How to structure Joint Ventures (outsourced-indie-hacking)?
Hi there, this is my first post here as a long-time lurker
I have a question about joint ventures, i do joint ventures with people who have ideas for tech-products/services - some of the deals so far have been cash-only (either for completed products or for hours), %-share-only, partnerships where i get paid for my hours, but also had to put in the same amount of money as co-founders in order to get the same % of shares (from which my dev hours and other expenses are then paid ) or % of eventual exit-value after acquisition.
Some of these models are extremely high-risk towards myself (%-share or %-exit-value since both are 0 at the beginning and might stay that way)
What is a good way to go about structuring such deals and reducing my risk? None of the company valuation calculations seems useful since startups are all worth 0 at the idea phase and often during its first year or more.
Personally, I wouldn’t bother, just get paid cash only or make an active multi-year commitment to only one startup. It sounds like you are an active partner for a month or a few months and then you passive partner forever after. That’s a disaster for you and for them. Percentages are a red flag: if they promise in percentages, they don’t know how equity works (probably). If you truly want to proceed ahead, just say, “If you ever sell out, remember that I helped you out and give a fair share.” No paperwork, no legal risk to you and, in the end, it’ll be the same: either they will reward you or cheat you, depending on their nature.
Thanks for the advice, i guess %-value anything is a terrible deal no matter how i look at it. The problem with %-only deals is that i'm the only person with skin in the game.
From now on, cash-only with shares on top of that if they want long-term commitments, this way, my risk is 0.
FYI:
You can get a percentage in a partnership (in most U.S. states) but you'll probably be liable for debts, no matter what is in the partnership agreement. So, if one of the partners goes out and signs a lease for a Lamborghini in the name of the partnership, even if you have no idea and it's against the partnership agreement, the car dealer can still chase you and all the partners for the entire debt. Any partner can sign for the entire partnership and the car dealer is allowed to assume that the partner had the authority. That's why you want none of that, even if you get it for free. (Unless you trust all your partners implicitly and maybe not even then.)
You can get corporate shares but they can't and shouldn't be promising (perpetual) percentages. A corporation has to be able to issue new shares and dilute current shareholders; otherwise, new investors simply won't ever invest. This will starve the company and likely cause it to fail or, at least, cause the company to carry a bunch of dead weight (non-performing investors).
IANAL
In South Africa, it used to be only the directors that were held liable. I started reading tax laws now and it seems it changed over the last couple of years, shareholders have some level of liability now as well, not 100% sure if that's only a tax liability or if that includes all liabilities, the law seems open-ended in that regard.
Criminal liability is also possible if it can be proven that shareholders had some vague idea of what was going on even if the shareholders were given the impression that the criminal activity was no longer ongoing (by not reporting it, shareholders become accomplices).
One startup in which i was a shareholding director, the founders approached me asking if i felt comfortable building something that would be considered illegal, but only had fines as ramifications if caught (this would have been a quick 20 mil of which 10% would have been mine) - i said no, also sent that in writing just to cover my own arse, resigned as a director that same day and got rid of my shares the same day.
Profit-share on top of per-hour billing seems like i would be avoiding this liability-minefield, but perpetual profit share doesn't seem like good value to the company, unless it's capped or i'm involved in which case the profit-share is justified - enforcing it will require setting up proper contracts with proper lawyers and working with lawyers to enforce it.
%-exit-value on top of per-hour billing also avoids this liability-minefield, but would deter future investors if this number was very high. Without a time-frame, this number also means nothing, founders could be selling their shares to a holding company and have the holding company acquired or could forever be living from the profits and never sell the company. Again, i'll probably need such an agreement setup by proper lawyers.
thanks for your input @movietrekker, this has been very helpful!