What resources can I use to defend a higher rate?  I'm building a
software product for a company who'll rely on it for a significant
amount of business over the next couple years.  They've offered me a
percentage of gross sales and I think it's too low: 10%.

This web page discusses an "affiliate label relationship." That
person's response comes really close to what I'm faced with, but it's
the only one I've found.  It says 10%-20% is the norm, but I don't
know where that comes from, or even if that's a legal term:
  http://discuss.fogcreek.com/joelonsoftware/default.asp?cmd=show&ixPost=67462

I've never negotiated anything like this before.  I don't mind
haggling with a salesman, but I've never actually BEEN the salesman! 
Are there any examples of similar projects or business relationships
that I can reference to evaluate equitable terms? Is 10%-20% of gross
a reasonable expectation?

---

Clarification of Question by preferredcustomer-ga on 17 Jun 2004 19:53 PDT

Are there professionals who advise or represent clients like me?  An
attorney somehow leaps to mind, but I suppose some kind of
agent-specialist might exist, eh?  I don't feel the need to hire a
professional, just wondering how other folks handle this stuff without
firsthand experience.  Or, is it just so personal and subjective that
most people just negotiate quietly, playing a high-low numbers game? 
It's difficult to know what my number is when I'm unfamiliar with the
playing field.

My wife says "Just tell 'em 35% or you'll walk."  (I admire her
agressiveness.  She's thinking 'more jewelry.' )  I don't mind arguing
a point I can defend, such as "There's no way I can do this for less
than X because a,b,c..."  Truth is, I don't know how to defend any
percentage.  It's a WAG!

You are not an employee, right?  Have you signed any sort of a
contract with this company assigning to them your rights in the
software product?  This is a very crucial fact because unless you sign
such a contract and as long as you are not an employee, you will own
the rights to the software--NOT the company.  This fact obviously
changes your negotiating position.  I am going to assume that you own
the rights, specifically the copyright, in and to the software because
you are not an employee and you have not assigned away your rights. 
In such a case, it would be very common of you to retain those rights
and simply license the software to the company for a fee.  In such a
case, 10-20% of gross sales annually is a reasonable royalty.  If on
the other had you are assigning away all your rights, then 10% is not
enough.  I would say that 25% of gross is more reasonable for a
complete assignment of all your rights in the software since they own
all the rights and can create derivative works, obtain additional
licensing revenues, etc.

If you have not already agreed to the 10% (or even if you have) ...

You explain that your costs are proving much greater than you
anticipated ... for whatever reasons (they've changed the spec, want
loads of changes, etc.)

Is there any chance of their upping your remuneration?

Because (maybe) you'll have to take on some help ...

That's correct, I'm not an employee.  And we haven't entered into a
contract yet.  I do currently own the rights, but they want me to
assign all rights to them.

Is 25% your personal measure, or is it based on other similar cases?

I'd previously given a $ estimate to do the job in a set length of
time.  They verbally agreed to this but have since offered me the 10%
to stay with the project and continue improvements as necessary. I
anticipate the 10% will surpass my original estimate, but so will the
effort...

Sure they have started with a low figure. It's a good negotiating
strategy and they may think that they'll be able to do a deal on that
basis but they sure aren't going to be too surprised if you say 'Not
enough, sorry!'

What is the right figure is hard to call.

Only last Monday, a pal of mine told me that he had been authorised to
buy a certain domain name for £20,000 (that's UK Sterling!).

And what do you think he got it for?

£500 ... His first call.

Best of Luck!

OK, let's assume you do assign all the rights to them and then stay on
as an independent contractor continuing to do work on code you wrote
and assigned to them.  There are two issues:  (1) the fee you charge
for assigning your rights to the code, and then (2) how much you
charge to stay on.  I have worked on scores of deals involving the
engagement of independent contractors in the IT arena, and the way you
determine issue (1) is by figuring out how much value the assigned
intellectual property will provide to the company over the useful life
of the product, find the present value of that amount at some agreed
upon discount rate, and then discount that further based on the fact
that the company will have to spend additional money in subsequent
development and marketing costs.  The 25% of gross annual figure gives
an approximation of the amount derived by the formula, I feel.  For
example, if the software will generate $100,000 in revenue over a five
year useful life and you agree upon an 8% discount rate, the present
value of the software today is $68,000.  They could pay you that
today, in fact, for the software.  But that amount is further
discounted, and they pay you $25,000 today since they have to sink
additional development and marketing funds into it.  That?s the same
as if you get 25% of gross each year for five years.

As to issue (2), I think you would just charge then on a time and
materials basis for your work on the product after you have assigned
it to them.

Thanks ipfan.  Your numbers make sense to me, though I'll admit I had
to study them for a couple minutes.  I'd never considered it that much
before, and definitely not that way.  Now I almost feel like 10% is an
insult.  But I'm no financial guru and I'm wondering how I can use
your point to my advantage.

Now I don't want to appear greedy -- 'cause I'm not.  Fortunately my
livelihood doesn't depend on this project, so I'm comfortable walking
away from it.  But we all could use a little extra money, right?  And
if I'm gonna work for it, I think it should be worth my while.

As for issue #1, assigning rights: I already offered a fixed amount
estimate to complete the project, including assigning all rights, in a
set amount of time.  Given the considerations you've provided, I now
feel like I understimated the product's worth.  However, it seemed
like a good idea and represented a reasonable value to me so I'll
probably stand by it. Although, I guess I'm not legally bound to
because we never agreed in writing to anything.  Oh, and I haven't
given them much of anything either, yet.

And for issue #2, fee to stay on: Perhaps this is my biggest concern. 
We'll obviously have to agree on responsibilities and expectations for
maintenance.  I didn't consider time and materials as an option, but
it certainly could be!  I'll use this as a negotiating point.  They
want the percentage to cover this.  If 25% is reasonable for just
making the silly thing, then maintaining it must be worth another 10%,
eh?  I know, without some knowledge of effort required it'd be
difficult to estimate, but bear with me, please?

preferredcustomer,

This will respond to your 17 Jun 2004 19:16 PDT Comment.  Remember, an
assignment of copyright is not effective unless it is in writing.  I
understand that you made a verbal deal to give them all the rights for
a set amount, and I admire your ethicality in wishing to abide by
that.  But at the same time I do not think you are now obligated to
prepare a legally sufficient written contract to accomplish that
verbal understanding.  That's their burden, in my mind.  If they
proceed based on a verbal contract when they actually need a written
contract, well, that's their problem, you know?

As you say, you are obviously free to renegotiate the deal since
nothing is in writing and you have not yet performed most of the work.
 I guess you have to decide how much is fair, given my comments.  I do
recommend you engage a lawyer who is knowledgeable in software
licensing and IT engagements if they insist on a written contract. 
Arguably, there should be contracts for both issues one and two.  So,
in summary, if I were you I'd go back and ask for a higher percentage
in exchange for a complete assignment and I would propose a time and
materials contract at some hourly rate ($150 an hour is not
unreasonable at all) for the follow up work. If you do not want to do
time and materials, then 10% sounds fine to me--on top of the
percentage you get for issue one.

In retrospect, you may have wished to structure the deal as a license
with maintenance.  In this way, you retain the rights but grant them a
use license for either an up-front fee or annual payments, then they
pay you an additional annual fee for maintenance, upgrades etc., plus
they pay you an hourly rate for additional code writing, adding
functionality, etc.  But we're too far down the road in this deal for
that kind of arrangement it seems . . .