Early stage startup, first customer wants equity?
We're a team of 2 building a SaaS service for a niche industry. The product/service is subscription-based SaaS -- we have hopes of charging $10k-$20k per year. (We've validated this price-range). We've not taken any funding from anyone, but both have savings to last for a while.
We have been working with company X to develop our beta. So far, it has been very productive, but no money has exchanged hands and only NDA's have been signed. There was a handshake-level agreement that our product would be tailor made to their exact situation, and they'd be our first customer.
Now that we're closing in on an initial beta release, company X suggests out of the blue that, in order for us to keep working together, they'd want a piece of our company. (No specifics yet, but we're expecting the discussion to be 5-10 points). The equity would be vesting over a few years, and would have no 'privileges' like voting/etc (only value will be at exit). In exchange, they'd continue working with us to develop our core product, be our first paying customers, and also work as our sales team. And, in their, words, "align our interests".
The last part, helping us sell, is compelling to us because we don't have many connections in the industry, whereas the company is multifaceted and deals with many of our potential customers.
The crux of the matter is: if we do go through with such an arrangement, how do we structure such a contract? Company X has assured us that if they don't meet certain 'benchmarks', they'd return our shares. What would these benchmarks look like? For example, is it appropriate to ask that they help us sell to, say, X leads per year? agree to commit to purchase Y licenses per year directly? Help us launch ancillary services? Provide us with access to certain sensitive data?
And, in exchange, what do we offer them, besides developing the services to their needs?
Sorry for rambling on, but all of this is new to us and any insight is appreciated.
@wheresmycraisin's retrospective from 2020 captures the critical transition from initial concept to the first dollar of customer revenue.
Discussions analyzed Show HN launch mechanics, cold DM outreach conversion rates, and the psychology of validating customer demand before writing code.
I feel for you, that's an unfortunate situation. We are around that price point and selling into a niche industry and also got these types of offers/demands earlier in our journey. I am very thankful we declined them although they were tempting. Part of building a company is building a customer acquisition process that is repeatable and scalable and bribery doesn't qualify. If you build a product without a repeatable and scalable sales system you will fail. If anything the customer acquisition is more important than the product. This is why companies like Dropbox famously faked the product demo video, got a big waitlist of customers and then made the product. You can solve just about any problem a company has so long as it has scalable + repeatable system for profitable customer acquisition.
There are other problems with this...
1. People who actually have connections and power typically also have money, and understand the rules of investing. Respectfully, I think you're dealing with lower-level people who may not be able to deliver on their promises.
2. Once you start bribing it's never enough. People who extort bribes from you in any form will always ask for more. In my experience, this is rooted both in their greed and desire to conceal their inability to actually add value. Rather than saying... "sorry I can't actually make valuable connections" they will ask for bigger incentives.
3. It will hinder your company long term, other investors and/or clients who become aware that someone got equity for free will then be anchored at free. Be confident, you're worth something.
4. There are rules around this, blame the rules. Laugh it off with them and say unless they are accredited investors individually and/or their company wants to pay $70K for the legal it's a no go. Say this nicely and they may back off. The "shit sandwich" is a great way to deliver bad news like this... say something nice, say no, say something else nice.
5. I handle most the sales for our company and you can take heart that you are probably onto something valuable, congrats. Most people have a logic flaw I exploit as a salesperson that when they want something they want it completely. Humans are very bad at indexing desire, further if you have something unique they can't get anywhere else then you are in charge. That's great, part of what you're going to have to learn is how to get customers excited enough to try/use/buy your product without being so crazed with it they insist on owning it.
6. If you can't beat back people's desire to own a piece of your company stall. Tell them you'd love to have them as a partner but all the legal details would cost a fortune. Make it clear to them that you can't "paper" a deal of any kind without money. This might make it their idea to get you some money.
I hope some/all of that is helpful. Sorry I didn't distill it better. Others may disagree with some or all of this and they are entitled to their view. Best of luck!
My startup was offered this by a very well known large enterprise. We said no because they would have insight on what we do with our other customers (their competitors). We sought the council of several lawyers and law firms in the valley and every single one told us to walk away immediately. An infant startup should do whatever it takes to keep the legalities as clean as possible. If your situation was similar to ours, your customer is bound to try to put IP ownership language in the contract. If you are seeking future investment, this can quickly make potential investors run away.
Take it as a compliment that they want your technology very badly to make such an offer. You should try to talk to their competitors immediately to get some validation and try to sell to them at the same time. Never indicate that they are your only customer. If you're a startup, try to win a market. Do not develop bespoke technology for a handful of major players. You will quickly find out that you are beholden to them.
I'd be happy to tell you more of our experience if you'd like (email me)
I'd stay far away from company X. If they are randomly trying to change the deal out of the blue, would you want to be in a deeper relationship with them?
Like the other commenter said, treat this as an incredible compliment. They see the value of your product and want a slice of the pie. Please approach your other potential customers (ie their competitors), and start removing their leverage on you.
Best of luck! Good problems to have!
If they are not paying you they are not a customer.
The equity requirement is a version of "if you do it for free, I will tell all my friends about you."
At best, that is an offer to tell all their friends about how you did it for free.
To put it another way, the potential client ran you around in circles instead of being forthright.
Is that who you want to bring on as a partner?
Good luck
"Thank you for your offer. We are not looking to sell any portion of the company at this time. However, in order to further align our interests, after your successful onboarding with the beta release we are willing to consider offering a commission to your sales team for new customers."