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Fair Share?

Keys to negotiating your piece of the action.

When deal-makers talk about their slice of the pie, they mean some kind of commission, royalty or equity participation, usually calculated as a percentage. Sound simple? It's not.

First, what's the percentage based on? Is it on gross or net? If it's net, what comes off the top? Crunch some numbers to make sure you understand the calculation. Also, consider whether there is a floor or a ceiling on the total payable.

Second, when is it payable? Is it keyed to some event or condition? If it never occurs, is there an outside date? Must the deal be signed? Does it apply to the entire percentage, or just a part? Is it payable for a limited time, or in perpetuity?

If the percentage is in stock, don't try to figure it out yourself. The number of shares can mean nothing without considering voting rights, classes of stock, buyouts, vesting schedules, conversion and registration rights, dilution and the like.

There are also "political" factors. Percentage players in a deal often have a strong incentive to close quickly. No deal, no percentage, so the faster they get there, the better. This is a predictable pattern in many deals--it's up to you to work with or against it.

Finally, percentages can mean big upsides. Reserve these rewards for the people or companies that are key to the venture, or those who take an unusual amount of risk.

A speaker and attorney in Los Angeles, Marc Diener is author of Deal Power.

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This article was originally published in the March 2007 print edition of Entrepreneur with the headline: Fair Share?.

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