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Ask HN: How do I charge a client a % of profits?

• cowsup 3y ago
  Annual P&L report should suffice.
  • giantg2 3y ago
    You'll want it to be generated or audited by a 3rd party. You also have to agree on what defines profit in this case. The company might claim an overall/layman's loss because they reinvested or spent the profit on something else.
    • bruce511 3y ago
      Unless you want voting rights on how to spend all the money (which you can't have) the accounts, audited or not, are meaningless. Businesses make 100 decisions a week on spending money. All of it comes out of "profit". Most of it is necessary. Some of it isn't. Some is ultimately wasteful but 'seemed like a good idea at the time.' Some is there to reduce profit so to pay less tax. (In good years it's legitimately good to replace ageing equipment, do repairs, pay staff bonuses and so on.) In essence, by taking a profit share you are committing to be paid -last- the lowest priority of all. It's a terrible idea. If you want variable returns it has to be based on -revenue- and even then you're relying on the customers goodwill.
      • giantg2 3y ago
        I agree that revenue is a better measure, but I'm specifically addressing the statement around profit. If they do go with profit, some risk can be mitigated depending on how you define profit (what values it's coming from on the income statement for cost of goods sold vs all operting expenses, etc).
• btian 3y ago
  Audited income statement
• andy99 3y ago
  Depends on the industry and client doesn't it. I've heard of "Hollywood accounting" where movies were intentionally made unprofitable so that percentage-of-profit based payouts are low. You'd want to adjust how you do it based on the risk that expenses could be padded to make profitability look worse. Even if the client is completely legit, the incentive is there. It becomes like spending pre-tax money, so why not incur some more expenses.
• shoo 3y ago
  If you're in a situation where profit-sharing is on the table, you could instead ask for a revenue-share. There are fewer ways to game revenue share via accounting tricks or other shenanigans, whereas there's plenty of ways for insiders to extract cash from the business without it being classified as an accounting profit. For example, suppose surplus cash flows generated from sales are funneled into large executive salaries and classified as operating expenses. The increased expense of executive salaries reduces the business' profit, which would lower profit-sharing liabilities but wouldn't change anything from a revenue sharing perspective. Other dodgier ways could be related-party deals where the business enters into an agreement to buy something from an entity controlled by one of the executives -- leasing the company office owned by an executive for above market rates or so on. Cash is extracted from the business before being classified as a profit. But again, from a revenue share perspective, this doesn't change the situation.
  • marklubi 3y ago
    I second this. You want a revenue share, not a profit share. Never a profit share. It's way too easy to minimize profit (they're going to want to do that anyway to minimize taxes)... hire someone, raises, buy things, lease more office space, etc. Take the money off the top (revenue) so that you're an expense from the start that they can account for and can't easily manipulate to avoid paying you.
    • bruce511 3y ago
      I concur. Getting a percentage of profit makes you a taxman, and companies will optimize the accounts to pay less tax. In other words translate the phrase "profit share" to "voluntary donation" and the meaning will be the same. If you want uncapped upside then it has to be based on revenue, but even then it can easily be manipulated (A sell to B for pennies, which you get a share of, B sells to the market for the real money.) This is one of those cases where you should have a minimum-number in place, and you should be OK doing the work for just the minimum number. Treat anything else as Voluntary Bonus.
  • gadders 3y ago
    These people are the experts on minimising profit: https://en.wikipedia.org/wiki/Hollywood_accounting https://en.wikipedia.org/wiki/Hollywood_accounting
• b20000 3y ago
  you ask for audit rights in your agreement
• mcapodici 3y ago
  Another idea in addition to these ideas is charge based on number of licenses (e.g. linked to usage, number of users, or so on). This is easier to track and you can track it on your end.
  • codingclaws 3y ago
    Thanks, maybe I will ask another question with more details to see what my options are.