4 ms·

How much equity should I give to first client?

• PaulHoule 4y ago
  I've never heard of a client taking equity in a consulting shop. In fact, I'm not sure if I'd want equity in a consulting shop or if I'd call a client with equity in a consulting shop a "client". Consulting shops are not startups. You can scale the revenue of a consulting shop 10 times... By hiring 10 times the salespeople and 10 times the devs. It's not impossible you could start the next Infosys but the usual cycle for a consulting shop is it has some success, makes some modest profit, accumulatse some "technical debt" and legacy technology, then get out-competed by hungrier and scrappier competitors that are not weighed down. Some variations are: (1) some ambitious salesperson strikes out, poaches some of your customers and some of your devs or (2) the company tries to develop a software product or product line (I worked at one place that made an e-commerce package for wineries) which I'm going to say fails 49% of the time, succeeds modestly 49% of the time, hits it big 2% of the time. I am a technical person through and through but I am thinking that I am not hearing a story I believe about sales -- which is equally as important as being able to do the work. I think compensation in terms of equity makes more sense for salespeople than it does for devs for the same reason why salespeople frequently get a commission. It's not unusual for an offshore team to be fronted by somebody in a more developed country (e.g. I knew a Reddy who lived in L.A. and had a team in India) but it is a tricky relationship to figure out.
• Archipelagia 4y ago
  That sounds very suspicious and is most likely an extremely bad deal for you. 20% might not sound like a big deal while you're still starting – but to put it into perspective, if you work only weekdays, that means every Monday you and every single person on your team are going to be doing unpaid work for that client. If they were to bring something valuable to the table, then maybe it'd be worth considering. But it sounds like they're just giving you vague promises of bringing unspecified amount of other business? I think the right way to make that kind of relationship work would be to pay some finder's fee. But even them, I'd be wary of doing anything with that client – obviously there might be more than you hadn't mentioned, but from this post it seems like they're just interested in taking advantage of you. You don't want to be doing business with someone who's out to get you. EDIT: One more thing that stood out to me. I don't want this to seem offensive, so please take it in a I-want-to-help-you -and-think-it's-important spirit: it seems like you're starting a consultancy without really having any idea where to find clients, right? This is something that you absolutely need to address with the rest of your founders. Maybe you need to bring a good salesperson on board, maybe some of you need to learn sales, but you definitely shouldn't just go into it without any plan – otherwise you don't have a business, you have a gamble.
  • gkdjahgd 4y ago
    What do you think of this idea? - As mentioned in the post, if I give them equity but have a one year cliff and if they don't bring any clients then fire them before one year?
    • Archipelagia 4y ago
      Essentially, you're making them a fifth co-founder of your business. Are you and other founders okay with that? Like, to me it seems you're entering a very problematic relationship, but again, the only info I have is your post. Maybe they are a highly competent, pro-social person that would support you a lot. Based on what you wrote, to me it seems more like they are preying on your desperation to find clients. On top of that, even if they are a great person, your agreement is very vague and can lead to a lot of bad feelings down the road, on both sides: what if they have completely different expectations than you? You seem to expect them to be your main source of new customers, are you sure they see themselves exactly the same way? And all are your team members on the same page? I would very strongly advise you to give them only finder's fee on business they bring. If they are not okay with that, then are they going to treat your consultancy as seriously as all the other co-founders you have? If not, I would avoid this entire relationship.
• Tomte 4y ago
  None. That's preposterous. > is promising to bring business from other clients. Especially since this almost certainly means no business at all, except maybe more of those "give us equity" deals.
  • gkdjahgd 4y ago
    What do you think of this idea? - As mentioned in the post, if I give them equity but have a one year cliff and if they don't bring any clients then fire them before one year?
    • Tomte 4y ago
      Honestly, nothing. They would have to bring almost all your clients so that it sounds remotely fair/interesting, but then the question is, what are you doing with a consulting business, anyway? Think of it like this: they would get a massive chunk of your money. Forever. For a one-time service in the beginning. Even if they really help you getting started, will you be comfortable with that arrangement when you make it big, have hundreds of clients, and just because two of them were referred by them, they get a percentage of everything? If you really want to, offer them a cut of the revenue from clients referred by them. Not from other clients' revenue.
• duped 4y ago
  0
• baremetal 4y ago
  Are you afraid of not being able to get additional clients? I'm not sure what the upside for you is here.
• robocat 4y ago
  Commercial transactions should make the incentives of the parties clear. Here, you are giving away something (20% equity) for a promise, which is bad for you. If they don’t deliver on their promise of bringing clients, and they still vest, that sucks for you. Both you and the other party, may be better to have a commission based structure. You would be better off because you only pay if they deliver on the promise. They would be better off because minority shareholders can always be screwed, also if you “reinvest” profits then they get no dividends. If they refer you clients, then you could contractually give them a percentage of raw profits after expenses. You might allow them to “invest” those profits for equity? That keeps you both honest, and both incentivised to grow the relationship. I suggest you spend some time thinking about what reasons a business would give away a future income stream and a percentage of control. Many people have a very naive view of what equity is. If some act can change annual profits from $1x to $2x then you might consider giving away up to 50% of equity (percentage depends on risk/volatility/probability-distribution, ignoring value of control, ignoring opportunity cost, other huge factors too). Also think about how you split equity if you add 5 equity holders, where each holder can double profits. Hint: https://news.ycombinator.com/item?id=31733393 https://news.ycombinator.com/item?id=31733393 However, beware, because the party with all the power can usually snarf all the profits (typical employer employee relationship) and/or remove all their risks (e.g. get a percentage of contract price, rather than percentage of profits). You also mention: “Currently the company has 4 software engineers as parters with each owning 25%.”. This is rather unstable because if one person reneges or underdelivers, you have a fucking serious governance problem. Vesting is the usual solution, but even that has some really perverse incentives. I have wondered about having monthly pay include X shares, that way those that work and then quit will get equity, but then get diluted over time. The X shares would need to decrease over time (probably non-linearly) since risk is high at start and lower over time. Maybe equity is some metric of $ invested (opportunity cost per person for the income they could otherwise earn) against risk. As a generalisation, I suggest looking at the equity or pay structures of other consulting professions (legal, accountancy partners, engineering). Startup equity structures might not be a good fit for a software consultancy. Another heuristic: if any HN user’s comments particularly resonate with you, search for the user’s past comments on https://hn.algolia.com/ https://hn.algolia.com/ and use a keyword to narrow down results. There is a lot of value in the back-issues of HN! Disclaimer: Definitely my area of expertise, most of the above is ivory tower thinking and only a little is from practical experience. But I was involved with equity with a similar split to what you mention, so I have had more incentive to think about it deeply, and especially the downsides in retrospect.
• rl1987 4y ago
  This makes no sense. You don't give equity to your clients, you give it to investors in exchange of their money. Do not confuse the two.