No, it's basically they get a discount the faster they pay. 12 months it only costs them $2M (they've said this is very unlikely).
It gives them an incentive to pay me as quickly as possible.
There is no "earn"out, but we do need to provide them with some support - but we get to charge whatever we want for this (they pass the cost on to their customers). We certainly don't have to work full-time for them, and they know we can do this (we all have other gigs).
This payment plan and the amount of discount strikes me as a point of concern. Why is it "unlikely" that they can pay the $2M over a year? Why such an extreme discount? I'd start digging there. Is their business viable for 3 years?
Why don't you to ask them to borrow $5M, pay you that amount now, then let them pay off the loan over 3 years? At 12.5% interest, total payments come to about $6M for a 3 year loan term.
It's a way of shifting risk from you to them. Somehow, I doubt they'll agree; but their response may be very informative and helpful for further negotiation.
> Why is it "unlikely" that they can pay the $2M over a year?
Because this will be a new product for them, they expect it will take several months before they start to make any revenue with it.
> Why such an extreme discount? I'd start digging there.
Yeah, it seems like a big jump. I asked if it could be monthly pro-rata and they agreed to that.
> Is their business viable for 3 years?
I think so, or they'll get acquired.
> Why don't you to ask them to borrow $5M, pay you that amount now, then let them pay off the loan over 3 years? At 12.5% interest, total payments come to about $6M for a 3 year loan term.
Because they don't know that they'll be able to sell the product that they'll be building around my product. This way if they can't they can cut their losses without being on the hook for the entire amount.
I don't see that I'm taking much of a risk, if they terminate the agreement we get to keep whatever we've been paid to-date.
With everything you've posted (including the comments) it sounds like the company is trying to make you and your partners believe they wont be able to pay the $2M within 12 months in order to get you to agree to the deal. You're under the impression that you'll make a cool $6M and that's what their betting on. In all honesty I think they have the money all ready. Probably more too. You mentioned they where on the verge of making a deal with another company right? Who's to say the other company didn't demand $4M+ up front and the whole reason they're bailing is because they can get it from you for $2M?
I know it's depressing to hear but you really need to think about it and do some financial research on the company. Get legal advice. Don't be forced into signing anything just because the company is "short on time". Remember they want YOUR product. If they want it bad enough they'll stick around for a few weeks. Hell they may even offer more money.
Part of me wants to say that is a paranoid view, but I must confess that the degree to which the purchase price ramps up so quickly is a source of concern for me.
$2M to $6M is a dramatic difference. It's plausible to say that they're trying to do a deal that sounds like $6M but is, in reality, $2M.
It gives them an incentive to pay me as quickly as possible.
There is no "earn"out, but we do need to provide them with some support - but we get to charge whatever we want for this (they pass the cost on to their customers). We certainly don't have to work full-time for them, and they know we can do this (we all have other gigs).