Equity share - How to deal with it

Design Discussions design employment
1

I am working as a freelance designer and a client wants me to design an accessory for computer products.
Its is not a very complicated product, so the design should not be too complicated.
The thing is that the client only has a budget of about 1000 USD for the complete project (design prototype and production).
And that’s probably not enough, so he offered a equity share in the project of 50-50 %.
BUT:

  • there are already at least two similar products on the market.
  • one of them claims to have a patent pending.
  • he is in Europe and I am in China.
  • the existing product is way to expensive.
    -there are ways to make it much cheaper.
  • future development will probably increase the demand of the product.
  • how do I know he doesn’t run away with the design…

I don’t want to invest money in this project at the moment. I was thinking of the following:

HIS input:

  • the 1000 USD for prototyping and maybe a mold ( depends on production method)
  • the initial idea

MY input:

  • the design
  • Production ( I am in China and I have the proper connections)

In case we need more money to start production, we need to find an investor.

This way I wont get paid for my services and (I hope to) get enough from the sales of the product.
This is quite tricky, if the product is not selling it will probably cost me money. And, i think my input is higher than his input.

Is there anybody who has experienced a similar situation?
I could use some good advice.

Regards

2

If it is USD$1000, that is ridiculous.

Better to try your luck at kickstarter.com

Here’s the most successful project that raised the most money:
http://www.kickstarter.com/projects/1104350651/tiktok-lunatik-multi-touch-watch-kits

3

Ideas are like ********, we all have them.

Your Mom has ideas, your friends, stoners, Doctors, plumbers, everyone. 99.9% of them go to waste because they don’t act upon them with swift attitude and planning.

It takes someone with #1) a GREAT idea
and they must also have…
vision, money (or means to raise it), determination, a fierce willingness to not give up, and a business plan to make a successful product, plans for marketing/licensing/distribution/shipping/etc.

This guy seems to have…
an idea
$1000
and an ego (“its MY idea, so I should get rich for YOU doing all the work”')

Tell him if he is serious, he should borrow money from his parents, take out a bank loan, or find investors. Then that will show commitment on his end. You’re showing commitment by doing all the work, actually doing any work at all. I know teenagers who can collect $1000 in a couple weeks. This is not the sign of a successful business owner.

Likelihood of failure for an upstart business with only $1000 to spend… VERY high. So your 50% share of the company will equal $0.00

4

A message to other Industrial Designers, or professionals in similar industries…
Work like plumbers work. It is very simple.

Work = Pay.

NOT…

Work = Maybe pay later. (not going to happen)
Work = Maybe extra pay if my company turns into a massive success. (not going to happen)
Work = Percent of my business that doesn’t exist yet, but will soon based upon you making this product. (not going to happen)

If you’re doing one of the latter three options, you’re devaluing our profession, and I urge you to stop these practices or please quit.




[…Rant over…]

Can you tell I’ve been getting a lot of these propositions lately?

5

Taylor is right on.

I run into a ton of these cheapskate dreamers in my small ID practice too. Most people who send me inquiries with a @hotmail.com, @yahoo.com, or @gmail.com email address will likely fall into this category. Most of them want you to meet with them ASAP to do this or that without any talk of payment or realistic payment. It’s like promising you a pot of gold at the end of a rainbow only AFTER they succeed. Fat chance.

I have clients who get mad at me for asking for money. I don’t get it. Why are IDers held to a different standard and asked to do things no other profession is asked to? How can anyone expect to work for free or for what amounts to chump change. We’re expected to be fast, good, and cheap. They want excellent design and want us to help make products that will make millions yet offer peanuts or worse, expect all this for next to free or free. How can IDers be expected to shoulder all the burden, pressure, and responsibility when they’re offering nothing substantial in return? We have to design and figure all this out while they sit back and really do little to nothing while whipping you on deadlines and giving you the run around when it comes to money.

I say treat all business like a real business. Pay for work and work for commensurate pay. No money, no deliverables. I’ve seen way too many deadbeats, scam artists, and cheapskates in my years of consulting who think they can get rich quick on a dime. I can smell those creeps a mile away now. An idea and $1000 is a joke. Tooling alone should be a 5 figure USD$ investment to be realistic and so is real design work.

You are asking for trouble if you do this free/cheap without explicit contracts and terms on who owns the IP and what contingencies and conditions are in place. This is not something to do on a handshake. Probably need to really protect yourself legally with terms that indemnify you of any potential legal problems downstream.

I wouldn’t do this if I were you unless there is real pay and clear explicit terms. Usually a contract a lawyer puts together.

6

This is something that has been really driving me mad lately.

Why INDUSTRIAL DESIGN? Why this particular, niche, relatively uncommon career. Why does this career have different standards when it comes to payment than any other career?

I have thought about other, crazy niche, strange, uncommon careers, and none of them have this strange standard…

Sound/Audio engineer for recording studios, Pilot, Air traffic controller, Meteorologist, Professional athlete, Chemical engineer, Nuclear waste disposal expert, SWAT officer, Sign-spinner, Coal miner, Car mechanic, etc, etc. There are millions more jobs out there.

This-type-of-client to a Car mechanic:
“Listen man, my car is how I get to work, so this is how I make money. And because it needs a new cylinder head, I can’t get to work. Right now, I’m working on a million dollar idea. If you fix my car for free, you pay for parts too, if this million dollar idea takes off, I will DEFINITELY pay you later. I know, you have bills and a business and family to feed, but think about the monnnneeeeeyyyy later down the road man.”

This doesn’t make sense. The mechanic would keep the car until you pay for services rendered, plus, a daily/weekly storage fee. Or probably just sell it if you were that big of a jerk to propose the former.

Why is ID…
“Tell you what, I’ve got a billion… no, trillion dollar idea… I have no money, so you will have to work for me for free, and then I’ll make you rich (but substantially less rich than me) once you finish all of the real work”
?

This model needs to stop.

If you’re out there doing this, I’ll say it again, you’re ruining our profession. Stop it.

If this situation is new to you, don’t accept it.

7

All industrial designers, and in particular freelance designers, run into clients like this. Usually they are “inventors” or first time entrepreneurs.

I try to (politely) explain that I am not a venture capitalist - and then expand on this idea explaining that venture capital companies primary purpose it to invest in ideas and/or companies with potential.
If you can’t convince an investor to fund your idea - why should I?

8

Taylor, you’re looking way too deep on this one.

Ideas are like ********, we all have them.

Your Mom has ideas, your friends, stoners, Doctors, plumbers, everyone.

Since anyone who has ever had an idea knows how easy it is to have an idea,

then, they reason, it must be just as easy to bring it to fruition and it must not take must effort, or time… . . etc., etc., etc.
Ergo, since time = money, why should I have to pay a lot of money for a service that doesn’t take much time?

A colleague, in a related field, when confronted the identical issue, used to say, “It’s not my job to teach my clients my profession!” My counter was, “But it is.” Since few people have any sense of value in this area, they have to receive a condensed tutorial on the role of industrial design and what it’s worth.

The trick is to learn how to present this tutorial so that the client understands how time = money.

9

If you decide to do it, protect yourself contractually . One of the perverse things about these arrangements is that if you’re too successful, he has incentive to screw you over. This happens with the nicest of people. Greed can make anyone rationalize how they did all the real work after all.

Also his input needs to more than idea and money. He needs to take responsibility for marketing, distribution, tax paperwork, etc to make this equal.

10

How? Work for equity carries higher risk. How does that translate to lower value?

For an idea I believed in, I would prefer equity to pay.

11

This isn’t rocket science.

There is an idea I believe in…

What I put into work, I see in return.

“Work = payment”. Not “Work = maybe payment”.

Industrial Design is a profession. It is a career.

It is not gambling. If you want to gamble, play the slot machines, black jack, or the lottery.
It is not venture capitalism.

Why would you put your professional output up for a 0.1% chance of even getting paid at all?

  • Doctors don’t.
  • Plumbers don’t.

You’re sending a message out to your client, potential other clients, and to the world that Industrial Designers can be taken advantage of, they will provide cheap/free work, and that they will agree to terms that no intelligent business person would ever agree to.

The simple fact is, 99.9% of these individuals with $1000 who want to start a business, and want you to create the deliverables for free (for right now)… 100% of them will fail at their business.

No sweat for them. They only spent $1000, and didn’t lift a finger. You just spent $5k-$15k on design work, for free. You will never get paid, and now other Industrial Designers won’t either.

If people keep telling about free gas at the gas station down the street, because the gas station owners are dumb enough to “believe you will pay them in 3 weeks for gas you buy now”… Guess which gas station is going out of business?

Because their gas isn’t worth $3/gallon anymore.
Why would I pay $3/gallon at the other gas station when its FREE over there?
Why would I even spend $2/gallon?
Its FREE down the road!

Hence, the value of gasoline is at $0/gallon.
Suddenly I’m pissed at spending $0.05 per gallon.

This isn’t an argument worth having.

If a well established, track proven, serious business person comes to you with a business plan, strategy, and contract… maybe thingscould be different. $1000 and an idea, not happening. In fact, I’m willing to bet $1000, that you will never get paid within 1 year. Thats an extra $1000 in my pocket.

12

I like this.

The reason I’m making a point here, is because if it isn’t made, we’re all going to be working for free due to others out there making terrible decisions that affect the profession.

For every ten professionals that are fighting tooth and nail for every penny they earn, it just takes one amateur designer to work for free, to devalue both of their work right back down to Zero all over again.

13

It’s not just IDer’s that have this problem. Plenty of Photographers, Graphic Designers, Interior Designers, etc. are expected to work for free or for pennies/hour.

I personally think this has to do with the popularity Design has in our country today. Design is seen as a very cool profession, but to many it carries with it little value. Many think that what Designers do is fire up a computer, pop open a template, click a few buttons and voila… out pops design gold. You have a very valid argument Taylor. There is absolutely no reason anyone should work for free.

And the plumber analogy is great. But, there’s really only 3 things you need to know to be a plumber.

  1. Shit runs down hill
  2. Payday is on Friday
  3. Don’t bite your fingernails
14

This isn’t rocket science.

There is an idea I believe in…

What I put into work, I see in return.

“Work = payment”. Not “Work = maybe payment”.

Industrial Design is a profession. It is a career.

It is not gambling. If you want to gamble, play the slot machines, black jack, or the lottery.
It is not venture capitalism.

This is your view. Please don’t claim it’s universal.

Some people are happy with a guaranteed dollar. Others are willing to occasionally flip a coin for $2.50. The former will have more peace of mind. The latter will make more money in the long run.

They key is not the fact that he may get nothing. The key is his ability to evaluate the odds.

I will say again, that if someone can articulate a business plan convincingly, I will provide work for equity. I am willing to take risks at the margin (i.e. that don’t threaten my ability to eat and pay rent) if I judge the potential payout to be worth it. I think you are mistaken in saying this is always wrong.

Why would you put your professional output up for a 0.1% chance of even getting paid at all?

  • Doctors don’t.
  • Plumbers don’t.

You’d have to be unusually bad at judging ideas to get to a 0.1% chance.
Surgeons work for equity all the time. I’m working with some right now.

You’re sending a message out to your client, potential other clients, and to the world that Industrial Designers can be taken advantage of, they will provide cheap/free work, and that they will agree to terms that no intelligent business person would ever agree to.

For this to be true, the client would have to be planning to fail. I have met very few people who concoct dumbass ideas for the specific purpose of getting someone else to do pointless work. Most of them are convinced it’s a million dollar idea and hate the fact that they’re ‘giving up’ x% of it for work.

All that is irrelevant. What is critical is your ability to separate the dumbasses from the serious people. And negotiate well.

The simple fact is, 99.9% of these individuals with $1000 who want to start a business, and want you to create the deliverables for free (for right now)… 100% of them will fail at their business.
No sweat for them. They only spent $1000, and didn’t lift a finger. You just spent $5k-$15k on design work, for free. You will never get paid, and now other Industrial Designers won’t either.

Well yes. You should not accept idiotic terms. A fair bargain would split equity in a way that is proportionate to each person’s investment in time/money that and their opportunity cost.

As far as other IDers go (I’m not a designer btw), this is a very weird claim. Would you also advise unemployed graduates to not take unpaid internships because it cuts into your paycheck? Everyone’s decision is personal and depends on their needs and wants.

15

I like to use the lawyer analogy. If you hire a lawyer to draw up a contract, he starts charging you pretty much right away. If you get half way though and change your mind, no problem, he is just going to keep charging you. I think they have it pretty figured out.

16

I want anyone who is reading this to fully understand this statement is not true.

Those who do the latter will make less money in the long run. You are rolling the dice, and betting against the House. Those who haven’t been paying attention… the House always wins.

Situation A:
Ten jobs. $10K-$15k each. Cash guaranteed.

Situation B:
Ten jobs. Valued at $10-$15k each. Each job guarantees 5X the actual value, if you work up front for free. (Because the idea is so amazing, but the clients don’t have absolute zero money up front).

Situation A:
Designer makes $100k-$150k. Cash in pocket.

Situation B:
Very likely, Designer makes $0 total. At best, Designer might make $15k from one of the jobs. This is without factoring in the lawyer fees. And the headache. And reducing the value and quality of our profession.


This isn’t an OK practice. You can think it is. But it isn’t. You’re not an Industrial Designer, so I’m not offended, but you are certainly devaluing a profession somewhere. Stop telling other Industrial Designers this is a smart move.


Additionally… an unpaid internship is not the same thing as working for free for a client with “great idea” and hoping to get paid later. An internship provides you with quality real world experience normally through a company with a large amount of experience with Industrial Designers. You’re not working alone for a client who demands the world and doesn’t pay you. Totally different things.

17

Great response!

What I learned so far from the response is; get more input from the client side. He needs to show more commitment to the project, good point.
A good contract and business plan. Find investors. Get paid for your work!

I think I will make the concepts and he has to pay for that. With the concept he can find investors. From there we can take it further.

@Taylorwelden
I partly agree with you, offering your services at a bottom price is bad for the business.
BUT Freelance work has become very international. The competition is killing, you now compete with designers from all over the world. There is now increasingly more competition from countries as China, India, Pakistan etc. There is a lot of crap there but they are getting better by the day and they offer their services at rates much lower than an American or European designer.
And they can do that because daily live there is much cheaper.
This is a new situation and we need to adapt to it. The excuse that if you want quality you pay more will no longer be valid.
How are we going to deal with that?

I think we are going a bit off-topic but what the hell.

18

You are wrong.

For every two jobs the first guy takes, he makes $2.
For every two jobs the second guy takes and flips a coin, he makes nothing on one and $2.50 on the other (on average)

$2.50 > $2


If we use your own made up example

Those who do the latter will make less money in the long run. You are rolling the dice, and betting against the House. Those who haven’t been paying attention… the House always wins.

Situation A:
Ten jobs. $10K-$15k each. Cash guaranteed.

Situation B:
Ten jobs. Valued at $10-$15k each. Each job guarantees 5X the actual value, if you work up front for free. (Because the idea is so amazing, but the clients don’t have absolute zero money up front).

Situation A:
Designer makes $100k-$150k. Cash in pocket.

Situation B:
Very likely, Designer makes $0 total. At best, Designer might make $15k from one of the jobs. This is without factoring in the lawyer fees. And the headache. And reducing the value and quality of our profession.

The house wins because the rules only allow you to make bad bets. There are no such rules in the real world.

If two of the 10 jobs in situation B work out, you make 100-150k. If three or more do, you make more money. If you think this is too optimistic, you should be demanding more than 5x to adjust for a lower success rate.

I don’t know how many other ways to say this. It is always a payout vs. risk decision.

If Steve jobs offered you 1% of Iphone profits in exchange for work, would you seriously turn him down for money in your pocket?

This isn’t an OK practice. You can think it is. But it isn’t. You’re not an Industrial Designer, so I’m not offended, but you are certainly devaluing a profession somewhere. Stop telling other Industrial Designers this is a smart move.

I’m not saying it’s always a smart move. I’m saying it isn’t always a dumb move.


Additionally… an unpaid internship is not the same thing as working for free for a client with “great idea” and hoping to get paid later. An internship provides you with quality real world experience normally through a company with a large amount of experience with Industrial Designers. You’re not working alone for a client who demands the world and doesn’t pay you. Totally different things

The principle is the same. Trade something now for gains in the future.

Btw every grad who takes an unpaid internship devalues the market for those who want paid internships. It’s not on them. It’s a free market and you have to compete. It is paid on supply and demand, just like everything else.


EDIT (addition): I’m almost feeling like this is devolving into a ‘freelancers always get screwed’ thing. As I’ve posted before I’m aware of that. F***, my company does it and it drives me up the wall. If you’re saying 9/10 people who make this offer to IDers fully intend to not pay, that may be the case. I don’t know the field well enough to say.

What I’m talking about is a general statement on using a partner model instead of an employer-employee model. You take on part of the risk of the product failing. For that you get a fair part of the benefit if the product succeeds. If you negotiate well and write a solid contract, it can be extremely profitable.

19

20

Yeah I had a client change the project specs on me midstream, made about 13 new changes and called me for about 12 extra meetings to relay those changes. I was too nice at first and did those extra meetings and changes free of charge but enough is enough. I started asking for more money and boom…they stopped abusing the free meetings but started getting masty with me as if I shouldn’t be asking for any more money. I say that’s bull. Then I hear all the other contract vendors they were using were getting paid hourly to come to these meetings and implement changes. How come the ID guy gets singled out as if we should be working for free while the EE and others are getting paid for scope changes? For some reason they have this view that what we do is “easy.” Yet they can’t move forward without our design vision leading the way. IDers set the overall direction from which the engineers work towards. We’re actually the leader of the marching band. Respect yourself and your profession. We provide a very valuable service, otherwise they can do it themselves and see how “easy” it is. Work for pay, cause if you are any good at it, what they pay you is nothing compared to what it will help make for them in the end.

Oh in my career I have entertained about 15 of these equity projects and only 1 of them is paying any royalties. That one is the one Ihad to sue the jerk for cause he tried to get out of paying altogether when it started looking like it would be lucrative. Be very very careful if you do this. Do not assign the IP and set conditions in the assignment like he has to pay royalties in order to retain the rights and you have the right to audit his books and also think about maybe asking for guaranteed mounts and ocntingencies so you have a upside no matter what happens.