After seeing how far the software has come, Teaching Company is happy with the product and wants to go live. We've only made a verbal licensing agreement so far, where we would provide the software for their exclusive use for $5 per customer a month.
Now that Teaching Company is all in on the product, the CEO offered to buy the software. Here is what they offered. Around 90K up front and 4% equity in the Teaching Company.
The CEO expressed that this is a good deal since my software isn't worth that much at the moment and Teaching Company can potentially sell for over 50 - 100 million dollars years down the line. I somewhat changed all the figures mentioned above for the sake of confidentiality.
I never had to build software for a single company. There's way more money to be made by competing in the wider market, although it's significantly harder upfront. I made the decision to build software exclusively for Teaching Company because I believe in their product, and more importantly, I care about my work-life balance and having time to spend with my family. With that said, competing in the market is technically still on the table since we haven't signed any contracts yet, and we've only made verbal agreements so far. Of course, as the CEO said, the software isn't worth very much at this point since it's still in the beta testing phase—but that doesn't mean we shouldn't consider its future potential worth.
My gut reaction is that this is not a great deal and I'm still thinking through what would be the best counter offer. How would you approach this negotiation? This is my first time going through this sort of thing and could use some advice. Your feedback is very much appreciated!
You have no idea what it could be worth. It will likely be worth nothing, as are most new ventures.
You have no real power here at all. The company can rebuild it for not much more than they're offering to pay you. They can also just sue you and win by default because you don't have enough money to fight it.
Also your verbal contract is probably not enforceable. There is a statutory limitation on contracts that aren't signed. I forget what it is, but I think it's one year.
This is a better deal than most people could get. Take it.
Your lump sum represents 18,000 customer months. Equity is always a gamble but I think you should take your own words to heart.
"I made the decision to build software exclusively for Teaching Company because I believe in their product"
If you believe in this company then the equity might be more important to you (sense of accomplishment) than the money. It would be to me.
The other thing this highlights is that people should really get this contractual stuff out of the way before hand if possible. It would be a shame for either party to feel slighted as a result of this opportunity.
If it were me, and I truly believed in the company and their mission particularly given I might have worked on the app in my spare time and that I don't need the cash, I would counter with a proposal for actually less pay (potentially none) upfront but more equity. But that is me and factors in my financial situation. I would love to own 10% of an education related company that I actually believed in.
Most software/saas value comes from grueling marketing and sales work after it is "ready".
Ask yourself. Can you drive the sales process yourself, potentially earning zero for a year? Do you want your day to be a on-phone sales person?
I think it comes down to the old saying "a bird in the hand..".
Unless you LIKE doing endless phone followups and negotiations with customers, my advice would to strongly consider the offer, especially if you like your potential new employer.
90ish grand is not unicorn land, but definitely not pocket money either - and from two years of sidejob I am impressed (as a company owner for more than a decade and a half).
As you write it, it seems like 4% of the company not for percent of the sales. That might be much more (or less) value.
Being employed in a good company with a noticable equity share could do wonders for your work-life balance (but is not guaranteed).
As a last point. Being rich does not make you happy. Having slightly more than enough* and more freedom will likely make you much more happy.
* = Enough is hard to quantify but if you never think about money in your daily life, but you cannot buy a new iphone (or something of similar value) without thinking slightly is my rule-of-thumb for "enough".
EDIT: missing "and" and typos
You have to do some calculations and forecasting w/ some assumptions but can all be done in a few hours.
The other strategy would be to wait and let the cash flows start.
Lots of way to take this forward - get someone to counsel you.
Either way... you seem to hold all the cards. What do you want out of the deal? You say you believe in them... why not ask to come on board and get a sizeable share of the company?
Of course, if they know that this is your plan, you obviously cannot get a better deal. So they have to think that Plan A is not to sell. But ultimately if you don't see how to grow this yourself, you should sell to someone who does. The fact that you're offering them an exclusive license suggests you don't really know how to turn this into something much bigger.
Should you push for a bigger equity stake, or more cash? That's harder to answer
Do you have any approximate numbers as to how many users they are expecting ?
I think you need to evaluate these numbers before you can negotiate. Obviously you want to keep this deal, but you're going to need to bring in revenue to scale.. so keeping in some type cost per seat is ideal. It is a good strategic investment opportunity and for a seed round, its definitely not bad.
Is the $90K in hard green cash or it's some kind of future payment? Is that in written?
Assume the 4% is worthless, but pick it just in case, but don't assume it is worth $2MM. Is that in written?
How many founders, how many programmers and how many other employees does the company have?