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How do you structure equity distribution to sales folks while in beta and pre-funding mode?

All,

We are moving to beta mode and will launch our first customer soon. We provide a SAAS solution to brands in consumer electronics and appliance category to help them manage, curate and publish all their post purchase product data. Thus, we are a B2B solutions company. I want to recruit few sales people to help me sign few more beta customers and want to pay them with equity and commission basis for helping close few deals with a minimum contract of 6 months. Here are few questions I had..

1. How many shares or equity in % is good for a SAAS based solution sell per customer?
2. Do you still have equity vesting over 2 or 4 years period to ensure that the deal comes through?
3. I presume investors will not like in future an equity giveway without a vesting schedule?
4. Anything else that I should be thinking about in this context or when I put together a contract?
5. What commission % are good or standard in this situation?

Any suggestions are much appreciated. Thank you,
Ajay
http://www.linkedin.com/in/ajaybam

5 Replies

Scott Milburn
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Scott Milburn Entrepreneur
Entrepreneurial Senior Executive and Attorney

Hi Ajay,

Can you clarify what you mean by paying "equity and commission"? It is not unusual to pay someone just commission for seeking beta customers. If you are paying a reasonable commission, then a small amount of equity as a "retainer" makes sense, but you don't need too much equity if there is a decent commission.

To answer your questions.

1. One reasonable approach to deciding how much equity is to base it on what a sales person would get if they were a full time employee, and pro rate it for the work/time. E.g., if they would get 0.5% vesting over four years under a normal plan, for full time employment, that translates to about .01%/mo. If they are going to spend three months half time seeking beta customers, you just do the math to get a reasonable idea.

2. Vesting over a period of years is for long term employees, to encourage them to stay. In this case, if you are hiring these people as permanent, long-term employees, you could do that. On the other hand, if they are temporary employees or consultants, at least initially, then just do 5-10 year warrants.

3. Investors will insist on a stock option plan that sets aside a specific pool for employees/consultants, and an option "budget" that outlines about how much each type of employee would receive.

4. Clarify the circumstances under which the person earns both the equity and a commission. E.g., do they get a commission for a qualified lead who participates in a demo, or does the customer have to close. If the latter, does the sales person have control over whether the sale closes?

5. With a beta customer for an untested service that has no current market or brand, it would often be a fairly high %, perhaps 33%. Recognize that it is often harder to find beta customers for an unknown service, than it is to find customers for an established service/product.

Mike Moyer
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Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Ajay,

This problem is a nightmare to solve unless you use a dynamic equity split. A dynamic split will ensure that each person on the team (including you) has exactly what equity they deserve to have based on the value of their actual contributions relative to others on the team. I've written a book that will tell you step-by-step how to implement. It's called Slicing Pie and I'll give you a copy if you email me at [removed to protect privacy] (I do this because I don't want people to think I'm hijacking this forum to sell books!).

With regard to your specific questions:
  1. The dynamic model will tell you exactly how many shares (exactly)
  2. Don't worry about this until you raise series A investment. The dynamic model has the right protections in it so you won't need vesting (in some cases the model is the vesting)
  3. Investors will respect your cap table, but they will likely have their own terms for their money. All existing shares will be subject to the same restrictions which you will have to negotiate with the investors. In other words. You can issue stock at whatever terms you want, but they can impose reverse vesting terms if they want (if this is what you negotiate)
  4. Clint Costa is an attorney who is an expert in dynamic splits. He offers an equity agreement template and a 1-hour consultation for $50 through www.SlicingPie.com/clint-costa
  5. I'm a re seller for an SaaS solution and they allow for a 25% commission. If you aren't paying your sales people you will have to provide a higher commission. My book will tell you how to pay people commission with the right amount of equity.
This will solve your entire equity problem. There are free videos and spreadsheets on my site that can help you implement.

Thanks for asking this question. I LOVE this topic!!!!

-Mike Moyer
www.SlicingPie.com

Steve Brett
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Steve Brett Entrepreneur • Advisor
I can't help you with the more sophisticated questions but I do strongly recommend against equity positions for "sales people."

If you mean a c-level director of sales who will be part of the management team, then yes, an equity position may be appropriate.

If you're talking about new business development (the sales force), these people often come and go for any number of reasons and you don't want ex-employees or disgruntled poor performers - and multiple voices - influencing your startup company.
Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Ajay;

we need more info. feel free to DM me if necessary. Also, be sure that you are discerning between "commission" for closing sales and equity for rewarding long-term commitment and risk. don't confuse the two. I get this question all the time from technical founders - "i just want to find a sales guy and pay him on commission - how hard can that be?". It is no less a daunting task than "i just want to find a technical guy to build my product and pay him with equity". the answer is, it all depends. Designing compensation plans for sales people is tricky. Commission only is about as clear as it gets in "pay for performance" - how many other positions in a company get paid only for performance? You want a plan that provides incentives for the right behavior and disincentives for the wrong behavior. Without knowing your pricing structure, target market and the relative sophistication-level of your product/service it is impossible to tell whether you should even consider direct sales and what kind of sales model(s) might fit. for example, if you are selling a "data analysis" (a technical sale) solution directly to "consumer electronics brands (this says to me direct to the Samsungs, Apples, GEs and LG's of the world - an enterprise customer) and a typical transaction for a typical customer (as Scott M mentioned, closing a sale for a startup is typically much more difficult than closing a similar sale for an established company) takes 4-8 months and yields $5,000 in annual revenue then there is simply no way you will attract sales people with the necessary skills if you plan to pay commission only (plus equity). If on the other hand you are selling a not-so-technical solution to small CE retailers and a sale takes 30-90 days and yields $5,000 in annual revenue you will still have a challenge because of the type of sales talent you need (inside sales), but this has other challenges. On the plus side, if you can attract an experienced, professional enterprise-sales person with only equity and commission based on your vision, then that speaks volumes about your product. good sales people are hard to sell (once it comes to opening their pocket book).
AJAY BAM
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AJAY BAM Entrepreneur
Ceo and Co-founder at Vyrill Inc
All, thank you for your responses. I am digesting all of them and will reach out to you on your comments. Thank you!
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