I was recently offered a freelance position where I would be designing some personal accesories for a startup company. They are offering me $20/hr plus 3% of the company profit. I am waiting for them to send me the contract to review. Does this sound like a good deal for me? What things should I be aware of to protect myself? I am also working full time at the same time.
Be careful. If you’re not business-savvy and familiar with contract terminology, I’d venture you’re going to get screwed. The first point I’d ask is: what profit? How is it defined? Most companies don’t make a “profit” on many products. “Non-profit” companies earn their owners lots of money. Is this a percentage of profits after EBITDA or before? Is this a royalty based on retail margins or on wholesale?
At $20/hr and with the expectation that you will see no income from this other stream, is that satisfactory?
My money is on you getting shafted. Sorry.
I’ve tried this strategy a couple times early in my career and never saw a dime. Most of the projects were with start-ups run by guys who didn’t have a clue. Unfortunately I didn’t see this until mid-way through the project.
The bookkeeping is also tough for this type of arrangement. They would need to show you their books and odds are good they will show you a trimmed version of the sales figures unless they are a publically held company with auditers.
On the surface this arrangement of “sharing the risk” is attractive, but you need to be a good judge of character and the product line for it to pay off. Anything that looks too good to be true usually is…
STAY AWAY. this is a classic trap lots of young designers get sucked into.
as mentioned, profit sharing is really difficult to calculate, and that is even asuming there is any profit. most start ups actually lose money…
$20/hr in my opinion isnt so great either for a consultant. most consultants depending on the project and experience would bill out at least at 2-3 times that if not more.
best of luck.
Definitely be cautious. The safest bet is to stay away completely, but if you decide to proceed here are some things you might want to consider:
1 - charge enough “up front” or “hourly” to make it worthwhile/profitable for you even if you never see any of the royalty income (treat the royalty as a bonus)
2 - royalty based on sales, NOT on profits (much easier to keep track of sales figures than profits)
3 - make sure you have the right to audit the books
- be sure your contract clearly states phases, deliverables revisions etc. another common problem lots of first time designers run into. 1 design by contract then 10 rounds of “revisions” for “free”.
Shounds shaky to me also, but it is a way to try new things out with little risk.
If you want to try this arrangement out, maybe a better deal would be a royalty agreement on products sold, like 3% of wholesale cost. That way, you get paid on the success of the product, not of their business plan.
Also, charge at least $30 an hour minimum.
Ditto Jimr - make more than $20 an hour - at least $30-$40 if you are just starting out - and get a percentage of SALES vs profits. Likely they will run in the red for a while upon introduction of products. Make another negotiation on profit percentages…this could be a single number - like $5000.
In my experience:
Big name NY based ID consultancy in 30+ years have done only 1 project on earned royalty basis, with Sony!
ID acquaintance designed cool office chair entirely on royalty, earned nothing until 3 years after completion, but eventual royalty payments were quite good.
Lessons learned: big corporate design co. deemed royalty payment project risk of return too high. If you as small independent guy agree to royalty payments, they can be lucrative if you can wait that long. But as others say, it’s extremely rare.
If $20 per hour sounds like a good deal, $20 per hour plus 3% might be a good idea. depends on the contract…
but no, lol, people that offer you a percentage of the ‘profit’ have a way of never really turning a profit after paying the expenses and paying themselves…
and no, lol, people that offer you a stake in a company when you aren’t a freaking bigshoot somebody are just trying to seduce you with dreams of grandeur while they bullshit their way into getting you to work for cheap/free.
ask them what the 3% of profit is projected to be. then ask for the cash equivalent. if they balk, whats the issue? same/same right? six of one, half dozen of the other? but they won’t be happy to pay you even half of the ‘projected profit’ because they don’t have the money now, and in all likelihood they won’t ever.