers for him, you're out in the cold.

    I'm glad you see that his vague, smoke-blowing offer of "sweat equity" can be quickly and easily diluted into nonexistance...and it most certainly will be.

    This is NOT to dissuade you from jumping on board a potentially lucrative biz op. With your technical skills, you should be exploring and vetting opportunities like this. Just keep in mind that you want to partner with people who have the kind of serious business savvy that can really make a biz fly. And folks like that, by and large, are sharp enough to know that you get business arrangements clarified, agreed to, and in writing, very early in the process. Best of luck, amigo!
     
  5. kalyanbk

    kalyanbk
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    Thank you

    Thank you all for your kind and helpful responses. As suggested by all of you, I requested the person to submit a business plan, clarify my role and stake in the company, show projected profitability and how compensation and valuation of the "sweat equity" will happen. The person provided a very amateurish business plan that had no financial details at all. He also threatened that my presence in the "team" was based on contribution. I put my foot down as suggested and requested for my efforts, part cash payment and rest sweat equity as partnership stake and also asked for a nominal payment for the prototypes along with a formal contract/agreement. He has not spoken to me after that.
     
  6. Fergal

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    It's a pity that he has not spoken to you kalyanbk, we live and learn and we learn most of all from our mistakes. Sounds like you have gained some valuable experience and knowledge from this situation. Maybe you can find another business partner to go into business with.
     
  7. ArcSine

    ArcSine
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    Kalyanbk, while there's no way at this point of knowing whether this guy's headed for boom, bust, or something in between, it's frequently true that guys such as you've described are much more adept at generating liabilities than revenues. If so, your membership on the team might have entitled you the privilege of sharing in a bunch of expenses and debts.

    So perhaps, treating yourself to a nice congratulatory dinner this evening is in order, and you can toast yourself on the money you didn't lose on this one. While you're at it, keep in mind Fergal's point: If you've got the expertise at developing marketable programs, other (bona fide) deals are out there needing your input. Cheers!
     
    #7 ArcSine, Aug 25, 2010
    Last edited: Aug 25, 2010

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