Episode 428 | Building Relationships with Agency Partners, Determining Equity Splits, and More Listener Questions

Episode 428 | Building Relationships with Agency Partners, Determining Equity Splits, and More Listener Questions

 
 
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Show Notes

In this episode of Startups For The Rest Of Us, Rob and Mike answer a number of listener questions on topics including building relationships with agency partners, selling across different currencies, determining equity splits, and more.

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Transcript

Rob: In this episode of Startups For The Rest Of Us, Mike and I talk about building relationships with agency partners, determining equity splits, and more listener questions. This is Startups For The Rest Of Us Episode 428.

Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve build your first product or you’re just thinking about it. I’m Rob.

Mike: And I’m Mike.

Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. Qué es la palabra este semana, Miguel?

Mike: Uh…

Rob: “What is the word this week, sir?” “What is the word this week, Mike?” actually is what it says. What’s going on with your computer?

Mike: I was trying to fix a random crash that I ran into, and of course as part of doing that, I had to restart the machine in order to debug some of the stuff that was coming up and test some drivers. I think as a result of that, my computer is now blue-screening and I can’t get it back into Windows.

I spent the last couple of hours trying to figure out like, “Okay, well go to the new crash dump, take a look at that and see if I can get access to it.” Then I’m troubleshooting certain things and looking them up from my phone. It’s just awful.

Rob: Right. Well, the good news is you don’t have other work that you should be doing.

Mike: Sure, yeah.

Rob: You don’t have anything else that’s pressing.

Mike: I have nothing else to do.

Rob: Hey, I think I know the solution, actually. Step one, uninstall Windows. Step two, install Linux. Boom, boom. Sorry, I think that’s a MicroConf joke, right?

Mike: That probably is. It’s that bad.

Rob: Yeah, it’s that bad. Don’t you have a Mac laptop? Just go [00:01:46] Mac all the time, baby.

Mike: Uh, I… no.

Rob: You’re still considering it?

Mike: No. I can’t stand the trackpad. That’s the thing that bugs me the most. I can’t stand using it. All my development stuff is all in Windows, anyway.

Rob: That’s the hard part, yup. I use the trackpad. I think it’s fine but I use an external mouse when I’m at my desk. I put the laptop up. You know, Mike, it is 2018. You know you can pair mice with Bluetooth or even USB to a laptop, did you know that?

Mike: I did know that.

Rob: I’m giving you a lot of crap today, huh?

Mike: I know.

Rob: I’m just kicking you while you’re down. Oh man, I’m sorry. I remember those days and I would lose a day or two productivity and it would just kill me. It’s infuriating.

Mike: Yup, and that’s really the point I’m mad at it. I’m just annoyed at this point. The worst part is that I’m still running Windows 7 and I’ve known for a while that I should migrate over to Windows 10 at some point. There’s still some software that I literally can’t use right now because I’m not running a more recent version of Windows but I know that there’s also so much stuff installed and it’s configured in just the right way so that my builds, works, and everything is configured just right. I know I’m going to burn at least a couple of days reformatting my machine and reinstalling everything and I just didn’t want to do it. Now, I’m at the point where it’s like, “You know what? I may just absolutely have to.”

Fortunately a couple of days ago, I had looked and said, “Okay, if I were going to do this, what software would I need?” I made a complete list of it, I took screenshots, and I was smart enough to put it all in a Google Doc rather than on my hard drive.

Rob: Oh nice. Geeze. That’s tough. Again, I don’t miss those days. I’ve never been the Windows basher because I’ve used Windows for 12 years or something and then switched to Mac. I remember being like, “Oh, this is better in some ways and not in others.” To be honest, I never thought that Mac was so far superior to Windows. Now that I’ve been on it for years, though, I haven’t had another one of those days.

I used to have those every few years. Especially when you’re a developer, you’re just doing aggressive things with your machine. You’re not surfing the web, looking at Facebook, and doing Google Docs. You’re in screwing around with registry stuff and you’re installing things you probably shouldn’t. You install and uninstall a lot of things and you run builds. I don’t know.

I just remember screwing my machine up every couple of years. I also remember the upgrade process was hard and cumbersome. I think that’s something that Apple has done a much better job. As an example, I upgraded to Mojave last week, which is the next version of the OS, and it has so many features and stuff but it’s an incremental version. They release those every 60-90 days it seems like and knock on wood, the upgrades always go fine. I’ve not had an issue. I’m sure it’s possible to have an issue but I hadn’t have an issue. Now it has new stuff and I haven’t had another moment like that since I switched to using a Mac, which I believe is probably six years now. Five or six years. I don’t know. It’s hard when that happens and you lose that much productivity.

Mike: Yeah and I’m thankful that it’s just going to be the productivity because I have backup software on my machine, so it’s not like I’m losing data or anything. I’ve got a local NAS device that I store a lot of stuff on and then I’ve got Dropbox where I’ve got all the other important stuff. It’s not like my hard drive is dead and even if it was, I can still get everything back. It’s just the time of reinstalling and reconfiguring everything and then trying to make sure that I still have all the software licenses, the right versions, and everything else.

I forget who it was. I think it was PDF Architect or something like that. They’re like, “Oh, there’s a new update. Click here for the update.” Then I clicked on it, it was like, “Oh, okay,” and then it installed, and then it’s like, “Oh, you don’t have the latest versions or latest license, so we’re not going to let you use it.” Like, “Wait a second, you just gave me this thing. You pushed this upgrade on me.” It’s like, “Come on.”

Rob: Yeah. I had that happened before. Yeah, it’s not cool.

Mike: Ugh. Onward, I guess. For the listeners, again, don’t forget about the AppSumo contest that’s running. We’ll link that up in the show notes so you can go check it out. But as with last week, There’s a contest that’s running right now in partnership with AppSumo. The winner is going to receive an all-expense paid trip to MicroConf, tickets included. As I said, we’ll link it up in the show notes and definitely check it out.

Rob: And if you are interested in having us answer a question, I believe we’re getting towards the bottom of the mail bag. Send us a voicemail if you can. You can call our voice mail number 888-801-9690. We like hearing your voice and frankly the listeners do, too. It makes people feel like it’s not just you and I making up emails, sending emails to ourselves and reading them on the show. No, that’s not really why we’re doing it but it’s just fun to have voicemails. But certainly if you can’t, send us an email at questions@startupsfortherestofus.com. We’re going to be answering several listener questions on the show today.

The first one is about building relationships with agency partners and it’s from PJ. He says, “I love your podcast, especially how you give us a short update at the start about your own businesses. My question is around building a partner circle at the beginning of a business especially when services are a necessary angle for the product.” I’m assuming he means consultant agencies. “What type of engagement model would you recommend thinking about, especially when aligning with a global services company? Especially when they ask for exclusivity. Thanks.”

I’m going to start by saying this is an example of a question that should be more specific. Do you feel like we need more info? Because I’m not exactly sure what he’s asking.

Mike: I’ve been in these types of circles before so I have kind of an idea. But I agree, it does need a little bit more context.

Rob: I think we can answer it in some vague terms quickly but I think we really dig into this. We just need more information about what niche or market you’re in and really, if you’re going to ask a question, please include more information because it helps us understand it. I think we can [00:07:51] more value to you as well as the listeners. But with that in mind, he explained us [00:07:56] in your words what he’s asking so we can talk this through.

Mike: My understanding of what he’s asking is that he wants to create a partnership program where other businesses will bring them in to either deliver services or they will bring their partners and to deliver services. By what he said about, “…when aligning with a global services company,” it seems to me the global services company, think of them as like IBM, or Dell, or HP, or something like that. They have a services organization but they don’t necessarily provide all the services themselves.

I’m kind of thinking back to my consulting days where I did exactly this and work for companies like that. What they will do is they have basically sales reps that are kind of all over the place and working with enterprise companies. When they sell services, it’s on their paper, and then they turn around and then they outsource it to somebody else. Typically, when they have exclusivity at that point, really what they’re doing is they’re saying, “We will subcontract you but you are not allowed to subcontract to somebody else.”

The part about exclusivity throws me a little bit because aside from that situation, I can’t see something where a global company like that would come and say, “We want you exclusively to deliver this,” and they want exclusive access to you. They don’t want anybody else to hire you. That seems odd.

Rob: Yeah, I would agree with that because you’re not just a consultant. You’re not a contractor unless he’s talking about starting a consulting firm because he doesn’t specifically say he’s building a software product. That’s why I think we probably need more info to answer that. But with all that, what type of engagement models would you recommend thinking about? What does he mean by that? Hourly rate or versus weekly retainer versus monthly stipend or per project?

Mike: Engagement models would be like how are you going to structure the contract for the services? Is it going to be on your paper or is it going to be on somebody else’s? Because whoever paper’s on is typically going to be the manager of that relationship and if it’s Dell’s outsourcing to you, it’s going to be on their paper, it’s going to have all their terms and conditions, and at the end of the day, that customer is Dell’s not yours.

If, let’s say, that you reverse it a little bit and you are a large software company and you bring in Dell to perform the services, they’re still going to want on their paper but you could turn that on its head if you have enough leverage to say, “No, it’s going to be on ours. This is our customer because we found them and we sold them the software.”

But at that point, Dell is not going to have a huge number of reps or technical services people on staff that are going to be knowledgeable enough about your software to be able to go and do consulting engagements. It’s possible they may do that but you have to be fairly large in order for that to happen. I’ve seen it with even extremely large pieces of software. They just don’t have the technical staff because they can’t pay them. And they don’t want to pay them, either, because those people are consultants and if every minute of their sitting on the bench, the company is not making money.

Most of those sales types of organizations—Dell, HP, IBM—they have a sales organization to sell services but they don’t have a delivery services organization with the consultants on the bench because they have to keep them at capacity like 100% at least 85% of the time. They have to be booked almost nonstop throughout the course of the year in order to even turn a profit on it.

Rob: That’s business, man. This is why we do products, am I right?

Mike: Yes because products are so much easier.

Rob: Yeah, exactly. Good one, Mike, I like that. Anyway, PJ thanks for the question. Hopefully, that’s some help to you. If you want to write in with more details, we can try to tackle it again in a future episode, but if not, I hope that was helpful.

Mike, interesting coincidence. We’ve got two questions about selling across different currencies. First question is from Paul and he says, “I’m enjoying you podcast a lot. I feel like I’ve got endless insights because your back catalog is huge. I’m a software developer who just started thinking about what it would take to start a SaaS.” He has two questions but I’ll read this one about pressing now. He says, “In a SaaS, the target’s regular, everyday consumers, how do you account for currency exchange differences in your pricing? Charging US$50 per month may seem fine in the US but in a less wealthy country, that could be a significant portion of someone’s income.”

My first piece of advice is, don’t build a SaaS for consumers but aside from that, you have thoughts on this, Mike?

Mike: I think I would probably follow the advice of Ed Freyfogle who spoke at MicroConf a couple of years ago and his general advice for situations like this is ignore the currency exchange piece of it where you’re quibbling over nickels and dimes for the exchange rate as it fluctuates. If you decide on, let’s say, $50 a month but US dollars, what is the equivalent in pounds, for example? What is the equivalent in Euros? And then, on your page, display the pricing using browser location data to figure out where in the world they are and you can display the page in local currency for whatever that is.

As they said, you wouldn’t want to, say, something like if it’s $50 a month and we’ll call the exchange rate, we’ll say that it’s even for Euros, you wouldn’t want to say €40.32, for example, and then fluctuate it as the currency exchange. You probably just want to say €40. Then if it goes up a little bit, that’s fine, just eat it, until they get close enough where it really makes sense for you to start changing those numbers to say €42 or €45. I wouldn’t even worry about that stuff. But you can just display the page in the local currency. That should be enough to get you through for the most part.

Rob: Yeah, and Ed runs opencagedata.com if you want to look at his API for figuring out where in the world folks are. I think that’s good advice. I would also say to focus on a single market to start with. If you haven’t written a line of code then pick a market. If it’s going to be the US, that’s fine. Charge in US dollars and worry later about, “Oh, we’re going to expand into India or we’re going to expand into Eastern Europe or other less wealthy countries.” If you’re going to start in the US, then the next place you would probably expand is to Canada and then to Western Europe. In those places, while you do have different currencies, they’re kind of on par in terms of what you would charge. I would probably just do like you said, just do a conversion and charge that. I would be less concerned about this.

Once you get into less wealthy countries, they can’t afford that. Just start it out in a single country, build up a business, and then by the time you get there, you’ll know what to do. Thinking about it in theory, about something that’s a year or two out, I think is just not helpful at this stage. Thanks for the question.

We have another one about selling across currencies, probably a similar answer. It’s from Scott Barton. He says, “I’m a recent listener on a back of Rob and Einar’s TinySeed announcement a couple of months ago. After being a longtime listener to swing-for-the-fences types of startups podcasts, it’s nice to find a community that I’m more in tune with. I listened to last week’s discussion about pricing. I wondered if you have any thoughts about pricing the same product offering across currencies, particularly to customers in countries where their currency maybe weaker?”

This is a similar question but I think it’s couched a little bit differently. He says, “For example, would you price a B2B product that’s selling for £249 per month in the UK as a US$249 product or would you adjust it for the exchange rate?” Currently, that would be US$309, based on when he wrote this email. So, similar question, similar answer, Mike, or what do you think?

Mike: I would think that it’s in many ways similar but I think there’s also a little flexibility you have here from the marketing standpoint where if you’re going to price it US$249, going to $309, $309’s coming in like an odd number. I might do $299.

Rob: Yeah, I would, too.

Mike: Or $324 or something like that. $309 is just a weird number. I would try to stay away from those.

Rob: Right.

Mike: That was a witty discussion.

Rob: Yeah, I know. All right. Our next question is about how much to have in place before starting to sell. He says, “I’m building a tool/service for myself that other people are willing to pay for. Is there a checklist to follow to take this from a hobby to a real thing? Do I need an LLC, terms of use, privacy policy, a lawyer, et cetera before I accept any payments or can I literally just set up a payment system and go?” Let’s make the assumption that he’s in the US because he has a separate question where he talked about US dollars. What do you think, Mike? Is the answer, “It’s depends”?

Mike: No. I think he can just literally set up a payment system and go. If it’s still brand new, you probably don’t have a whole pack of luck to worry about. If you don’t have a terms of use or privacy policy and stuff like that, until somebody complains and says, “That’s the reason they’re not buying it,” I don’t know if I’d spend a lot of time on it.

Rob: Yeah. I mean, is there a small amount of risk in doing that? Yes, there is. So, consult an attorney, think about it, whatever, but realistically, this is what you and I have both done with. Brand new products that are just starting. I did a sole proprietorship which just goes on your schedule, see on your taxes.

I did not have an LLC for, I believe it was seven years I was operating. I had software products, I had info products, I was consulting, and that was just all without an LLC, without a terms of use. At some point, I think eventually I had put a privacy policy in for some products and stuff but it’s a little bit of risk tolerance but really, the risk is probably really low. I always try to take the simple approach. The simple approach to basically get to selling.

You made an assumption there where you said, “I’m building something that I need but other people are also willing to pay for.” I would ask, “How have you validated that?” Don’t assume that that’s true. Go out and spend more time validating that before you sit in a hypothetical basement and code that out for six months because I think a lot of us had made that mistake. Thanks for the question. I hope that was helpful.

Our next one is about determining an equitable equity split. I’m going to leave him anonymous in case the person he’s talking to also listens to the podcast. He says, “Hey guys. A friend of mine came to me with an idea for an app and I’m considering going ahead with it. I’m a developer and I’ll be doing all the dev work, the support, et cetera. My friend will be doing the outbound sales, marketing, et cetera.”

Instead of creating another company and all the overhead that entails, because I already have a corporation, I’d like to own the software and pay him a cut of the sales. How would you go about determining the split? On one hand, the development will be a lot of upfront cost for me. But when we get to market, he will be doing the bulk of the work, with mine leveling off a bit with additional development and support.”

I really think he’ll be integral to the success of this, as I’m not an outgoing person. He’s a radio personality and good at the kind of [00:18:56] skills that I lack. I guess I’m asking if it’s crazy to split 50/50 or should I be asking for a larger cut? Thanks for any help or direction you can provide.” Interesting question.

Mike: And I think the top 10 lies developers tell themselves is that when the product gets to market, my workload is going to drop down quite a bit. I think that that’s an unrealistic assumption. The workload for a software product is absolutely not going to drop off once the product hits the market. You’re not going to have enough features in it that you want to put in it.

The other assumption I think here is that there’s not going to be very much marketing work or sales work that needs to be done until the product is done. I think that that’s a bad assumption to make as well. I feel like there should be a lot of it upfront because it helps to cut down on the risk that you’re building something for six months or a year that nobody’s going to pay for or you can’t get it in front of enough people.

Rob: Yeah, I would agree with you. It’s going to be in a rare, rare, rare case that you don’t have more work to do once the product launch. So, something to think about. The other thing I would say is, in advance, I would not go off and build this for six months while your partner does nothing because he should be starting marketing, starting to generate traffic on the internet, starting to do cold-calling or cold-emailing or getting leads and making pre-sales. Getting people’s screenshots or mock-ups or just customer validation, like, “Has your partner found 10 people or companies willing to pay X dollars for this product?” Then I would stop development.

In almost all cases, I wouldn’t do it until you have 10 or 20 or 30. Whatever the number is that you feel comfortable with. There’s upfront work that can be done to validate this more and reduce risk that has nothing to do with writing software. That’s another thing that I would consider. Even the entire time you’re building the software, he could be pounding the pavement and beating the bush, so to speak.

Let me take another dumb metaphor for this but I just think there’s more work to be done than him kind of hanging out until every bit is in place and then, “Okay, now we start the marketing engine.” I talked about this before but my second book was called Start Marketing The Day You Start Coding and frankly, these days I think you should start doing that actually before you start coding.

And with that, we didn’t actually answer his equity split question. It’s not even equity. It’s revenue share. The whole idea of not actually splitting the ownership is interesting because it seems to me it’s screws his co-founder because he has no ownership in the thing.

Mike: That was my first thought as well. I don’t know whether that’s a mental direction he was going or whether it was just the fact that he’s already got a company and he’s going to be using existing resources, he doesn’t really want to open up a second company to do it. Therefore, it would make sense in that case to have the software owned by something and if he’s not giving up equity in his own company to do that, then it still needs to be owned by somebody.

I would say that I think that you could have an agreement between two people and it could be written down that just says like, “This is going to be under this umbrella for the time being and at some point in the future, we’re going to branch it off into a different company just to make paperwork easier for the time being.” I think that that’s a perfectly reasonable thing to do, especially if you’re just trying to avoid legal cost because the product has no customers yet and no revenue and you’re going to be sinking a sizable chunk of effort into it.

The other thing this particular case that does for him is that it allows him to write off a lot of those cost because he can write it off on his tax and say, “Oh, well we’ve spent X amount of time doing this and we bought this particular product,” or, “We’re writing off a portion of this service that we’re using.”

Rob: Yeah, I agree. I think that’s how I think about it, too. I feel it might be unfair to your co-founder if you have it under the same corporate thing. I would perhaps try not to do that.

Mike: He does say later on, he’s asking if it’s crazy to ask for a 50/50 split or he should be asking for a large… I don’t think that it’s crazy-ass for 50/50 but I would have a hard time if you feel like the contribution of the other person is equal in weight to your own, then I would have a hard time asking for more than 50%.

Rob: That’s how I feel, too. If you would have come to me and say, “Look, I’m the developer and I may do support, and then this other person handles all the other stuff.” It’s typical kind of CEO/CTO role either the sales or marketing and developer role. I think that’s a good split and I think if you’re both all in on it and you’re going to be cranking on it, that’s 50/50. Makes the most sense to me.

It’s the other thing surround this, though, that this is more complicated than most situations I think, which is why we’re kind of digging into his points one by one because it’s just a unique way that he’s approaching and that I think we’ve kind of voiced some concerns or just thoughts on how we might do it differently.

Our last question for the day is about business appraisal services. I’m going to keep him anonymous as well because he’s asking about potentially selling his company and I just want to be mindful and stuff like that. His name’s Paul and he says, “Hey, Rob and Mike. I’ve been a long-time listener to the podcast. Thanks for creating such a great resource. I have a question about business valuation in preparation to selling a company. I’m having discussions with potential acquirers but I want to have some official documentation to defend the valuation I want for my company. I know there are many ways to value a SaaS business like mine but I think I’ll have more credibility if I hired someone to do proper valuation. Can you recommend any resources for this type of appraisal? Do you think it’s even worth it? Thank you and keep up the great podcast.”

What do you think?

Mike: I think there’s a couple of different businesses out there that would do an appraisal for you. FE International, they’re a MicroConf sponsor, they come to pass, as far as I can remember. Rob, I think you said you knew another one off the top of your head that does appraisal?

Rob: Quiet Light Brokerage, yeah.

Mike: You can reach out to either one of those but the thing that I would keep in mind here is that if you do go out and get an independent third party appraisal, just because you’re getting that to try and justify your position does not mean that it’s going to come back the way that you want. I see kind of like selling a house. You may decide that you want more money for it or it’s worth maybe a million dollars or something like that but they may come back and say it’s only worth $800,000. Then you have to decide, are you going to take less, or potentially be disappointed about it, or are you going to hang on to it and think about that in advance of getting that appraisal as to what your inclination is before you go do it? I don’t think you want to be surprised if it comes up and all of a sudden now you have to rethink your position on those things.

Rob: Yeah. I don’t know if it’s worth having an appraisal or not. I actually feel like an appraisal is a theoretical way to value a business typically based on a multiple, either of net profit or of your revenue. If you’re going to sell to a financial buyer, you typically sell over the multiple of net profit. If you’re going to sell to either a strategic or these days if you’re SaaS and you’re selling to private equity, you get a multiple of revenue. You get a much higher price for that.

Paul, I don’t know if you have a SaaS app, I would try to find someone who is willing to talk to you about revenue-based multiples. In that case, if you did get an appraisal from FE or Quiet Light, they’re going to be talking more about the net profit stuff because they deal more with financial buyers. I do think they have connections with some private equity but I’m just not sure about the details of that.

I think an appraisal might be a nice-to-have in the back of your mind just to be like, “Well, that’s what I can get it if I were to sell it through those channels.” I don’t know of someone who will come in and appraise other than that, other than through their buying network because it’s really what you can get for. It’s a market price. The appraisal is what, you get a bunch of bids and you can figure out what you’ll ultimately get for it.

As a side note, I do have a contact who could help you with that. I don’t want to call him out on the podcast without his permission. Paul, if you do want to reach out directly to me, you can frankly email questions@startupsfortherestofus.com and that’ll come to me anyway. I can connect you with him assuming that you have a SaaS app we can kind of talk about. It’s in a certain range and he can get really good multiples for it.

Anyway, I’m kind of rambling at this point. But I feel an appraisal, why not do it? I don’t know how much value I would put on that and I don’t know if I would use it during negotiations unless multiple buyers are trying to pay you under that appraised price. Then, you could always whip it out but then, I guess that’s the price you’re going to get for it. I’m struggling a little bit with this, with the idea of trying to sell it based on an appraised value rather than just running a market kind of an auction type. I think you’ll get a better price there.

Mike: Yeah. I think the way he phrase this question was that, having discussions with potential acquirers and I want to have some official documentation to defend the valuation I want. It’s not that they have come to him and said, “Here’s what we think it’s worth,” or it doesn’t seem like they’ve gotten to that point. It’s just I think you’d feel more comfortable if he had something in hand to be able to help justify his position. I don’t know if you really need that if you’re trying to play multiple acquirers off of one another. You can just say, “I’ve got an offer over here for more.” At that point, it’s really just about how much you can get them to push their offers up.

Rob: Right. It’s like how badly do they want the business. But good luck on that process, Paul. It’s obviously, can be both fun and stressful too to sell your business and do wish you the best of luck as you move forward.

Mike: I think we’re about out of time for today. If you have a question for us, you can call into our voicemail number at 1-888-801-9690 or you can email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Outta Control by MoOt used under creative commons. Subscribe to us on iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript to each episode. Thanks for listening and we’ll see you next time.

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One Response to “Episode 428 | Building Relationships with Agency Partners, Determining Equity Splits, and More Listener Questions”

  1. Rob says:

    Regarding the equity split question, you missed mentioning vesting periods and cliffs which is super important.