Initially we were going to ask for equity/ownership in the new company we'll form (it's myself and another coder I work with taking on this side project); however after my partner and I talked about it and there are some risks/liabilities we would like to avoid.
Long/short we are considering taking cash to build the app up-front, along with a percent of profit sharing. Our thinking is we can do the work at a discount depending on the percent they give us allowing them to decide how much they want to pay for the app versus % of profit sharing. This would allow us to be involved with the company beyond just building the app, but without taking on any of the legal responsibilities that could end up costing the company a lot.
Just wondering if there are pros/cons to this arrangement that we haven't considered? Really any feedback on this arrangement is welcomed, I hadn't ever thought of this before, my partner came up with it after we dug into the details of the business and the liabilities became known.
These are just the easy examples, dicking around with depreciation, capex vs opex... there is a giant bag of tricks that can be used to hide- or show- profitability.
If you are going to go down this type route, a percentage of revenue is a much better idea. Its much more difficult to hide revenue.
Be in or out.
Don't waffle in the doorway.
Make the decision based on trust. If you don't trust them, then stay at arm's length. If you do, then consider marriage.
The trust of a business person should be based on their commitment to execute toward specific milestones that are equivalent and contemporaneous with your development of the software. If their hard work does not start now, that's fine. They are a client not a partner.
Good luck.
Should the company become really successful, they'll either continue paying you or hire another firm to rebuild the software. Since you're licensing the software, they would no longer be able to use it after expiration, and likely won't have time to rebuild on the fly without impacting revenue.
Just having a 'profit sharing' or even 'revenue' sharing agreement won't be enough. The internet is replete with accounts of founders shuttering one business and opening up a new 'business' with all the same property and none of the liabilities. While it might not be legal, it will be a very difficult battle for you to win, especially if the other party has better cash flow.
Just be careful not to run afoul of the GPL or other copy-left licenses if you distribute the software to your friend's company. If you are able to host it for them (eg, you are providing a SaaS type offering), this would be even better, unless of course you're doing something illegal, in which case I'd recommend not having any part in it.