Context & Opportunity
This document outlines a proposed partnership framework between a compliance platform startup and an experienced auditor. The goal is to structure a relationship that leverages the auditor's expertise and credibility while preserving the founder's full ownership and control of the software company.
The Independence Rule
Audit firms operate under AICPA independence standards. If the auditor (or his firm) audits a client, they cannot also sell that client software or services — it would compromise audit independence. This means the arrangement must be structured as a separate entity from his audit practice. He can contribute to product development, validate frameworks, and refer non-audit clients, but cannot recommend the platform to clients he personally audits.
What Each Party Brings
You (Founder)
Technical build — software architecture, development, deployment
Product vision — pricing, UX, go-to-market strategy
Operational experience — you run compliance as a small business, you know the pain
100% ownership and control of the software company
Auditor Partner
Framework expertise — knows exactly what auditors want to see in evidence
Credibility — an actual auditor validating the tool carries enormous weight with buyers
Referral channel — every audit engagement is a potential lead for the platform
Quality assurance — ensures evidence collection actually satisfies audit requirements
Three Options Presented
This document presents three compensation structures ranging from simplest to most involved. The right choice depends on how involved the auditor wants to be and what his firm's independence rules allow. All three options preserve your majority/full ownership of the software company.
Option A: Advisory Retainer + Referral Fees
Best if: Auditor wants to stay at his firm; lower commitment, lower risk, cleanest structure
| Component | Terms | Notes |
|---|---|---|
| Monthly retainer | $2,000–$5,000/mo | For framework validation, product feedback sessions, marketing credibility (name/bio on site) |
| Referral fee | 15–20% of Year 1 revenue per referred customer | OR flat $500–$1,500 per converted customer; written referral agreement specifying attribution |
| Milestone bonuses | $5K–$10K per milestone | First successful audit on the platform, first 10 paying customers, SBIR grant award |
| Equity | None | You retain 100% ownership and all decision-making authority |
| Time commitment | 5–10 hrs/month | Product reviews, framework validation calls, occasional customer-facing calls |
| Term | 12-month initial; auto-renew annually | Either party can terminate with 30 days notice |
Pros
Simplest to set up. No equity dilution whatsoever. Easy to unwind if it doesn't work. Clear, predictable cost. Low legal complexity.
Cons
Less skin in the game for the auditor. No long-term upside for him if the company grows significantly. He may be less motivated than with equity or ownership.
Option B: Advisory Equity (Minority Stake)
Best if: Auditor wants long-term upside; stronger alignment for fundraising/acquisition story
| Component | Terms | Notes |
|---|---|---|
| Equity grant | 3–8% of the company | Vested over 4 years with 1-year cliff; advisory shares, not common stock |
| Monthly retainer | $1,000–$3,000/mo (lower because of equity) | Reduced cash comp offset by long-term equity value |
| Referral fee | 10–15% of Year 1 revenue per referral | Slightly lower since equity provides upside |
| Your ownership | 92–97% | Full operational control; auditor has no board seat, no veto rights, no management authority |
| Vesting schedule | 4-year vest, 1-year cliff | If he leaves before Year 1, no equity vests — this protects you |
| Buyback clause | Right of first refusal at fair market value | If he wants to sell his stake, you get the option to buy it back first |
| Drag-along rights | Standard | If you sell the company, minority stake holders must participate; prevents blocking an acquisition |
Pros
Strong alignment — he profits when the company profits. Better story for SBIR proposals, investors, and acquirers ("auditor co-founder/advisor"). Lower monthly cash burn. Vesting protects you if it doesn't work out.
Cons
Equity is hard to take back once granted. Requires legal docs (advisory agreement, vesting schedule). Small dilution. Tax implications for both parties on equity grant.
Equity Value at Exit
Compliance software companies are acquired at strong revenue multiples because the revenue is extremely sticky. At $1.8M ARR (Year 3 midpoint) with a 5x revenue multiple, a 5% stake would be worth ~$450,000. At 8x (common for compliance acquisitions), it would be ~$720,000. This is a compelling pitch for someone who believes in the product.
Option C: Separate Consulting Entity (Two-Company Model)
Best if: Auditor wants to actively build a revenue stream; cleanest independence structure; highest earning potential
Under this model, two separate legal entities are formed. This is the most sophisticated approach but also the one that best addresses audit independence rules.
Entity 1 — Software Company (Yours, 100%)
Builds and sells the compliance platform. Revenue from SaaS subscriptions, self-hosted licenses, and support tiers. You own 100%, make all product and business decisions.
Entity 2 — Consulting LLC (Co-owned or Auditor-Operated)
Offers compliance readiness assessments, quarterly reviews, and audit preparation coaching. Revenue from professional services. Auditor is the primary operator. Formal referral agreement with the software company.
| Revenue Stream | Entity | Pricing | Revenue Split |
|---|---|---|---|
| SaaS subscriptions | Software Co. | $300–$1,000/mo | 100% to you |
| Readiness assessments | Consulting LLC | $2,000–$5,000 one-time | 50/50 or 60/40 (you/him) |
| Quarterly compliance reviews | Consulting LLC | $500–$1,000/quarter | 50/50 or 60/40 |
| Audit prep coaching | Consulting LLC | $2,000–$4,000 per engagement | 40/60 (you/him — his labor) |
| Cross-referrals | Both directions | Formal referral agreement | 10–15% referral fee each direction |
Why This Works Best for Independence
The consulting entity is legally separate from his audit practice. The software company is separate from both. Clients who use your platform and need an audit can go to any firm — including his, as long as the specific engagement partner isn't involved in the consulting entity. This is the cleanest structure for AICPA rules.
Pros
Highest earning potential for both parties. Cleanest independence structure. Consulting revenue feeds product roadmap (you hear customer pain directly). Multiple revenue streams from day one. Consulting services are high-margin.
Cons
Most complex to set up (two LLCs, operating agreements, referral contracts). Requires more of his time. Need to manage the boundary between entities carefully. More administrative overhead.
Financial Projections: Auditor Compensation by Option
These projections show what the auditor could earn under each structure over three years, based on the revenue model from the market opportunity analysis.
Platform Revenue Baseline
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Platform ARR (midpoint) | $180K | $650K | $1.8M |
| Total paying customers | 30 | 115 | 300 |
| His referrals (est.) | 5–8 | 15–25 | 30–50 |
Auditor Earnings by Structure
| Structure | Year 1 | Year 2 | Year 3 | 3-Year Total |
|---|---|---|---|---|
| A: Retainer + Referrals | $36K–$72K | $39K–$82K | $42K–$100K | $117K–$254K |
| B: Equity (5%) + Retainer | $18K–$42K + equity | $21K–$50K + equity | $24K–$60K + equity | $63K–$152K + equity* |
| C: Two-Entity Model | $20K–$50K | $60K–$140K | $120K–$260K | $200K–$450K |
*Option B equity value depends on company valuation at exit. At $1.8M ARR with a 5x revenue multiple, a 5% stake = ~$450K. At 8x (common for compliance software acquisitions), 5% = ~$720K.
What Drives the Differences
Option A (Retainer + Referrals)
Steady income from retainer ($24K–$60K/yr base), plus referral commissions that grow as the customer base grows. Predictable, no risk, no upside beyond the referral fees.
Option B (Equity)
Lower cash earnings but significant upside at exit. If the company reaches acquisition territory ($1.8M+ ARR), equity value could exceed all cash compensation combined. The trade-off is illiquidity — equity is worth nothing until a sale event.
Option C (Two-Entity)
Highest total earnings because the consulting entity creates its own revenue stream independent of the software company. By Year 3, if the auditor is doing 30–50 readiness assessments and quarterly reviews per year, the consulting revenue alone could exceed $200K. Combined with software referral fees, this is the most lucrative path — but requires the most time investment from him.
The Dinner Conversation Playbook
Don't Lead With Numbers
The goal of this dinner is to gauge interest and understand what he wants — not to pitch a specific deal. Let him tell you what excites him, and then match the structure to his answer.
Questions to Ask
| Question | What You're Learning |
|---|---|
| Have you ever thought about building something on the side? | Is he entrepreneurial? Does he have appetite for risk? |
| What frustrates you most about the tools your clients use for compliance? | Product insight. Also tests whether he actually cares about solving this problem. |
| What are your firm's rules about side businesses or advisory roles? | Independence constraints. Some firms are stricter than AICPA minimums. |
| If something like this existed, how involved would you want to be? | This determines Option A vs. B vs. C. "Occasional calls" = A. "I'd want to shape the product" = B or C. |
| What would make this worth your time? | Let him name what he values. Cash? Equity? Intellectual challenge? Helping clients? |
Match His Answer to the Structure
"I want to keep my day job and help on the side"
→ Option A. Retainer + referral fees. Minimal commitment, clean separation from his firm. Start with a 6-month trial at $2K/month retainer.
"I believe in this and want long-term upside"
→ Option B. Small equity stake (3–8%) with vesting. Lower monthly retainer. He profits most if the company gets acquired.
"I want to build something together"
→ Option C. Two-entity model. He operates the consulting arm, you build the software. Both entities cross-refer. Highest earning potential for both. Most time commitment from him.
Topics to Cover
Beyond the structure question, make sure to discuss:
| Topic | Why It Matters |
|---|---|
| Independence rules at his specific firm | The structure must work within his firm's policies, not just AICPA minimums |
| Non-compete / moonlighting policies | Some firms restrict partners from outside business activities |
| His timeline | Is he thinking about this now, or in 1–2 years? Impacts which option to pursue first. |
| Letter of support for SBIR | Even before a formal agreement, an industry letter of support strengthens SBIR proposals significantly |
| Structuring as a separate entity | Float the idea of a separate consulting LLC — see if he's open to co-owning or advising on one |
Important Reminder
Get a business attorney involved before signing anything. You want someone who understands professional services independence rules (ideally one who works with CPA firms) to draft the advisory agreement, operating agreement, or referral contract. The dinner is for gauging interest and alignment — the paperwork comes after.
This document is a discussion framework only and does not constitute a binding agreement. All terms are subject to negotiation and formal legal documentation.