Starting a Small Home Business

If you follow the process for inventing outlined in my book, Inventing on a Budget and Cashing in on the American Dream, you will be hiring team members either entirely on contingency, or on a part-fee/part-contingency basis.

Hiring on contingency means that instead of paying money upfront for services rendered, you pay your team members as a percentage of any net profits realized from the project. This payment structure has a number of important advantages over paying someone upfront.

1. You only pay out if you realize a profit. Most of your projects wont realize a profit. Paying team members on contingency helps keep your upfront costs low and team members (including yourself) get paid only if the project is profitable.

2. Ownership = Excellence. Paying team members on contingency gives them ownership of the project and incentive to perform at their highest levels. Fee-for-service providers are less motivated and usually shoot for the bare minimum to justify their fee.

3. You gain validation. If you cannot convince team members to sign onto a project on a contingency basis, perhaps your invention idea isnt as good as it needs to be. Each of your team members is an expert in their field and their signing onto your project is an implicit endorsement that they think it will be successful. This validation gives the project momentum and further increases your chances of success.

4. You can do more with less. Inventing is a numbers gamethe more inventions you can develop given your limited time and resources, the higher your likelihood for success. Hiring team members on contingency allows you to stretch your resources and develop more inventions for less money.

The obvious question is, How much do you pay team members? Of course there is no one right answer but here are some guidelines that will help you get there.

1. Consider hiring on a part-fee/part-contingency basis. Of course the higher the fee, the lower the
contingency percentage and vice versa. I usually just offer to cover material costs, and translate their time into a contingency percentage.

2. Shoot for what is fair. What is considered fair can, of course, be very subjective. Start by asking your prospective team member what they think would be fair. If it sounds reasonable to you sign an agreement. If not, try to use objective criteria to arrive at something you can both agree on. For example, I estimate the amount of money I expect to make from the project and base their contingency as some multiple of what their time would cost. Therefore, if a team member wanted
to join a project that might pull in $100K by contributing $5K worth of work, I might offer them
15% (3x their work product) of the net profits.

3. Tie percentage to net profit, timelines and deliverables. Use the Independent Contractor Agreement provided in the Appendix of my book to properly define net profit, and tie payment to proper execution of timelines and deliverables.

4. Remember 100% of 0 is still 0. The correct percentage for team members is whatever the market
will bear. Shop around and remember to not be greedy. You might think that 50% or more of your profits is high, but it still holds potential for you to make money.