Contracting Issues for Software Developers

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Contracting Issues for Software Developers Powered By Docstoc
					Business & Legal Issues for
Software Developers

      Surviving vs. Thriving:
      Making the Deal Work for You

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Taxation and Choice of Business

   Factors to Consider in Choosing Your
    Business Entity:
   1. Taxes
   2. Liability
   3. Exit Strategy

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Sole Proprietorship

   Easiest to form
   Disadvantages—wide open for liability
    and self-employment tax is 15.3%

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General Partnership

      Liability is shared between
      partners, but they are fully liable
      or acts of partnership and they
      pay 15.3% self-employment tax

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Limited Liability Partnership

   Limited partners take no part in day-to-
    day management of the partnership,
    in order to limit their liability
   General partner is fully liable for the
    acts of the partnership, so general
    partner is usually a corporation
   The corporation usually does not have
    a lot of capitalization
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Limited Liability Partnership—

   The limited partnership structure is
    frequently too burdensome for a small

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   C corporation—corporation is liable,
    not the shareholders. But in exchange
    for the corporate shield, it’s taxed at
    the corporate level and again at the
    shareholder level.

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   S corporation—you still have the corporate
    shield for liability, but this is a pass-through
    entity for tax purposes. S corporation does
    not pay taxes on the corporate level.
   You have to pay yourself a salary, but
    there’s no requirement for what the salary
    should be—it must be reasonable
   Portion of profits that is not salary is
    distributed as dividends
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S corporation—cont’d

   You save yourself a lot of taxes with
    the S corporation and it’s a very good
    entity for small businesses.
   Disadvantages: subchapter S election
    must be filed within 75 days of
    formation; you have to pay yourself a
    salary; annual reports have to be filed

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Requirements for Subchapter S

   Cannot have more than 100 members
   Cannot have more than 1 class of
   A corporation cannot be a shareholder
   A trust cannot be a shareholder

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Limited Liability Company
   Pass-through entity and offers more
    flexibility than the subchapter S corporation
   No restriction on number of members and
    corporations can be shareholders
   Owners of LLC are called members. LLC is
    governed by operating guidelines and
    members are bound by those guidelines.
    LLC is can be operated by all the members
    or by those who are designated as
    managing members.
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Limited Liability Company
   Unlike limited partnerships, participation in
    management by members of an LLC does
    not expose them to personal liability
   LLC can be taxed as corporation or as
    partnership, depending upon its
   for an LLC that is a small business, the
    operating guidelines are usually drafted so
    that so that it’s classified a partnership for
    tax purposes.
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Limited Liability Company

   When the LLC is classified as a
    partnership, the LLC is disregarded as
    an entity for tax purposes and it’s
    taxed as a partnership, so the profits
    are subject to self-employment tax
    LLC entity is a good choice when you
    cannot form a Subchapter S

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II. Compensation

   Know the going rate for your skill set
   Understand the concept of Margin. If
    yours is a small business, then the
    only way you can grow your business
    is out of your margin. That means you
    have to have a margin.
   Knowledge is power, so get
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   Meet with you accountant to determine
    what your hourly rate should be, given
    your costs for sales & marketing,
    continuing ed./training expenses,
    administrative tasks, and your
    downtime between engagements
   the amount which you must have, and
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   Setting your rate vs. negotiating
    your rate: Don’t let your customer
    set your rate for you.
   You can negotiate in order to get
    business, but only to a point.
   Meet with your accountant to
    determine your negotiating range.
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 --Set your hourly rate at the
   amount you need to have in
   order to achieve a good margin.

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How to deal with clients who want
you to work too cheaply

   Due to cash flow, if you are in the position of
    having no alternative but to take a rate that
    you know is too low, take the engagement,
    but tell the customer it’s an introductory offer
    and the price will go up in 30 days (or 60
    days, if you can’t get 30 days)
   Try to keep the number of hours you spend
    on this engagement as close to 10 as
    possible (1/4 of your work-week), so that
    you have time to pursue obtaining higher-
    paying engagements
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   You’re a small business so your payment
    terms should be net 14, no more than net 20
   If you have discounted your rate to get the
    job, you cannot discount on the front end
    and the back end as well. In other words,
    you must be paid on time. Make sure you
    have a quick escape clause in your contract
    and terminate it if they’re not paying in
    timely fashion
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   Beware: If as an independent contractor,
    you accept a rate that is too low, you might
    increase your rate with that client over a
    period of time, but you will never get your
    rate up to where it should be with that client
    because they won’t value your services.
    Even if you raised your rate 25% each year,
    it would take you 4 years with that client to
    get to where your rate should be, which is
    just an unworkable arrangement.
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Equity compensation
   Sounds nice, but unless you have valid
    reason to believe that the stock in this
    company is well worth providing your
    services for equity, the last thing you need
    as a small business owner is to be another
    minority shareholder in a young startup
   Unless there’s been a valuation of the
    company by a disinterested party who does
    see value, in many instances, the stock is
    worth very little, and may be in the
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Equity compensation-cont’d.

   Ask questions like: who performed the
    valuation of the company? How did they
    arrive at the value of the shares? How will
    you get your money out of these shares?
   You can take payment in equity, but do so
    sparingly. It’s a better combination to give a
    reduced hourly rate + equity compensation

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Barter Compensation
   Also called “swap”
   You can provide services on a barter basis,
    but this is still considered income and you
    have to declare it for taxes.
   There are a couple of barter business clubs
    in the Triangle area and bartering can be a
    way of obtaining needed services when
    cashflow is at a trickle.
   Keep barter to a minimum, because you
    can’t meet your expenses if you take too
    much business on a bartered basis.
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Working with Contracting

   Even if you’re working through an
    agency, you should still negotiate to
    get the best rate you can. This comes
    back to knowing the going rate for your
    skill set

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Points to Consider

   If your annual salary for your skill set at a
    company would be $83K, this is $40/hr.
   If the agency is paying you $40/hr. and
    billing your services out at $80/hr., I can
    argue that this is fair, given the amount of
    marketing and sales they have to put into
    locating the opportunity, plus they pay you in
    advance of collecting.

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Points to consider:

   If the contracting agency is paying you
    at $40/hr and billing you at $120/hr.;
    notice the nice MARGIN they have
    built into their price.
   What do you need to grow your
    business? MARGIN
   So, try to negotiate a higher rate.

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Points to Consider:

   This assumes that you have already
    done your research by asking the
    necessary questions to learn the rate
    at which they’re billing your services.
    Remember, knowledge is power and
    you want more power over your
    destiny so you can grow your company
    (which means you’ll have more power)
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Points to Consider:
   What’s their best alternative if they don’t hire
    you? What’s your best alternative? How
    much do you need the deal and how much
    do they need it?
   Always try to increase your leverage. This
    means “Get more customers. Have more
    than one (or two) revenue streams.”
   Join networking groups, professional
    groups, chambers of commerce, and
    network, network, network to get more
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Contracting Agencies
   Re-negotiate your rate when your job duties
    increase. If you’re working longer hours, re-
    negotiate your rate.
   It is not a good working relationship where
    you are employed by a contracting agency
    and your job duties have tripled in the past
    year, but your hourly rate is the same and
    your benefit package is unattractive.
    Remember that people will treat you exactly
    as you permit them to treat you.
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Contracting Agencies

   Noncompete clauses shouldn’t be
    longer than 6 months with a
    contracting agency.

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Points to Consider:

   Take courses on negotiating strategies to
    improve your negotiating skills. Remember
    that it is always more difficult to negotiate on
    your own behalf, and do what you can to
    improve you skill in this area.
   Recommended resource: Gain the Edge!
    Negotiating to Get What You Want. Martin
    Latz, author.

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Contractual terms

   Protecton of IP—Unfortunately, almost
    every company will want you to assign rights
    in copyright, and invention rights, to them. If
    you do not consent to this, they simply do
    not engage you.
   Work for hire is commissioned work. The
    company will generally require that they own
    the rights to the software that you
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Protection of IP

   If you have developed software and
    you want to market it, take the time to
    register a copyright for it. For a $30
    filing fee, you get a lot of statutory
    protection ($150,000 per infringing

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Contractual Terms
   Indemnification—This is where you get to
    reimburse everybody for all their legal
    expenses, including the dollar value of the
    judgment, if anything goes wrong.
   Try to avoid indemnification.
   If they won’t agree to the deal without
    indemnification, make sure the clause is
    mutual. Also, factor the increased risk into
    the cost of your services. Purchase
    additional insurance and factor that into the
    cost of your services as well.
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Contractual Terms

   Waiver of Implied Warranties—
    disclaim all warranties, express or
    implied, including any warranties of
    merchantability or fitness for a
    particular purpose. Has to be
    prominent, IN ALL CAPS

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Contractual Terms

   Limitation of Liability—Limit your
    liability either to the dollar amount of
    the contract or to the amount actually
    received under the contract. Limitation
    of liability clause has to be prominent,

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Contact Info:

Sharon S. Acree
Acree Law Offices
3737 Glenwood Avenue, Suite 100
Raleigh, NC 27623-0042
Phone: 919-272-1376

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