Author: Mitesh Shah (email@example.com)
A risk-reward based freelancing contract that allows startups to hire the best people with a sliding scale of risk-to-reward ratio.
Frustrated, cash strapped startups often end up using sub-standard freelancing work that creates vendor lock-in, reduces product quality, puts them behind schedule and ultimately reduces their chances of success. This is especially true in technology dependent startups that depend on an app or web based service. Amazing UX / UI design, and high quality easy to maintain code does not come cheap.
Conversely, those who are really good at something will not (and perhaps should not) work for below market rates.
Sometimes, founders end up giving away co-founder level equity to someone who is just good enough to build an MVP, and will not see things through for the next 5-7 (or more) years which is what it will take to succeed. Dead equity is hard to recover and turns off potential investors.
We are proposing a new way to solve these problems by using this template contract to hire those who are really good, and to align the relationship for mutual success.
- Encourages fruitful relationships between startups and experts / high quality freelancers.
- A fair way for everyone to benefit from success.
- Startups do not lose any equity.
- Short term relationships become more feasible. This means you can higher whoever you need at the time without having to essentially marry them.
- The reality is that startups need to change their product quickly, and ALL THE TIME.
- If a freelancer is paid to do a particular task, or has completed a required milestone, they are unlikely to enjoy making improvements or changes.
- By making this an hourly arrangement, the Freelancer is likely to be happy to take on more work, and this reduces the amount of time wasted on negotiations per task.
- When billing hourly, time theft is a real concern. We encourage all parties to be honest and transparent. This builds long term trust. To combat this issue, we also encourage startups to hire vetted / highly trustworthy individuals and perform their due diligence up front.
- Create an official word / pages document (with letterhead of Startup organization), copy and adjust the template text as needed.
- If the Startup or Freelancer already has a contract that they would like to use, then carefully select clauses from this template so that they do not conflict with other clauses.
- The target rate, actual rate, date ranges, immediate % increase and accumulated % increase are all negotiable. Both parties should negotiate the terms of this agreement to their linking and use the template for structured negotiations and discussions.
- Any Actual Rate that is significantly lower than the prevalent market rate, or significantly lower than the target rate typically indicates a high level of risk. We urge both parties to structure more aggressive rewards for higher risk agreements. This is because in general, startups have a high failure rate, and it is highly possible that the Freelancer will not receive further compensation.
- Startups and freelancers are encouraged to consult their mentors, peers and/or lawyers for any concerns related to the final proposal.
** Please note that this template has not been written by a lawyer nor reviewed by one. It is a proposal directly from the organizer at Chai Combinator. **
Agreement Participants & Duration
This agreement establishes a contractual working relationship between __________ (the Startup) and __________ (the Freelancer) starting __________ (Start Date) and ending __________ (End Date, which only specifies when the Freelancer contract ends, not the end date for Royalty Payments).
Rates & Royalty
The Freelancer’s target rate is __________ per hour/week/month.
The Startup will, however, pay the Freelancer __________ per hour/week/month (the Actual Rate), and the difference between the Target Rate and Actual Rate (Deferred Royalty Base Rate) will accumulate into the Deferred Royalty system as follows:
- The Startup agrees that the Freelancer is sharing the risk and is thus entitled to rewards if this startup does succeed.
- Deferred Royalty will be equal to Deferred Royalty Base Rate + __________% (the Immediate Reward).
- The total Deferred Royalty owed under this agreement will accumulate in value at the rate of __________% per month/quarter/year until fully paid/converted (the Long Term Reward).
- The maximum payout of the Deferred Royalty for the Freelancer is capped at __________. (the Royalty Cap) (Leave blank if no cap is needed)
- For accounting purposes, Deferred Royalty is not a loan or actual debt and should not enter the books as such. Rather works like an executive bonus IF & WHEN one of the Payout Conditions occur.
- The Startup (or IP owner) is still functional as of __________. (the Maximum Date)(Leave this blank if there is no Maximum Date)
- The Startup raises __________ in capital internally or from investors (Leave this blank if payout is NOT triggered based on funding).
- The Startup grows to __________ in gross revenue. (Leave this blank if payout is NOT triggered based on gross revenue).
- The Startup reaches __________ in profits. (Leave this blank if payout is NOT triggered based on profits).
- The Startup is acquired for any amount greater than __________ or by an entity whose valuation is greater than __________ or by an entity whose turnover is greater than __________. If the Startup, or the work product is acquired by another entity for less than this amount, then the new owner automatically replaces the Startup for the scope of this contract. (We recommend NOT to leave this blank).
- The Startup decides to pay the bonus early. Yay!
Optional Equity Conversion Clause
- The Startup agrees that the Freelancer may opt to receive shares instead of currency for the Deferred Royalty payout. The price of shares will be set based on the valuation of the company at the time of payout minus __________% as a discount.
Quality of Deliverables
The Freelancer agrees that any and all work performed under this agreement is fully owned by the Startup and they are entitled to reuse, sell or repurpose it in any way it chooses to.
Signatures (with date)