Whether it's a commission, a participation, a royalty or equity, when deal makers talk about taking "a piece of the action," they usually mean some kind of percentage. It may sound simple, but in the real world, cutting someone a fair slice is not. Here are some things to think about:
1. Is it justified? Percentages can mean big upsides. Reserve these rewards for those who really bring value to the table-usually the people or companies that are key to the venture, or those taking an unusual amount of risk.
2. Buyer or seller? Percentages motivate those on the selling team to fight for top dollar. But on the buying side, there's a conflict of interest: The more the buyer pays, the greater his or her percentage.
3. Would an hourly rate or a flat fee be less expensive than a percentage? This is a common theme when professionals are involved. If they'd perform the same service either way, run the numbers to see which is better for you.
4. What's the percentage based on? Is it on everything or just a part? Is it on gross or net? If it's net, what comes off the gross to get there? Make sure you understand how a percentage is calculated. Crunch some numbers. If your opponent has any skills, he's good not only at counting the beans, but also at hiding them.
5. Is equity involved? Stock is complicated, so you must get professional help. The formalities are legion, and the pitfalls nasty. The actual number can mean little without taking into account voting rights, classes of stock, buyouts, vesting schedules, conversion rights, registration rights, dilution and the like. Don't try this at home.
6. When is it payable? This depends on the precise wording of your contract. Is payment keyed to an event or some condition? If that event never occurs, is there an outside date? Does the deal have to be signed? Do the terms of payment apply to the entire percentage, or just a part?
7. Is there a floor or a ceiling? Providing for a minimum or maximum can be a great move, depending on which side you're on.
8. For how long is it payable? Certain deals can go on for years. That percentage income stream can be well-deserved passive income or a total boondoggle, depending on who is getting it and why. Ask yourself: Should these payments go on forever? If not, when do they stop? Clauses that phase them out are sometimes called "sunset" provisions.
9. Can I audit? The calculation of profit shares, commissions, percentages, royalties and the like is prone to abuse. Sadly, it's often not a question of whether you'll be shorted, but of how much. Having strong audit rights can really help.
10. Who's rushing me? The percentage players in a deal often have a strong incentive to close quickly. No deal, no percentage; and the faster they get there, the better. This is a predictable current in many negotiations-it's up to you to swim with or against it.