Partnering with an established company on a revenue sharing basis

I have been building a web service over the last year, and I have recently been in discussions with an established international company, on customising and licensing my web service to sell to a niche market that they are well established in.

They are offering a revenue sharing agreement whereby I am responsible for development and hosting and they are responsible for sales, marketing and frontline support.

For me, the development is largely done. The core features of the service are complete, so we can go to market very soon with a little extra dev work.

For them, they already have a large group of customers in the niche market who they can easily sell this too, and in fact have already attracted some early adopters to trial the service with and the new service will also tie in nicely with their existing offerings and allow them to upsell. Plus they already have the frontline support staff in place from other software offerings.

So, my question is, what would you think a reasonable percentage would be to offer them on a revenue sharing basis?

Also, should I start higher than what I believe is a fair rate, say (50/50), in the hope that they will settle for less revenue.

Bearing in ming though that this agreement has the potential to kickstart my business so I am very keen for it to happen.

Thanks for taking the time to read this, and I hope someone has some insights for me :)

This is a great start and congratulations, most don't make it this far.

(I'm not a lawyer, this is guidance for you to start approaching a lawyer)

That said, be careful your about to put another company in between you and your money.
Its probably easier for them to replace you than it is for you to start getting a new client base elsewhere if it all goes wrong.

Things to make sure you have thought about:

• You want to make sure your going to get paid, often. What is the exact trigger for you getting paid, can you calculate it yourself or do you rely on them? (don't rely on them).
• Don't be exclusive. IF your signing contracts they will try for exclusive. You say you will consider it once they have proven themselves, apart from that your job is to find other customers and sign them up too. Otherwise your just a division of their company that they don't have to carry legal liability for.
• Make them prove themselves. Set targets for 2, 3, 6, 12 and 24 months. If they hit these figures you know your safe. Your key risk here is that you are "a possible" revenue stream, if its too hard they will loose interest, your stuck with no money and they hold all the clients.
• Assume your going to still be doing work... "the development is largely done" is a lovely thought but in 25 years of doing this ... its never done. Make sure the "Revenue" pays for you to keep improving and bug fixing ... and if you think it will go well ... factor in 1 more cos the demands will most likely grow, not shrink.
• Work out when you get paid. Don't make it once a year after they cover costs ... you will most likely starve. The best answer is "when their customer swipes the credit card, 50% of that amount is transferred to your bank account". Next best is your system can track each "payment event" and send them an invoice every month. Anything else be VERY careful.
• Try to work in a minimum service/support charge. This is important for both parties if you sell it properly. If they are selling something they will need to know your available and focused on THEM (you may get other clients remember). You will trouble shoot their problems, answer their questions (there will be many to start with). This is separate to the revenue share which you both benefit from when everything is going smoothly. This is also your key negotiation tactic, lower your 50/50 raise this up to balance it out, this is safe money now, the "sharing" is the upside assuming it all works. Ideally this should scale to match volume.
• Intellectual property (IP). Focus on this, you own it, you will continue to own it, do not give it away. If they buy shares in the company THEN they may come to own it but while its purely "revenue sharing" then they are a customer paying you as a supplier. They are not paying you to develop their system. They are paying you for usage of your system.
• Make sure you have a legal company LLC in the US, PTY LTD in Australia ... each country calls it something different. Its important as you will start to grow and need it.
• 50/50 in other words is "your price to them is 1/2 of the price they charge their client".
  
  • What are they charging their client? If they can't or won't tell you, you have a problem.
  • Is 50% of "retail price" enough for you to grow? What volumes do they predict in the first 3, 6, and 12 months? can you pay yourself from these volumes?

Their doing this way because to them it feels like it is less risky, which means your probably carrying whatever that risk is.

(I'm not a lawyer, this is guidance for you to start approaching a lawyer)