Ethics question - friends vs. business

[OmniGLH]

Ok so I know it's touchy to mix money with friends, but in my quest to find ways to make side money to cover this godforsaken sport we call roadracing - I think I may have stumbled upon something.

I'll try to keep this very general and clear-cut.

My buddy and I have a new mutual hobby.  Upon getting into this hobby, we found some areas where we could make some improvements.

1 - I identified the problem.

2 - I came up with the idea on how to solve the problem through the creation of a "widget."

3 - Based on our conversations, my buddy created a rough sketch of the "widget" along with a very rough but functional prototype.

4 - Buddy and I both road tested and verified the functionality of the prototype.

5 - I then took the rough sketches and prototypes, cleaned up the designs, and got them loaded into AutoCAD.  (Yes I own a legit copy of Acad - I did it for a living while going to college.)

6 - I then converted the Acad file into a specific file format, and sent it over to a mutual friend of ours, to have these "widgets" cut on a laser-cutting machine.

Now... you would agree that it's fair to expect a portion of the profits in this project, right?  It was my original idea, but we both worked on the physical solution.

Other facts:

7 - buddy will incur miscellaneous costs associated with selling this "widget" as a kit, including mounting hardware, etc.

8 - buddy will incur all advertising costs.

9 - buddy will be assuming all "risk" involved in selling this product through his self-owned business.

Now... with these new facts thrown into the equation, what would YOU think would be a fair %-age to ask for, since I don't feel I should GIVE this away?  10% of the margin, 20%, 50%?  Keep in mind he IS one of my best friends.  We're not arguing or anything about it - in fact, I haven't really even approached him on it yet. I don't mind helping a buddy out on this - but it's a good idea and it could result in a decent return.  This past weekend we pre-sold 5 of these things, just based on very rough and ugly, hand-cut prototypes.  We didn't even give them a price (we haven't worked that out yet) - they just wanted one, regardless of cost.

My thoughts are that I was leaning towards 20% of the profit, but then also cover 20% of his advertising expenses for this particular part.  

Any thoughts?

[K3 Chris Onwiler]

As the author of a novel which will sooner or later be published, my profit will scale out at 12% of the net profit margin.  It will take x number of sales before I even get to that scale.  I put in all the sweat to create the manuscript, but I am involved in none of the monetary risk of publishing, advertizing, or marketing the book.  After 7 years, the full ownership of the manuscript returns to me.
These are just figures for comparison's sake.  As you can see, I won't be getting anything close to rich for the two years work I put in...

[Woofentino Pugrossi]

Usually its best to talk about it before you actually start R&D. When I worked at Geneva Vans, both owners were friends but I;ve seen them literally come to blows over petty things like what kind of wood to use in the overhead consoles.

[Jeff]

Talk to your buddy.  Tell him you're trying to find something fair without being off either way.  Ask him what he feels is fair.  I would think that somewhere in the 20%-25% profit range would be absolutely appropriate.

The other thing you have to ask yourself is would you assume responsibility if something malfunctioned and caused injury/death?  This is obviously why he gets the bigger cut...

So... now... bring some of these /things/ with you this weekend... we're all intrigued!

[r6_philly]

If you are not involved in the actual production and selling, then 15% of the actual profit would be something realistic and fair. you can even set up a deal where you get 15% of the profit over and above a certain amount. But it needs to be clearly put because if he pays himself a salary then the profit would be much lower than if he does not take a salary. So what counts as "profit" needs to be clearly defined.

Make up a contract, with payment schedules and auditing proceedures and follow with paper work and periodical statements.

[CCSRacer114]

Zero.

Here's why...

You haven't mentioned that you've protected whatever this 'widget' is.

Once someone like me sees it, I'll copy it and sell it for less than you because I won't have the R&D expenses.

(I personally won't do that to you, but other people will).

You two need to develop a plan for this BEFORE your first one goes out the door. And while you two are developing your plan, talk dollars.

[Nate R]

114's right. Look at frame sliders.... If someone had protected those, they'd be doing pretty damn well.

There's TONS of companies making them now.

Find some sort of design protection. I believe there are other options outside of a patent.

As for the $$$?

Well, I have an investor this year. He loaned me a total of over 11K this year at 15% interest for thim. (15% period, regardless of time up to a point)

He is also handling some of the accounting this year, and helped get some things planned, organized, and get some systems in place.

He will also be getting 15% of the profit this year. Next year, maybe a few %, but his involvement will be less.

He is making out well, and I was able to use the capital to really get machining rolling on the SV sliders. So, both sides are happy. That's what you really need in order for it to work. Don't compromise if you don't really feel it's fair.

BTW: Can you call me, Jim? I'll be around tonight until at least 11PM. I may be able to help you 2, in a way.

414-828-7500

[jer271]

Ill just stay out of this one  :-X

[GSXR RACER MIKE]

     Along that lines, it's usually the 2nd, 3rd, 4th, or 5th manufacturer of a similar product who usually profits big time. With little or no product development, waiting until the product has the major bugs worked out of it, and having extra money for well placed-abundent-fancy-advertising, those secondary businesses stand to profit much greater.

     I personally would try and go more toward the higher percentage sooner, being that the biggest sales may be fairly short lived before competition pounces on the idea (if it really is a good thing then some free-loading idea-stealing thief of a businessman will do as described in 114's post). It's one thing to make a similar product that is better than the original, but a basically identical product being made cheaper outside of the U.S. is B.S.! I think those businesses should not recieve any tax breaks or incentives of any kind and ultimately should be taxed heavier for having their products made outside of the U.S.! >:( On the other hand I look at the Woodcraft products and I see products that are well made and often times unique, and on top of it made in the U.S.A.

     Remember also that most likely your buddy will try and get you to agree to a lower take than what you 1st suggest, after all he is a businessman!

[OmniGLH]

Well... it's not BIG profit or anything.  If my share of the profit goes over $1k I'll be shocked.  Advantage we have is that the margin is fairly large... manufacturing costs are pretty low since we're using some of my sponsors to get stuff done.  Manufacturing costs would probably be fairly expensive if we didn't already have some really good connections.

It's really nothing I don't think anybody here would be interested in... it's not a motorcycle part.  And it's really not something big enough to warrant having it "protected".  I'm just doing it to make a little quick cash on the side.