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.
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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?
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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.
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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.
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