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Have you had any difficulty setting up a Grunt's commission in a Grunt Fund (Slicing Pie)?

My partner and I have started a B2B business and bought copies of "Mike Moyer - Slicing Pie" to manage the equity distribution among us. Overall, we're very happy with the method and have found it avoids nicely bad feelings and "gator"-type haggling-negotiations.

That said, we are having one key difficulty with it - and this unresolved issue has gotten us in the uncomfortable gator pit. So I'm putting it up to you for advice.

In a nutshell, my partner is a product developer. We came together after he had built a first working prototype (without a business model). No IP on this possible, but we valued this intellectual property in the Grunt Fund per the hours he put into doing this. That part was simple. I'm the business dev guy. I'm bringing in industry expertise and an important network that is instrumental in having our first customers (businesses). As per Slicing Pie, we wanted to set up a commission on sales to value this key network, but have ended up haggling around it.

The business is B2B and sells solutions to large businesses, solutions that do not exist on the market at this point in time (no tested market). Classically in B2B, it's also a "hard sale" and a priori high margin (well in the double digit) business.

Given that, I proposed valuing the network in the Grunt Fund with a 10% sales commission up to $100K in sales, 3% for sales up to $1M, and 1% above that.

My partner feels very uncomfortable with that:
  • He's afraid that a sales commission skews everything, running the risk that *if* (big if) we're very successful (in the millions), it could eat up up a significant portion (20%) of the Grunt fund depending on the TBV (total base value of the Grunt Fund) at the time.
  • He also feels that my network contribution (input) is the same regardless of the sales output, so he questions the very essence of the commission.
  • Finally, he feels it introduces perverse incentives on his side to recalibrate the Grunt Fund early, or close the Grunt Fund early, or even not to pursue these particular customers that are most natural given my network.
Instead of the commission suggested, he would prefer an entry "package" valuation in the Grunt Fund. I, on the other hand, feel uncomfortable with this because there is absolutely no basis in valuating this and naturally leads to haggling negotiations. In a nutshell, we're back in the Gator pit.

Are we alone having these difficulties with the Grunt Fund? Everything has been easy so far, but this is a stumbling block for which Slicing Pie is of no great help. Have you encountered these issues? Do you have any suggestions? Do you feel that the commission proposed is an order of magnitude off of being reasonable?

Thanks!

6 Replies

Lawrence I Lerner
0
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Lawrence I Lerner Entrepreneur • Advisor
Digitalization and Transformation Coach
Thanks for starting this thread! Really curious to hear other opinions, I am running into the slicing pie model more frequently. With the caveat, I have not read the book....

This seems to be a classic dynamic with established organizations as well. Sales and Developers. One cannot exist without the other. The average developer at well-established software company that I know earns $63/hour. Sales execs with incentive plans can bring in six or seven figure incomes. The ratio of Developers to Sales is usually high. In this case the ratio is even so the overall numbers are skewed.

Over above anything that either of your contribute (cash, furniture, space) would it be reasonable for you to each "earn" an hourly rate and multiply that by your hours? The rate can be mutually agreed upon by both.Each shares in the profits of software revenue. As the organization evolves, you can migrate into other models.

Cheers
Mike Moyer
6
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Thanks for using a Grunt Fund! You are off to the right start with your business. The model should feel right, unless something is askew. My gut tells me that you are contemplating taking the commission on top of a fair market salary that is similar to your partner's. So, when you do your job well you get gravy, when he does his job well he does not.

At the core of the Slicing Pie model is fairness and it uses fair market rates to establish theoretical value (I now call this value "slices"). Traditionally, dedicated sales people get a base salary plus commission. Relative to other people at the same level in the organization, a salesperson usually takes a lower base salary. Target compensation would be similar to other managers at the same level. However, if the salesperson knocks it out of the ballpark there is the possibility for upside.

If you two consider yourself "equals" in terms of your level in the organization, your skill set, experience, education, etc, you should both have similar compensation. Let's say you both deserve $100,000. Your developer probably expects some kind of parity.

The developer would have a GHRR (Grunt Hourly Resource Rate) of $100/hr (($100,000 x 2)/2,000).

Your salary, however, would be a mix of salary and commission with a target of $100,000. So, if the going commission rate in your industry was 10% and your target revenue is $1,000,000 this would imply a base salary of $0 for a commission-only position. If the commission rate is 5% this would imply a base of $50,000 of a GHRR of $50.

CEOs, Presidents and other non-sales possessions generally don't take a commission. Only people who are dedicated 100% to sales do. In return for the luxury of focus and the ability to earn a lot of money, they take a lower base plus commission. Commissioned salespeople are usually not roped into other managerial responsibilities.

So, determine how much of your job responsibility is dedicated to sales. Use that to determine your fair compensation. For instance, if 50% of your time is sales then earmark 50% of your compensation to be commission. Set your sales goals to create a target compensation similar to your partner.

Think of it this way. If 100% of your job is to generate sales and you generate $0 in sales you don't deserve much. If 50% of your job is to generate sales and you generate $0 in sales you deserve half of your compensation- the non sales half.

If your job is to generate sales and your revenue target is $1,000,000 and you sell $1,000,000 you did your job and you deserve as much compensation as other managers at your level (namely, your partner).

If you hit $2,000,000 in sales your partner should be happy to compensate you at twice what he earned because you are over delivering in a very real way.

If you both aren't comfortable with this arrangement something else is wrong. Feel free to contact me through SlicingPie.com and I'll help you get to the bottom of it.




Chris Carruth
1
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Chris Carruth Advisor
VP/Director. Strategy | Business Development | Operations | Product | Solutions
Setting sales comps/spifs are treacherous but in this case, unless I am reading it wrong, the issue is one of escalating bus dev comp that could throw off the "balance" of the founding team. If the read is wrong ignore the rest...

Two suggestions:
a) You can always cap the commission part, at what cap is something you guys have to a) work out, b) understanding that start-ups always need more cash than anticipated and c) could include "catch up" payments once the company reaches stable revenues and can afford such a payment. Details are something you need to decide but first step is getting agreement on the approach.

b) You could set aside an executive equity incentive plan that basically translates "superior performance" by either founder into additional shares/equity, but done in the form of options so you don't incur tax penalties along the way. Your accountant and/or CFO should be able to guide you here.
Or perhaps you cap the commission (a), move whatever would normally be above the cap as being "superior performance" and do (b). Just be careful of tax consequences and make sure the equity incentive plan is figured into the company's cap table so you don't screw up subsequent capital rounds.

A good CFO, with startup experience (not hedge fund/not Fortune 100, no Wall Street, BUT STARTUP) , with recommendations from previous startup clients, will be a world of help. Not getting the right CFO will be a world of hurt though. Make sure the CFO comprehends that while his boss may be the CEO (but is sometimes the Board itself) he/she is not his client, the shareholders are, regardless of who they are.


Chris
Hamassala David Dicko
0
0
Hamassala David Dicko Entrepreneur
Air France Boeing 777 first officer airline pilot, and Air France KLM Corporate strategy and innovation director
Thank you for those very those high quality answers and comments! They are very useful and to the point. Some of these invite more questions and comments, so here I go -

@ Lawrence - I agree with your point. And yes, above everything else (cash, space, furniture), the core is work hours earning market revenues in the form of equity. That's at the heart of the Grunt Fund model, and perhaps the most important piece of it. I encourage you to read the book, it's a very easy read and well worth it I think.

@ Mike. On principle I agree with the heart of what you wrote, where I have difficulty is applying this in an early startup context, and also reconciling your post with chapter 3 of Slicing Pie, for the following reason.

There are two of us (most of the rest is either contracted out or smaller level grunts), and we're working in an extremely uncertain environment. We have no revenue track record, no proven business model, all we have is a business model, a product we're building, and hopes and dreams, out of which, sure, we can make nice good looking excel sheets. We're trying to roll out the build-measure-learn cycles (lean startup) as fast as we can. One of us has particular expertise in product development, the other is business oriented, and while we each have our own expertise, we take most key decisions together, as would be most natural in such a setting.
So I have difficulty in qualifying me (business guy) as a "sales rep" though, sure, I am in charge of busdev (as well as custdev, sales and marketing). More to the point, setting sales targets would have very little basis until we've proven that we're able to generate the first $ in revenue, particularly if that accounts for large portions of lost GHRR revenue. Ultimately, work goes into key learning, and hopefully sales will follow. Of course, we could nevertheless split functions and consider a % of total salary dedicated to pure sales, and commission that part. That said, it feels a little phony to both of us, for the same reason you mentioned that CEOs and executives don't usually take commissions.

More importantly, the salary structure of sales rep wasn't the basis at all for our wish to set commissions. It wasn't to "reward" business dev or sales (sorry if that wasn't clear in the original post). It was meant as a way to value the key network (what you call "relationships") of possible prospect customers I was contributing into our startup. In your book, in chapter 3, you have explanations for how to account for various contributions in the business. Of these is time, cash, supplies & equipments, ideas, and relationships. In that last part, you mention cases linked to relationships that land a sale, or other types of relationships that can land a series A for example. And you suggest setting up a commission structure to value those relationships in the Grunt, similar to what the market would value "a finder's fee". All this makes sense, and in principle, is not necessarily directly linked with the function of "sales rep". You could well imagine Grunt1 who translates his relationships by introducing key prospects to the startup, even though he may be the product dev in the startup. So I see these two issues "sales rep commission" and "relationship commissions" (based on realized sales) as possibly distinct, and certainly not always the same. Am I missing something or reading this wrong?
To link this directly with our issue, the question is: how do you value the relative contribution of a Grunt, not in time, but in "relationships" that can ultimately land sales?

@ Chris: Yes, capping commissions is a very good solution. Very clearly, commissions, whatever the reason/form, must be well calibrated / contained so as not to skew off balance. That much is very clear, and capping is a possible solution to that.
As for (a) & (b), the point is not to reward in cash at this point, but essentially in something somewhat similar to your options solution, except in a simpler way more appropriate to our early startup, through a Grunt Fund. I think your solutions apply well to startups post-seed funding, or post series A.
Jake Carlson
1
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Jake Carlson Entrepreneur • Advisor
Software Development Manager at Oracle
This will likely not be a very popular viewpoint among sales people, but IMO 'relationships' themselves should not really be valued at all. It's only when those relationships translate to actual sales that they should be entered into the reckoning as commission (if commission is a factor in compensation). And anyway, who's to say that the product dev doesn't have some obscure relationship that will result in 100% revenue growth?

I know that commission may be what gets a salesperson going, but I think it may be bit absurd for a co-founder. Does a product dev get extra compensation if he does his job *better*? No, at least not immediately or directly. Product devs have metrics too. Better usability, better performance, etc are all metrics that translate to better customer retention, if not at least some new customer acquisition. When there are only 2 people, each person has an immediate and measurable impact on results. So either don't measure by results at all, or measure equally between both of you.

My advice is to throw commission out the window for the time being. Make equity compensation commensurate with what you put in rather than what comes out, period. Or, if you insist on commission, then give the product dev a similar commission structure where increasing key metrics for him gives an upside similar to sales commission. At the early stage, the upside is a viable and growing business, which increases the value of both your equity and which should be motivation enough for both of you to do your respective jobs well.

If you base your equity compensation on commission but you are not 100% sales, then you will find yourself dissatisfied if the % of time you spend on sales changes. If you begin thinking you'll be doing 50% sales and structure your compensation with that in mind, what happens when you find yourself only able to spend 25% of your time on sales? You'll need to restructure that compensation structure constantly.

Keep it simple, keep it fair. The sales are no good without a product to back it up, and the product is dead without the sales.
Mike Moyer
0
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Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
I like Jake's response.

It appears you are tying to assign a value to relationships before any sales are generated. The Slicing Pie Model relies on observable values, like commissions, and does not account for un-observable values, like the future.

Commissions are good for rewarding sales people for sales and throwing a bone to someone who makes a critical connection and helps foster the sale. Same for the finder's fee. Neither of them are intended to be gravy.

In your case I would recommend taking a fair market salary for being the company's Marketing/Sales/Strategy/Product/Etc guy (probably a similar salary to your cofounder's). Don't take a sales commission.

I would be happy to set up a call with you to talk in more detail. You can contact me throughhttp://www.slicingpie.com/about-mike/
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