An Idea About Starting a New Software Company

[mouser]

Hi everyone,

I wanted to bounce some ideas off you guys+gals about an idea for a slightly unusual kind of software/freelance programming company idea and hear your thoughts on the matter.

This isn't really directly related to DonationCoder, except to the extent that i've met a few really good coders on DC that, like me, don't fit all that well into the normal corporate or traditional work-for-pay freelancing framework.

My idea is focused more on programmers who are incredibly highly motivated to work on projects that they are excited about and have strong opinions about what program ideas they are interested in, and who want to maintain some control/interest in the resulting work.

Ok so the idea is basically this:

• Programmers come up with program ideas that they are interested in working on -- or solicit ideas from possible funders.
• People who have some money to "invest"/"fund" who read about an idea they like then partner up with the programmer to "fund" development time.
• The funding money will be much lower than it would cost this person to hire a high quality professional coder to write the program if it was to be exclusively owned by them as a client.
• Instead, they would be paying the coder a smaller amount in return for being a partner in the project -- a 50% (or whatever) owner in the resulting code.  Both people would be involved in the program's development, and both would be emotionally and financially motivated.
• The main motivation for working like this is my growing feeling that for many of us, we need to believe in and be excited by a project idea in order to be fullfilled working on a project -- but that if we are we work our hearts out and really enjoy the work.
• In terms of a larger "company" -- i was just thinking that it's useful to have a sort of collective of a some other coders or even (gulp) project managers, who can oversea any given project, give advice, make sure it's on track, etc.
• The use of the resulting programs emerging out of any such project would have to be discussed and agreed upon ahead of time -- i.e. will it be open source, will both funder+coder be able to use the resulting product independently?, etc.  This may be the trickiest part of the thing.  But I'm envisioning that most of the appeal will be on working on a product that both people will share revenues from, like a website (or that either no one expects to make money).
• Another way to summarize what i'm suggesting in a simpler way is that the idea is to avoid a "client+hiredgun" approach, and move to an "equal partner" approach where one person puts up some money and the other puts in the initial coding time.

Thoughts?

[cranioscopical]

One of the 'partners' had better be good at marketing, and both had better be good at accounting.

Might be worth a try, for all that.

[Veign]

First,  the idea on paper sounds great and something that would produce a mutually beneficial relationship.  Both parties happy, one sees their idea come to life, the other gets funding to write code (which is all a developer really wants to do).

Second, the legal/contractual aspect would be a nightmare.  Partnerships work only when both parties have two things: 1) A very strong, well written contract and 2) 100% trust.  Blind partnerships (where you can't see or shake the other persons hand) will be a weak relationship that will only be as solid as the happiness of both parties.  Once an issue comes up (like speed of development, funding the project, project direction) the relationship will breakdown quite fast.

Questions:
- How do you write a contract when parties could span countries/laws - need a lawyer for this
- What happens when one party doesn't fullfill their requirement - either delivering code or funds. 
- What happens when the relationship totally breaks down.  Who gets what
- Who sells the application and handles taxes and expenses

I'm not trying to burst the bubble, just pointing out some of the issues that will come up and be difficult to handle.  Partnerships are one of the most difficult and brittle business relationships to have when starting out on something. 

It might be better to have a company that is a kinda of R&D software company that develops and owns applications of various types.  Then investors invest in the company, and all applications, while coders are paid from the investment and own a percentage of what they write.  The company controls, manages and accepts the legal responsibility of all projects.  Its kinda of like your idea except the company becomes the center of everything and investors are not dealing with coders in any way.  They are only investing in the company.  Coders are not dealing with investors, they are dealing with the company.  Maybe the more you invest the more you can influence what project is funded or developed.  At the end of the project the company sells, markets and distributes the application.

Anyway, this was only my initial thoughts and may be way off base.

[Davidtheo]

I agree with Veign.

Maybe a company that gets given ideas from people and then sets these ideas up as shareware where programmer can work on them as they want and for free.

[40hz]

Been down that road a few times. Not trying to rain on the parade, but here's my two cents worth based on my experiences:

1. You will probably have better luck seeking Angel rather than Venture capital if you go the route you're suggesting.

Venture capital usually wants a product that's either 'ready to go to market' or nearly so. VCs seldom (possibly never?) fund people that just "have an idea." The only exception to that might be when the people with the idea have a strong industry reputation, and a proven track record of delivering innovation both on budget and on schedule.

That's because VCs are not interested in building a company for the long haul. Their goal is to cash out as quickly as possible for as much as possible. Ideally, they want to get back their investment (plus several hundred percent more) within one to three years. That goal can do a number on people that want to build something lasting. Angel investors, on the other hand, are often more willing to fund something they feel is 'right' as opposed to just profitable.

2. One big problem I've encountered in many business deals comes when one party is providing the idea/product/service, and the other one is fronting the money.

In my experience, I have yet to see that arrangement work. Inevitably, the people that are doing the actual work begin to resent the people that "did absolutely nothing but lend us some money." And the people with the money invariably begin to want some role within the company they've funded.

Usually the 'money people' try to create managerial positions so that they can feel they're a part of the action. And because it's their money, they have considerable clout when they want something. It's a prime example of the Golden Rule of Capital: He with the gold rules.

I suggest that you make something other than just money be a criteria for working with somebody. Make sure they can also provide your venture with some other value such as industry contacts, marketing know-how, or legal services before you take their cash.

3. Be extremely careful if you enter into a co-development arrangement. That's where you agree to a reduced price for programming in exchange for your retention of rights to the code you develop. The programmer will always absorb the bulk of the risks under this type of arrangement.

Consider:

The person that paid for development got a program he wanted at a reduced price. If the programmer doesn't deliver, he gets his money back.

The programmer got paid less money for her actual work in exchange for an equity stake in something that, by itself, isn't worth much of anything. If the product doesn't sell, then it's just another case of "Oh well"

I occasionally need to contract programming services for some of my clients. There were many times back in the 90s when a coder offered a deep discount on the project quotation in exchange for the right to sell what they were developing for my client to other non-competing businesses.

And guess what?

a) I don't recall a single instance where my clients didn't take them up on the offer. 

b) I don't know of a single instance where such programs were successfully marketed to a broader clientele.

***

(eeek! active ping alert on my screen - server just went down somewhere )

Gotta run. More to follow when I get a minute.

[mouser]

Fantastic comments so far.. incredibly useful.  Please keep them coming.