If it were my nominal client, not one that pays a monthly recurring license fee, I would call my Legal Counsel to see what loan instruments (it is essentially a loan, after all) can be hammered out, how collection can be enforced, what you must do to legally charge interest within the bounds of your state's usury laws, how to word the loan agreement, your potential exposure if the client does flat-line (more on that below), etc. Then I would attach the legal fees you incurred to the cost of loaning the value of your parlayed billings.
Be certain to include any "penalty clause" in the agreement in case payment does not come forth, so instead of getting just a flat piece of equity it would be an increased percentage of equity. The more you flex in repayment, the higher your level of equity involvement. Of course, having equity in a company that could flat-line on you may not be a good idea. But if you help them out with their cash crunch, and they "over-float" your loan to them, you ought to get a bit more in value back for their increased value of getting the added float from you. That seems less harsh than calling it a penalty for not paying on time, eh? I would also consider how busy I was at the moment. If you need additional work it may be worth the toss of the coin. If you are buried then it may not make sense to take the risk. I would have to take into consideration, as you did, the past relationship. In my particular case I would also have to take into consideration a multi-year relationship I had engaged in where a company I was providing commercial services to filed for bankruptcy on 12/31/2006 (their market went flat, direct mail for mortgage companies). That left me on the hook for $2,500, and an associate for $5,000. I had the opportunity to exchange money owed for equity in a partnership. Luckily I opted to not do that, otherwise it is possible his creditors could have come after me despite the credit being "pre-Gil" or not. Whether they could have legally collected from me or not is not so much the issue. It would have been more a matter of the grief and expense of fending off an assault to begin with. Good luck! Gil > -----Original Message----- > From: [EMAIL PROTECTED] > [mailto:[EMAIL PROTECTED] Behalf Of Ted Roche > Sent: Monday, January 29, 2007 4:06 PM > To: [EMAIL PROTECTED] > Subject: [NF] Extending credit to clients? > > > I had a client I've worked with before approach me for a follow-on > project. They're strapped for cash at the moment, but had been perfect > with payments on time in previous project that lasted 10 months. > They'd like to defer some of the costs of development for a period, > which I can sympathize with, but I'm not a bank and am fairly naive > over the terms offered. Anyone have an opinion (ha! In this crowd, has > anyone got an opinion -- what a funny guy!) on whether this is ever a > good idea or gotches on these terms: > > Time billable at $X.00 / hour > > Compensation split > > One-third = cash payable monthly NET 30 > Two-thirds = convertible, unsecured 90-day note at Prime + 3% > > Each 90 days, client will pay interest due and roll note over for > another 90 days or offer the choice of the following options > > - payment in full of all principal and interest due > - conversion to equity at the rate of $XXk owed = 1 % equity (or fraction > thereof) > > I don't think it's such a good idea to get into the loan business > myself. But I'd welcome comments if someone has done this with clients > to hear how it worked out. The red flags for me include "unsecured", > options appear to be at the client's discretion (getting the client to > clarify the options here) and conversion to a minority shareholder. > Obviously, if the business goes Google, that could be gigabux, but the > reality is that's it's more likely pennies on the dollar, or > nothing... > > [excessive quoting removed by server] _______________________________________________ Post Messages to: ProFox@leafe.com Subscription Maintenance: http://leafe.com/mailman/listinfo/profox OT-free version of this list: http://leafe.com/mailman/listinfo/profoxtech ** All postings, unless explicitly stated otherwise, are the opinions of the author, and do not constitute legal or medical advice. This statement is added to the messages for those lawyers who are too stupid to see the obvious.
