I met with a client last week that had a problem not terribly unique for many business owners. She has a business partner and together they provide consulting services on product innovation. I’ll call them Betty and Veronica. They have been quite successful in their niche. The products they design require substantial attention to detail in the development and launch stages. Their services include both creativity and project management expertise. As such, their roles and responsibilities are clearly divided ; they take advantage of their strengths and incorporate the type of work each likes to do into their business model. Betty is very creative. She excels at creating new applications and coming up with new product concepts. Veronica is very detail-oriented and likes hands-on projects. Think of it this way - Betty thinks up the solutions and Veronica develops and launches the solution. There’s just one little nagging problem....
You have already guessed the issue based on the headline of this story. The execution and launch of their products involve hours and hours of work. In fact launching a new product involves 3 times more hours of work than the innovation phase. So Veronica is putting in 3 times more hours than Betty. However, Betty believes her contributions are more valuable than Veronica’s. She believes that without her innovations, they would not have a product to sell.
Veronica is tired and frustrated with doing all the hard work.
In their operating agreement, they split the profits equally. At this point, both feel the distribution of profits is not equitable. Betty feels she deserves a bit more than the 50% because her innovations are the heart of the product line. Veronica feels she deserves more than 50% because without the execution, they product doesn’t exist.
It’s the age old question of: What is the value of an idea?
Consider this approach from Will Schroter, founder of startups.com:
“Think of the idea like a seed.
The seed alone has the potential to be something great, but by itself, it's just a seed. The idea alone can't compete in the marketplace. It requires a ton of resources and execution for it to grow into a beautiful flower — and more often than not, very few people are capable of nurturing it properly.” (https://www.startups.com/library/expert-advice/how-much-is-an-idea-alone-worth)
There are a few different ways they can resolve this dilemma. One simple way is to sell their products with two price components - the innovation/design portion and the delivery portion. They can assign costs associated with each piece to the appropriate revenue stream and agree to share fixed costs (assuming they both get the benefit of those costs). Then they can each take the profit of her own contribution. This may help in the future if they decide to dissolve their business and go their own ways.
The nagging question is how do you put a price on an idea? An idea has no value if there is no way to deliver it to a buyer. Conversely, if there is no idea, there isn’t anything to build and sell.
Business partners will want to consider the division of work on their projects to be sure this scenario doesn’t happen. Oftentimes entrepreneur partners jump in without considering the sweat eequity contributions one another is providing.
Betty and Veronica are in for a bit of the rough road ahead as they each volley for what they feel is rightfully hers. Stay tuned.....
Jodi Henson is a business consultant and an entrepreneur. She works with prospective and existing small business owners to help them overcome challenges and attain their goals. Jodi lives in NE Florida with her husband. You can contact her at email@example.com or visit her website at jodihenson.com.