The problem with “revenue share”

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Written by dermdaly on August 21st, 2009

As an iPhone developer for hire, I get regular approaches from people with ideas that they would like to turn into realities. I sign non-disclosure agreements and then get brought into their confidence to explain their idea.

Some turn out to be better than others. Those with a broad appeal may become successes; those with a niche appeal will most likely not make much money; they possibly won’t turn a profit, but one man’s great idea, doesn’t appeal to another so generally I try to not make an early judgement call.

At some point in the conversation we get around to ballpark figures. This is usually when I explain why we will need to go into more detail. In fact, I typically cite my own blog post about pricing. The potential client usually sees the benefit in what I am suggesting, but 9 times out of 10, they will still want ballpark pricing. I understand this. They really want to know if I think their projects is a €500 project, a €10,000 project or a €250,000 project; They are basically asking for scale and if their budget will work.

In many cases, the potential client starts to talk about doing the project on a revenue share. The logic goes like this:

  1. They’ve put time into developing their idea; its a good one, and it is going to sell like hot cakes
  2. All that needs to be done is to knock the code together, get it on the app store, and await for the money to start rolling in
Moneymoneymoney

Picture Credit: Flickr User amagill

There’s a big problem with this approach. It ignores one large part of the problem.

Risk

If we work together on your idea, I’ve to put a great deal of effort into the software development. Software development is complex, detailed and a good programmer has very real talent, which has taken many years to hone. (I’ve never met a great programmer who wasn’t already at it from around 12 years old). Experienced programmers know that the devil is in the detail

So lets look at the proposition from another perspective. When did your idea come to you? While lying awake trying to go asleep? Perhaps you sat at home, with a pen and paper over many nights, scribbling ideas, honing them, refining them…
or

perhaps it came to you while you were sitting at your desk in work…getting paid.

And when am I going to do the work? Well, during my working day..when other customer’s should be paying me, so aren’t, because I am working on your idea, but that’s ok, because its gonna sell like….well..I’ve already explained that.

So..Imagine all goes well…and the sales do well…From day 1 we’re splitting the spoils, and this has really paid off. The customer who was going to pay me has gone to a competitor, but hey…I’m doing ok out of “very cool idea 1.0”. Version 2.0 will probably make even more anyway.

Or

It hasn’t sold well…I’m behind on my mortgage…The customer who was going to pay me has gone to a competitor..and he’s not coming back.

How are things with you?…..Oh…this was actually just a side project…so all is well; you’re still in your day job. Hey…nothing ventured, nothing gained right?

Ehhh…..

A good idea is valuable. If there’s real evidence of work being done to develop or prove the idea, that mitigates the risk. If you’ve crunched the numbers, even better. (If its that good, you’d be crazy to be giving chunks of the revenue away).

Tell you what. I’ve another model. Lets use some hypothethical figures. We’ve knocked around your idea. Its going to cost €10k to develop, and you’re interested in a revenue share. Now…lets consider the risk element.

Here’s a deal: I’m taking all the risk, and I see the value of your idea. So how about I do it for €5k, and there’s some compensation for the risk. There’s two things we can do. How about the first €10k it makes goes 100% to me, and after that we go 50/50 ? Or…How about we reflect the risk in the revenue share from day 1. So…Your investment is only €5k, but the revenue split is 70% to the developer, 30% to you.

Still interested?

Pic Credit: flickr user texaseagle

Pic Credit: flickr user texaseagle

Hey…..where’d ya go?

Comments (18)

[…] The problem with “revenue share” | tapadoo http://www.tapadoo.com/2009/the-problem-with-revenue-share – view page – cached As an iPhone developer for hire, I get regular approaches from people with ideas that they would like to turn into realities. I sign non-disclosure agreements — From the page […]

Great post Dermot.

We often get offered similar deals (replacing iPhone apps with web apps), and you’ve highlighted a lot of the concerns we have.

One other one, is that a revenue share deal is a fancy way of saying a business partnership. For example, if you build an app, and get say 30% of profits, then it’s in your interests to promote that application as much as you can, as you want to earn money.

So now “Mr. Ideas” has not only got you coding his app, but also has you promoting it. As a professional, you need earn your time investment back, and you’ll do this to the best of your abilities.

Say you charge €500 a day, and it took 20 days to build/deliver/launch etc, and disregarding that you’re doing bugfixes for free etc. You need to make €10,000 off that application to break even. As you’re only earning 30% of the revenue, you need to generate more than €30,000 to do that.

Since “Mr. Ideas” initial investment is usually minimal, he has less incentive to push this thing forward, where as you’re busy trying to pay your mortgage. He can walk away from this one, and work on “genius idea #2”. You’re stuck €10K, trying to make it work.

It’s a crazy arrangement, in exceptional cases it might work, but as a general way of building software it’s broken.

Gianni Ponzi says:

Hey, I have a great idea for me looking good in a Ferrari.

Maybe I could go to the dealership and they will give me one as I will be advertising their car while driving it 🙂

Anyone who has a real business idea will understand the importance paying the developer for their expertise.

99% of revenue sharing ideas = I don’t have the money or the idea isn’t good enough for me to waste my own money on it so the developer can take the hit.

You’re absolutely right! Remembre we met each other in a similar situation and you showed me that thi is correct. Now I learned from you. Anyway I hope one day we’ll work together.

Excellent post. My partners and I were laughing about this the other day as well.

There is no lack of great ideas and no lack of Mr. Ideas who have a 100k vision and a 10k budget or want to offer the rev share like they are being magnanimous.

Really great post.

Benjohn says:

Interesting stuff. Not a position I’ve yet found myself in, as I’m the iPhone developer and the ideas man. What has worked for me is employing people to help me out using a profit share. So, while I have ideas, and I can code, I’m not a good artist, writer, or musician. For my first app in the store I cut three others in to the profit, and I’m very glad that I did it. I basically split it up the 100% in terms of hours. I think this was pretty generous, but each of the people was putting in their own hours and taking on the same risk of not getting paid at all (or perhaps getting paid a lot). Anyway – it’s worked well, and I hope it is something that I will be able to repeat, as collaborating is great!

mm dermdaly says:

Hi Benjohn,
Collaborating is indeed great. And in your case, where you can clearly quantify everyone’s effort, then revenue share can work. Especially if everyone knows up front that there a danger of getting nothing. My post is far more about those people who think that their idea is worth more (or the same) as my time, without ever considering the risk aspect.
Thanks for your comment,
Dermot.

Francesco says:

What about this revenue share model?

1) I put the idea.
2) You estimate the cost of building it.
3) “we” build it, I do the marketing/design of it and you do the coding.
4) You get all the revenues until you get twice as much the cost you had estimated.

5) After that point I own 80% of the idea and you own 20%.

Makes sense? Or is it still totally crazy?

mm dermdaly says:

Hi Francesco,
It depends on the situation. it is certainly less crazy in that:

It recognises the risk by paying back double if it works out
It also has some long term payback for the developer
If it is such a good idea, the ideas guy will get justly rewarded too

Of course, the final decision will be between the ideas guy and the developer.

Many thanks for taking the time to comment,
Dermot.

Jake Kahle says:

Great post. As a former Mr. Idea with zero money, in the beginning I quickly learned that developers are not risk takers. Accordingly, for all those other poor Mr. Ideas out there, approach the industry which will benefit from your app. Offer them the rev share deal as I did successful with my casino partners.

Then, when you have your development funds, find a developer who didn’t turn you down when you were poor. Why make somebody who lacked faith in your ideas rich?

mm dermdaly says:

Hi Jake,
I agree that many developers aren’t risk takers. But that would be why you are the entrepeneur, and they are the developer for hire. I’ve shown the real practical cases why revenue share is difficult. As the ideas person, you can however improve the odds: For example if you can prove the size of the market for the app (using basic market research for example), you can give the potential sharer more confidence, and more belief in the project. I can think of two examples recently of approaches where I was offered a revenue share, and when I asked basic questions, the guy hadn’t a clue. It showed me that he didn’t think this through in any detail, yet was willing to “offer” me a revenue share to get it done. Naturally, I declined.

Many thanks for adding to the discussion.
Dermot.

[…] This post was mentioned on Twitter by Michael Carnell, powpow. powpow said: The problem with “revenue share”, great post from @dermdaly http://bit.ly/RZ342 […]

Creativeone says:

It’s seems to me that as a creative force you should also give credit to those folks with the ideas after all if you had those same ideas then you wouldn’t have clients.
Next yes you can not enter into any relastionship without work, what are you bringing to the table.
SEO, Design, Testing, Coding, project management, or distribution you need to bring something other than idea concepts.

That’ my two cents on this issue

mm dermdaly says:

HI Creativeone,
I’m not sure I understand your argument. If I had the ideas, I’d simply develop them (if I thought they were good enough) and sell them, taking 100% of the revenue.

Christopher says:

There is a flip side to that coin. I’m a front end developer with no experience developing iPhone apps. I approached an app developer with an idea I had related to a former industry I worked in. I offered him 25% revenue, he was skeptical at first but chose to do it in the end. Now he’s making over £250 a day while I’m working 8 hours a day to provide the data for the app. I’m not complaining. It took both of our skills to realise the product.

Barry says:

I saw the thoughtful blog about how to fund a development.
From the creative end, the software (app or web application) will serve a useful purpose for me, so I get value even if it only has one customer. But there are plenty of people like me.. (I think). Most of the risk is funded from the creative end. From the developer end, he pays the bills, has a chance to build his business, and might pay off his new car.
If the program takes off it can fund a salary of someone who can unload some of my work and support the program as well. Ultimately I might see a profit (after income is about $100k).
So my thoughts are that I try to get the developer to do it at cost. Then his revenue share is possible if he does it well. Also as the program is improved more users try it and like it, with various related revenue streams.
So the model might be up-front break even, some maintenance garanteed payments, then a high revenue share until maintenance costs are covered, then down to an “Apple share” of 30% once income is more than, lets say, $10k per annum.
My budget might be (USD):
20k to do the initial working version
5k to tweak and do the “run in” phase
2k to support the web site hosting etc
50% of next 10k
30% after that (it is not an App so we have not given a percentage to Apple yet).
====
Questions:
1. Is this a ballpark deal for a developer?
2. Who has an actual worked example of something that worked well and that both sides were happy with?

Sebastiaan says:

I really think that you are not reasonable at all. For example, I have put in 100’s of hours into developing an idea, researching the idea, developing a visual design and developing a design for a database. And doing all this while having a job is hard, I can tell you that.

Then you ask me 5k and a revenue share at 30-70%??! Why don’t you do a project in your spare time, this way you can pay your bills and invest time into an idea you believe in, whether that is your own idea or someone else’s idea that you think would be a game changer. You just want to eat from both sides, that’s why someone like me would never do business with you.

Being an entrepreneur is all about taking risk in something you believe in. Whether that is money or time isn’t making any difference. I am invested, but you want to pay upfront and take most of the revenue….that’s just making people upset man.

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