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Ideal Profit-Share Ratio? And Share Your Thoughts

Thread title: Ideal Profit-Share Ratio? And Share Your Thoughts
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03-22-2012, 12:35 PM
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tropunk is offline tropunk
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  Old  Ideal Profit-Share Ratio? And Share Your Thoughts

Hi Freelancers,

This is John, a web designer / developer from India.

Was browsing few links related to profit-share and merger terms for a freelancer-joining-a-company scenario.

So I have been working as a web developer since last 4 years and have got good reputation in the industry with decent clientele. An agency who wants to start their in-house web development wing has now hired me for a month to see how things go. Now the month is coming to an end and I am supposed to send a proposal regarding financial matters on how can this be carried out.

Few things you need to know:
- They are giving me salary but way less ($300/mo) than I already earn. Their say was that it will be low because they are looking at "Profit-Share" relationship, which can be my main source of earnings.
- I will be heading the web dev department, they will be providing me with a team to work under me as and when more projects start coming.
- I am responsible for almost everything, generating leads, sending quotes / proposals, confirming jobs and executing them.
- I am looking at a long-term relation with this company, they expect me to grow their business into 3 folds with the addition of web development wing.

Now I am really confused as to what profit-share ratio should I include.
I don't even have any idea on who gets t he bigger share.
The magic word here is "Profit" share, which is NOT the share of actual turnover. So basically they will calculate the total web dev jobs I got in every quarter, remove out the expenses (I have no idea what expenses) and then whatever is left, which we call profit will be the amount available to be shared as per the ratio I am asked to decide.


I have never worked in a company before, neither have I done any full-time job. Always took my jobs on per-project basis. Hence, quite unaware of how things go at such places.

Can you all please help me out here?

Also share your thoughts about whether you think I made a wise choice? I am looking to grow the business and make it long term. But I can't afford an office-space or hiring a team. So is this a good approach?


Thanks,
John D'mello

03-22-2012, 06:07 PM
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Lowengard is offline Lowengard
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  Old

Truthfully, John?

This sounds like a situation where you need paid-for advice from someone who knows the business environment and norms in your area, not the wisdom of crowds.

That said, here's what I think. It is in no particular order.
1. In essence, this employer is asking you to work on commission. So you could read advice related to that to get a sense of what to do and how to do it.
2. If you want to earn at least as much as you were earning on your own, then take the difference between that number and what you're paid, and that's the amount you need to generate from profit-sharing. If the business grosses $10,000 per month and their profit margin is 10% of gross, then their profit would be $1,000. If you need to add $100/month to your salary to bring it up to what it was before you'd want at least 10% of the profit. (I used these numbers to make the math simple.)
3. On the other hand, I assume that when they say "profit share" they're talking about sharing the profits only of the division you're about to start. Therefore, you are assuming considerable risk in this venture: they want to leverage your knowledge, your client base and your ability to manage a team of employees, all to their benefit. And under the circumstances, I don't think it would be unreasonable to ask for 90-95% or even 98% of the division profit, at least until it's well established.
4. While I don't think this is totally unworkable, the first thing you need to settle is what each of you gains from the arrangement, and what each of you risks. Determine the balance of the four (your risks and rewards, the employer's risks and awards) and you'll begin to have an answer.

03-22-2012, 08:05 PM
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Lowengard,
Thank you very much for sharing your thoughts. It did help me resume thinking on this, I was almost blocked.
I guess what you said is the correct way to go, majority of the share to me until it's established and once company starts putting in their own money for hiring the team and other such things, they can increase the cut.
Also, good help with that calculation. It was obvious but I wasn't thinking on those lines for some reason :P

I will have a talk today with the CEO and will probably come back with more questions.

Anyone else wants to give their inputs? I'd appreciate it.

Thanks very much!
John

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