Compensation for software development

This kind of arrangement can work very well...

...or/and it can all end in tears!

Clarity is very important. Lots of arrangements could be mutually beneficial, as long as you're clear from the outset.

1. If you're handing over a percentage of anything (e.g. revenues, profits, proceeds of a sale of the code itself at exit etc), you're entering a long term partnership. So make sure that's appropriate, and agree up front how to terminate the agreement as and when you or your developer wants to.

2. Think through very objectively what's the transfer of risk you're achieving, and don't make assumptions (such as that the presence of a revenue share guarantees a level of attention, or that its absence will limit the quality of the work).

3. Work out what the product lifecycle looks like. What do you need at the pioneer stage, what will you need post validation and as you grow, what will you need as and if you decide to take the product into new niches etc? Make sure that your agreement covers this - and if your associate is only going to be contributing at a particular stage, you need to decide a mutually acceptable way to 'dilute' their tax on your growth.

4. If you can't isolate the deal from your other activities or products, you probably shouldn't do it at all.

5. (This should be obvious, but can easily get lost!) Make sure that it's costing you less to get the product to market with the deal than without.

6. Recognize that you need to work out when the deal can't be done, and decide in advance that you will either bale out or go back to an agreed pay-for-work basis if that happens

Do you have a contract with the person? If not - all fool you! Get one sorted or replace him/her.

Remember to protect yourself at all times legally and your product/idea. Hiring without a contract can leave you vulnerable - (s)he could even walk out the office and rewrite the code for someone else (or themselves) - what agreement do you have to stop him/her? Sure, you could sue and argue IP rights (though if they recode and not use your code spoecifically then this is very grey anyway - and theyt would probaqbly get away with it) - but it may cause too much damage by the time you get any justice (if you do).

If you DO have a contract, then they are obliged to abide by it (including renumeration) up to the end of that contractual agreement (and any limiting clauses therein - e.g. not allowed to work for competitor for 6 months after leaving project or start up in a competative way - 6 months is the norm in the UK due to precident where long periods were set and courts put them aside - check with your local lawyers for best fits locally).

They are, of course, free to re-negotiate at the end of the contract - and may have escape clauses to force it earlier - you should also have clauses to protect yourself and allow you to replace them or lock them in to their agreement during the contract period.

Can you clarify whether the person wants both fixed fee and ongoing percentage? or just the ongoing percentage?

I'd would recommend rejecting a % of sales. What happens when you need another developer? or 3? The first developer will get a percent of their contributions. Or will the first developer pay for any new people you need?

Or what if the first developer gets a better job offer? Do you have to keep paying?

Pose these questions to your developer and see what answers you get

If you do have to give a percentage of something, make it profits and not sales.

I would avoid it altogether though if possible.

From a business standpoint, the fee the person sets when they are contracted is what they get. That said as far as norm, I don't think there is one. If you have a product that will generate a large amount of revenue, and you have the cash to pay someone a flat fee, that's always better. If not, I don't think you have a choice.
In regards to your questions, there is no standard per se. It really depends on the work involved, their overall contribution, etc, etc. I don't see the reason for the percentage increases other than to give yourself a headache LOL The money will increase as the product matures due to increases in sales, but the percentage should stay the same.
As others have pointed out in the thread make sure that you get EVERYTHING in writing. If this guy agreed on one thing, and now wants something else, he is either indecisive or sees high value in the product. You don't want someone indecisive, and if he sees value, well than you have the upper hand in negotiations.