Paid on the Come

"We've got a great market, and this is going to be a great product. Just do this work for us, and we'll let you have a cut of the profits when it starts to sell."

When you hear these words, run. Every bad business deal I have ever been involved with as a consultant involved getting paid on the come.

Which is extremely sad, because the whole notion of profit-sharing is so appealing to the politically conservative, free-market, entrepreneurial spirit. In a perfect world, it seems like everyone ought to be paid this way: with a fair share of the actual profits. It should give everyone an incentive to work for the good of all, since everyone is sharing in the same pie. It makes people look to both the top and bottom line, controlling costs as well as maximizing revenues. Most importantly, it makes people share in risk, which provides a level of incentive beyond the mere humdrum, work-a-day sorts of incentives and disincentives.

So if it's so philosophically ideal, why has it been a source of so much lost revenue and venomous relationships in the real world?

• Profit-sharing relies on trust. You have to trust that you're going to get paid when the money actually comes in. It seems like this ought to be a simple thing to monitor, but it's not, because cash-flow is often a hand-to-mouth affair in entrepreneurial ventures, and absolutely everyone is hungry for the cash. "Gee, we got some money in this month, but next month might be weaker, and we still have to pay some bills, so I'm not sure we're really in the black yet . . . ". Worse yet, it is in the nature of businesses to immediately reinvest their capital, rather than cash it out. "Ummm . . . well, we've got some momentum now, and we won't be able to keep up with the competition unless we hire more salesmen now, so we still don't have the money..." In the end, you have to trust that whomever was going to cut you in "on the back end" will be able to withstand the pressures and deliver on what they promised.
• Requests for deferred payment usually reveal weak business plans. There is, of course, a reason that someone is asking you to get paid later. It means that no one else, including the client themselves, was willing or able to come up with the cash to pay up front. There are a few perfectly justifiable reasons why a business might be in that situation; there are also hundreds of bad reasons a company finds itself needing interest-free loans from workers. No matter how you slice it, there is a weakness in the business case, and you are being asked to fill in the gap.
• Lack of cash is the only natural check against stupid ideas. Most businesses and business ventures, even the ones that manage to get financial backing, fail in the end. Without the enforced discipline of cash management, many many more stupid business ideas are unleashed on the world. When you agree to take a back-end share of the profits, you are foregoing the most important protection against being involved in an ill-advised venture.
• Shared risk must be evenly shared to properly incentivize a team. You should only accept a share of the risk in a venture if everyone else is taking a share of the risk, too. If not, when the going gets rough, you will find yourself putting in extra time and energy while everyone else kicks back and takes a free ride.
• Desperation can masquerade as bold entrepreneurship. Even if the others are sharing in the risk, they may be risking so much because they have exactly nothing to lose. If a guy is 100 grand in the hole with a dead product and no business plan, he might in fact being sharing the same risk as you . . . but only because he has no choice.
• The continued relationship must be more valuable than the individual venture at stake. Trust can only operate if all parties have more to gain from continuing the relationship than from whatever can be gained in this particular deal. You can be much more assured that everyone will do the honorable thing and keep their commitments if they still have to work with each other in the future. If it's a one-time deal, and one or more of the parties has no interest in continuing on in the future, then the incentives to cooperate drop of drastically, and it becomes much more tempting to leave the other guy holding the bag.

If, after all the warnings and caveats, you still feel like you want to forgo up-front payment for a cut of the profits, here are some simple guidelines:

• Never take all your compensation on the back end.
• Never get so involved in a venture that you can't afford to walk away from it completely, unless it's your own business.
• Always make deferred compensation an explicit part of a written contract. Even if Accounts Payable asks if they can pay you a month or two later, get an explicit agreement of what they are going to pay and when they are going to pay it.
• From the beginning, demand an audit trail be regularly provided of profits, so you know whether you're getting your fair share.
• The moment the audit trail stops coming to you, or the moment you don't get your fair share of the profits, stop all work immediately. Don't move a muscle until you get what's coming to you. Even your best friends will put of paying you if they think they can get away with it.
• Only work with people who are as honorable as yourself.