Ask HN: Negotiating for ownership in a client's company

https://news.ycombinator.com/item?id=4095973

by anonymois • 14 years ago

13 2 14 years ago

news.ycombinator.com

A favorite client has been aggressively trying to get me to come back to work for them (I was an employee for them for a few years before I left to return to consulting / starting up some new ventures).

I currently consult for a software company that is wholly owned by a larger, established company. The software company was created to spin-off the larger company's internal software for sale. They have a few licensees, but are not profitable at this time.

There are some market opportunities in their industry that I'd like to get involved with, but have avoided due to conflict of interest with this client. I believe that chasing down some of these opportunities will make this company profitable within 2 years.

I'd like to approach my client about going to work for/with them to explore these opportunities & drive growth, but I want to negotiate ownership in/of the software company as part of the deal in lieu of the extra compensation they've offered me to return.

The owners of the company are planning on retiring in the next 10 years. I would like to negotiate some kind of equity transfer as part of an employment agreement with them... In a perfect world, I'd ask for 5% of the company per year for 10 years, with some kind of mechanism for actual control at the end of 10 years. However, that feels like a greedy starting point to me.

I would rather approach them with an aggressive deal that they may say no to than a deal where I've left something on the table. The worst case scenario for me is they say they're not interested and I continue to consult for them (which is a pretty great situation already).

My questions:

  * I'd love any examples of people succesfully doing this 
    in the past. 
  * What's a realistic goal for taking ownership? I have
    been responsible for nearly all of their growth over 
    the past 5 years.
  * What sort of mechanisms can I suggest to protect both
    myself and the client? 
  * Am I missing something obvious?

debacle• 14 years ago

1. One of my friends (who I worked with at the time) wrote an OSS software package in his free time and leased its installation to our at the time employer. At my current workplace, one of the owners worked his way into his ownership stake in the company, but he is a minority owner (and the only owner who is also an employee).

2. You are very unlikely to be given any consideration for ownership whatsoever. They've already compensated you for all of the growth you've created, and unless you are CTO material ownership is probably not on the table.

3. I would suggest you start a company, with the client having a stake and you having a stake (you'll probably have the minority stake). Then you're on a bit more even terms, the client is reducing their exposure, and limiting their responsibility to you. They'll bring the capital to the table and you can bring the ideas. There are a lot of different ways to structure source licensing that greatly reduce the risk of getting fucked, for lack of a better word.

4. Maybe. From the amount of information you've given you sound delusional. You expect them to take on risk, give you ridiculous equity in return, and then walk away after ten years. You'd be greedy to ask for a 30% stake. 50% of the company is ludicrous.

anonymois• 14 years ago

This is useful, thank you.

Starting a separate company to go after some of these market opportunities is a good idea; and one that I've thought about as well. I should have made it more clear that I wasn't trying to negotiate for them to give me their company, but to negotiate significant ownership interest in it.

Since I've left, they've asked me to come back and offered significantly higher salary, shown interest in licensing software from me that would take care of some of their business problems, and "would consider any other option" that I brought to them in order to come back and take the reins again.

I do have a track record of generating results for them, and their growth has completely stalled since I left.

Approaching this as a separate company in which I'd ask them to invest, I don't see much difference in the end result. I'd still want to hold significant ownership interest in the new company, I'd still be asking them for money to fund the venture, the risk appears to be similar to me. I am certain that I can significantly improve the value of the company because I already have paying customers lined up for this new functionality.

I agree that even asking for 50% after 10 years is ludicrous, but I want to consider ludicrous options.

The proposition that I'm making to them is to consider the value of holding 100% of the company as things go today, versus holding half (10%? 20%?) of the company at whatever value can be created between now and then.

I suppose a better way of approaching the question would be this: A client has been actively recruiting me to return and take over management of their software company. How can I maximise the outcome / what is possible via aggressive negotiation?

When I left their employ and they became a consulting client again, I was able to negotiate a pretty ridiculous seeming consulting arrangement with them and they have been very happy with it thus far. But it left me feeling like I wasn't aggressive enough in negotiations.