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I'm joining a software startup as a (co-founding) CTO. I am also bringing my industry contacts into the venture, and will be the only person taking initiative on business development. My contacts are the only initial customer prospects for the company. We won't have a separate sales/biz dev person joining the company for now.

I am told by the founder that I will be paid salary for executing my prime responsibilities as a CTO. But I will be paid only commission for any of my business development initiatives resulting in licensing and royalty revenue for our tech offerings. I am wondering how offers of such commissions are stated in the letter of employment, and what a fair offer is.

For example, if I clinch a customer deal resulting in $500,000 license fees for our technology, payable over two years, and the customer shares a certain (undetermined) amount of revenue from the sale of their product (with our technology) in the market on a periodic basis, (1) What is reasonable for me to expect as commission? (2) What is the typical schedule of payment of the commission? Does each periodic receipt of revenue from the customer trigger a corresponding installment of commisison payment?

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please ellaborate on your commitment as stated in the letter of employment (contract period, etc). It is important to calculate the formula for your over time shares plan, commisions and anual bonuses. – aviad Apr 22 '11 at 7:06
The founder has just begun telling be (verbally) what the components of his offer wil be in general terms. All I know is that the base salary will cover CTO duties, bonuses will be paid for technology milestones, and commission will be paid for sales activity resulting in revenue. I will have stock options. I am asking him for founder equity for my activities contributing to the formation of the company, and value I am bringing into the startup (technology roadmap, business strategy, the necessary key employees needed to build the technology, industry contacts and initial customer prospects). – Aaron Smothers Apr 22 '11 at 7:19
If he's the idea guy (and money guy?) and you're going to be the only other person but you're doing all the sales and development work... you should have 50% of the company and you don't get commission on sales. Like a founder in most companies you win when the company wins. – Sean Apr 22 '11 at 15:08
He is the money guy who will be in charge of accounting and facilities, as CEO. I bring vision, strategy, tech roadmap, an initial team of 3 other paid engineers, contacts and business potential, to be appointed CTO&VP of Strategy. We will both be drawing salary. – Aaron Smothers Apr 22 '11 at 16:20

2 Answers

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I have always tried to target 10% as a commission rate, if someone is straight commission (like you are). If I had to pay someone's salary as a base, I would factor that in so in the end, the total was about 10%.

As far as distributions, I would have you paid monthly or quarterly, whichever made the most sense giving the structure of the business. At the end of each month (for example), see how much money was earned (watch the difference between earned and received) and pay you 10% of that as your commission.

If you're paid on earned revenue, not received, and a customer backs out, then that has to be factored into the next month's (or several months') pay.

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Everything and Nothing is reasonable to expect.

Computing something even near a reasonable commission would really involve you trying to get an approximate idea on COCA (Cost of Customer Acquisition), TLV (Total lifetime value), difficulty of sale and average contract length.

To use your $500,000 example. If the "effort" to sign up a customer takes little more than an email, incurs $50 in backend setup/processing costs on your end, and they customer is likely to renew their contract every year for 10 years, I wouldn't pay a very high commission on that because almost any monkey could do the work.

If all the above is true, except that you need to make a site visit and spend 2 days going over the product in excruciating detail, then the acquisition cost is a little higher (but still reasonable), but not it takes a very skilled monkey, so that might be a 3% commission.

Ah, but, 3% of WHAT exactly?

It's common in these cases for a sales person to get some sort of commission when the sale closes. Typically for ease of computation it is the equivalent of 1-12 months of service fees (presuming the margins are high and TLV of the contract is also very large). In some scenarios this is the only commission, in other cases you might get 1 month fees as the comp, and then another payment after a milestone date (from 3 months to 1 year, depending on expected churn rates).

The answers are just so all over the place that it's hard to give an easy response. Usually though you'll notice that a salesman selling a $10 product makes about the same yearly salary as one selling a $10,000 product, but their quotas and comp plans will be scaled accordingly.

In your case, you're already getting a base salary and doing sales as well for now. You'd probably end up with a $60,000 sales "salary", based 100% on commissions, with a plan set accordingly.

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