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This is my first contract negotiation. So I've written a program which supports some hardware that the company makes. (The support is important, and most customers will buy it, but the software product is ultimately optional.) It will sell for about $2K/license and they sell 70-80 hardware systems/year. The market here is biomedical research, i.e. the customers are individual research labs in universities and hospitals. The company will be hosting the software (obviously) and it will be part of their marketing pitch. They tell me that a 75-25% split is typical. Really? How does this smell to you guys? What are numbers that you have worked with?

Edit: A little more info. I have written an open-source version of this program that has been out about a year. The contract is to write a commercialized version (basically, more features) which I would give to them. They are going to pay me some money up front, then pay me 100% of gross up to a certain amount (low six figures) and after that, 75/25% them/me in perpetuity. They will have all rights and I won't be able to build another product in that category as long as I have a relationship with them.

Matt Phillips
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  • Most contracts I've heard about are work-for-hire, where you get paid for the time you spend, and that's it. I don't think I've heard of an ongoing split. Doesn't mean it doesn't happen, though - just that it's unusual. – Bobson Jun 14 '13 at 16:44
  • Did the company pay you to write the program, i.e. who owns the software? If you own it then you have some negotiation room - but the main thing is, are you comfortable with the offer? And can you resell/repurpose the software also? – Steven A. Lowe Jun 14 '13 at 16:52
  • @StevenA.Lowe Please see my edits. – Matt Phillips Jun 14 '13 at 16:57
  • @Bobson Please see my edits, it's a bit more complicated than simple work-for-hire. – Matt Phillips Jun 14 '13 at 16:58
  • Book authors usually only get 10% royalty by poublishers on consumer price of the book. – Marjan Venema Jun 14 '13 at 17:20
  • Just something more to consider - should any damage/failure related to the program occur, can you be held responsible? – JoseTeixeira Jun 14 '13 at 17:20
  • @user16484 It's a data analysis program, so that's not a big concern but liability is important to think about too, thank you. – Matt Phillips Jun 14 '13 at 18:23
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    One thing I would like to see in this negotiation is a clause about what happens if the company is bought out or sells this product to another company. If they sell it for 850 million you should see some money from that. If the company is bought out you should also see some money. Also if the company is bought out you might want some say in it. What if they sell to some company that is going to drop your product or not do a good job promoting it anymore, you should be able to back out maybe? Always prepare for the worst. – The Muffin Man Jun 14 '13 at 18:28
  • Is that 25% of revenue or profit? They could play the numbers to show they have no profit even after selling copies. Other than that it's a good deal. – mike30 Jun 14 '13 at 19:43
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    @Eric My father invented something and has given the rights to another company to manufacture and sell it. He gets royalties, and the things I described above are in his contract. The company doesn't have any retail experience, they make industrial products like metal racks so currently they are kind of just sitting on this. They spent $250k manufacturing and approached QVC, but like I said it's an unfamiliar market to them and they don't seem motivated anymore, so think about those types of scenarios happening to you and how you can protect yourself. – The Muffin Man Jun 14 '13 at 20:08
  • @mike30 GREAT point I will be sure to be clear about that. – Matt Phillips Jun 14 '13 at 21:50

3 Answers3

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Caveats: I am neither a lawyer nor a freelancer, so take this as simply my personal opinion rather than the voice of experience.

In general, this sounds like a really good deal to me. However, there's some things you're going to want to make sure are explicit in the contract:

  • Are you responsible for on-going maintenance and improvements? If so, will you be paid more for that, or is the 25% considered a retainer to cover any work you may need to do in the future?
  • Do they have any accountability to you? Do you have the right to audit them to ensure that you're actually receiving the 25% you're owed, or do you simply have to take their word for it?
  • Are you allowed to sell these new features, or any similar ones to other companies, and/or add them to the open source version? Or are you prohibited from adding anything resembling them?
Bobson
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  • Thanks, these are great questions. I hadn't even thought about #2. #3 hasn't been discussed in detail yet. All of these I will keep in mind. – Matt Phillips Jun 14 '13 at 17:18
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This is more of a business question then a programming question.

Frankly I'm jealous! You're in a great situation! Some thoughts:

  • If I understand the numbers in your post they're offering you an income of maybe $20,000 a year (once you reach the 25% level). Nice! But are you required to do anything for that income? For instance, is there a commitment to support the software?
  • In any negotiation, the first party to mention a figure (them) would usually expect the other side (you) to ask for more.
  • How long will it take to write the commercial version? Do you have enough money to live & work while that happens, bearing in mind savings and money up front?
  • Who will own the software? You or them? Either might be fine, but they should pay you more money if it's them.
  • These numbers are big enough that I would get a lawyer to look over any contract before you sign it.
MarkJ
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  • Thank you for your points. The issue of support didn't come up, we'll see what they put in writing. As I calculate it, the deal does give me enough to live on to get it done. They will own it. Can't afford a lawyer. :( But basically you think it sounds good. Thank you for your feedback. – Matt Phillips Jun 14 '13 at 17:15
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    @Eric - Can you afford *not* to have a lawyer look at it? – Bobson Jun 14 '13 at 17:25
  • I think it's a good situation, and you should be able to get a good deal out of it. Do invest some time in negotiating it and thinking about it. Bobson is correct - having a lawyer look at it could save lots of money and pain later. – MarkJ Jun 14 '13 at 17:29
  • I do also want to add that I wish I had this dilemma. It **is** a really good situation to be in. – Bobson Jun 14 '13 at 17:31
  • @Bobson: +1000 if I could. – John R. Strohm May 12 '15 at 22:53
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Seems pretty fair to me actually. Normal business (all business not this particular market) markup is 50% over cost, that is profit for the company etc. The other 25% is the cost for them to market, sales commissioni etc. basically their costs, so a 25% cut to you is actually pretty decent IMO.

This is especially true, since they could have just paid you a flat rate.

Bill Leeper
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