Hi. I’m not so familiar with the business side of designing, being very very new to this, but I just wanted to hear any input you could share, the more options you can suggest, the better:D Do get carried away.
There is a design by Person A. Person B (entrepreneur) likes it and would like to produce it-- so the “division of labor” is like this:
Person A: design, research mat’ls he wants to use, makes sure the mechanisms he’s proposing actually works (this is his responsibility, right? it can’t be trial and error during production)
Person B: Handles production/sales/mktg of products and of course
funding for x no. of units,
Person B isn’t buying the design, both just agree to work together on x units, as a test-run.
Questions:
- When x units are sold. %-wise, how should the profit be divided? Is there a standard?
- Should Person B opt to acquire the design/product, how does one begin to price an unproduced, untested idea? I say untested because of course the designer won’t hand over the impt blueprints of the design to protect himself until it is bought.
- Should Person B opt to acquire the design/product and agree to give Person A royalty per unit sold, what is the industry average of %royalty?
Sounds like big trouble.
“Big” = Huge.
Q’s:
- In an ideal World this would be easy. There’s really no standard. You’re basically at Person B’s whim to decide how much % that they think you need to receive.
- You’re selling your education, training, experience. Just because it’s untested doesn’t mean its free. It’s still in the conceptual stage. You shouldn’t be handing over a design for free in hopes to acquire money later. More than likely you won’t see money later.
- Royalty per unit has 90% chance of working out very poorly for the designer. Unless you’re very very close with Person B, how will you know the exact # of units sold? Person B doesn’t know about shipping costs from China for samples, or that extra expense for a flight over to meet the factory production managers, or the freight charges for bulk, or the cost to store the unsold product in a warehouse. All of these costs come out of your percentage, because Person B can.
Ideal situation…
You work out a price for Person B to pay for the idea up front. This is a one time price, they want it, they buy the concept. You’ve already done work, they think its valuable, they think they can get rich off of it, get paid for your work you’ve already done. Then work out a price to bring the initial concept into Phase ‘2’, where you’ll work out manufacturing issues, problems, details, materials, etc. Then work out a price for Phase 3, 4, and …
Royalties sound great in theory. But how will you pay for your food while you wait until you get rich later off of hopes that it is successful under Person B’s limited business experience?
If this person is your best friend, ponder the idea very carefully, if they’re just a friend, worry, if its just someone who came to you out of the blue, avoid.
That’s my experience. It really comes down to the fact that you’re a professional, get paid for your work. Essentially you’re doing work for free in hopes to win the lottery later.
any other questions, feel free to ask
good luck
Hi, Taylor.
Thanks a lot for the reply!
Royalites-- I thought this was a a standard as I’ve seen this condition on prestigious (well, at least for me) design competitions, so I thought it was a norm and that some kind of system is there, like how a writer gets his royalties? But, yes, I see your point and the set up is a bit unicorns and rainbows.
In the scenario I posted, I thought both designer and entrep were on equal footing, if not the entrep doing slightly more work + funding gamble. But I see your point, it would seem compensation is at the entrep’s whim if there are trust issues.
Would this be a good solution: All sales will be channeled through Person A, or at least a system Person A can freely access (ie online ordering only). So in essence, it is like a partnership. Person A can also function on the business side as he can monitor sales. Will profit-sharing be optimal here for both parties then?
If yes, does a 25/75? 30/70? (A/B) division sound fair to both? At least for x quantities. And if Person B wants to continue after the test-run, the upfront payment you suggested will be the way to go (or maybe continue the partnership).
What do you think?
Sounds risky. Think about who owns the patent and what are the limitations of what one can do.