What's a fair split when partnering up?
A software inventor checks with Ask FSB's experts for advice on whether a 50/50 split with a sales and marketing partner is a reasonable deal.
Eugene, Santa Monica, Calif.
I have a software product that I developed myself. I found a company that is willing to sell the product, and they would like a 50/50 deal: They’ll be responsible for advertising and selling and I’m responsible for continuing development of the software. Am I giving them too much of the profit?
By Shara Rutberg, Fortune Small Business contributor
Dear Eugene: To figure out the right split, you’d need to divulge a lot more information, says Chris Gill, president and CEO of the Silicon Valley Association of Startup Entrepreneurs, a nonprofit group that aims to empower software entrepreneurs.
"For example, who’s your customer? Consumer or business? How much does the software cost?" Gill asks. "A consumer product selling for $30 requires a very different sales and marketing approach than that of a business product with an annual per-seat license of $10,000."
A 50/50 split could be a reasonable one, according to Gill.
“In my experience, sales and marketing are equally, if not more, as important as product development to the success of a business,” Gill says.
On the other hand, it could be a lousy deal, says Judy Orfao, a member of the steering committee of the Great Nashua Software Entrepreneur’s Group. Orfao ran the Nashua Small Business Development Center during the boom years, when hundreds of tech companies launched annually in the area.
“It depends on the type of software and the strength of the group you’re getting involved with," she says. "When you’re entering into this type of agreement, you’re really taking a big step.”
The first thing you should do is find an excellent corporate attorney with software industry experience.
“Most of the time entrepreneurs and developers are pennywise but dollar-foolish and don’t feel they need expertise. But they do,” says Orfao. “When we’re talking software, it can easily mean a 70% to 80% gross margin. That’s a pretty hefty return. You want to make sure you’re dealing with someone who knows the business, because it’s easy to get trapped when intellectual property’s involved.”
The attorney’s experience might be costly, but “it’s extremely, extremely worth it,” she emphasizes. Your local trade organizations can recommend experienced, specialist attorneys who can take you to the next level.
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From Murali.R, Kerala, India Sir,
In my personnel opinion 50/50 deal is reasonable. Because as per the advice given from fortune small business contributor sales and marketing are equally important as product development. But don't gave away the source code. And if advertising, marketing and sales headache is not with you, you can concentrate more on product development.
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I think that the way to calculate the split, is to use the common way of calculating equity:
Cost to develop = (
# of hours which took to develop * your market rate per hour)
Cost to market = (marketing firm investment over X months)
Then you can figure out how much you wish to give away….
eCompetitors.com