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I started developing a product in 2001. It was a one off web site for a particular client in which I retained all rights / ownership of the software. By early 2009, the code base had been extended to the point that it made sense to "take it to market" so to speak.

I went through a couple sales guys that did absolutely nothing before finding the current guy in mid 2010. Prior to this I had exactly 2 deals worth maybe $60k, that I sold and closed.

The initial deal was that he would deliver $300k in sales, while covering all of the sales and marketing expenses, within 1 year that ended July 1, 2011. If he did that, then he would get 7.5% of the company. He was additionally paid a 50% commission rate. There were more metrics for following years with additional equity distributions, but those aren't important considering he didn't hit his target. Not even close: he made $85k in sales.

I kept with him because I understand that our market is sometimes...slow. Also, we changed our agreement in April so that I split costs with him (trade shows, etc). The new agreement made no mention of an equity distribution.

Now, I'm in a position that I'd like to bring on regular investors. We have prospects in the range of $500k to $1m that should close by the end of this year, but I need more people now.

Of course, in putting this together, my sales guy said that he was under the impression that we were "equal partners". Not just that he was receiving a 50% commission, but that he also had a 50% ownership stake. I'm trying not to just completely explode.

After going through the existing sales, new prospects and the previous agreement I said I'd give him 2% of the company and another 8% if he closed $1m by July next year. This should not only be completely doable, I'd be surprised if we didn't hit $2m.

Which leads me to my question: Am I smoking crack?

More to the point, is giving 2% of a company to a sales guy that has thus far missed targets, but has an honestly great probability of closing good deals later this year a "good deal" or a "slap in the face"?

After a couple hours of talking he wants, at minimum, 30% of ownership, 50% of revenue, and all "expenses" split evenly for the foreseeable future. I can't see how that is a good return.

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If you can't trust and work well with someone that you're going to have to work a lot with, you're better to sort it out earlier than later. – Chris Morgan Oct 17 '11 at 23:16

5 Answers

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The fact that you're even posting this tells me that you probably don't want to end up in a scenario where this guy has a significant equity stake in your company.

Based on what you've posted here, it seems like you alone have done the majority effort in creating value in the company. Concept, code, customers (initially), all your effort.

Your sales guy has been there a year and made a single contribution of moderate worth (knowing more about the expenses incurred to close this deal would be helpful, but not overly critical).

IMO, the sales guy has "employee" status, not "co-founder" status, and his equity should reflect that. A 1-5% stake would be along the lines of appropriate an in-line with what I have seen in other scenarios. This equity would be on a standard vesting schedule, not a flat-out grant.

Great sales guys can be a huge asset, but I'm feeling like this guy isn't "great". If he were, you would be convinced he was doing you a favor by only asking for an 80% equity stake ;)

My free unqualified advice: Offer him a reasonable employment package, contingent upon closing your funding round, include some nice accelerators for commissions if he exceeds targets by about 10%. If he does not see that as reasonable, the two of you will likely never see eye to eye and you might as well cut your losses early.

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A couple things: I'd be okay with him having a significant stake if he was producing at that level. Also, our cost of sales expenses are extremely minor (maybe 5%). – Finding Trouble Oct 19 '11 at 1:10
up vote 1 down vote

There is no set rule for how much equity a sales guy should get, and it's near impossible to give advice on it based on the limited information available.

Do you want to partner with this guy? It doesn't sound like it, so then don't. I am not sure why you are considering this so much, I am guessing there is more too it (ie. friendship, etc.). If it is purely business, he is not indispensable, so make a deal that works best for you while still dealing with him ethically. If he doesn't like it and leaves, you can get another sales guy.

If the idea of that worries you and you don't want him leaving, then negotiate with him and find a deal you are both happy with. If you can't reach that deal, well you have no choice but to go separate ways.

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up vote 1 down vote

Brian, it sounds like you have a good product. But it also sounds like you have a pretty unmotivated salesperson.

Have you sat down and asked your sales guys why he hasn't hit his goals? It's your job as sales manager (owner) to empower your sales staff, and motivate them to meet goals. Starting someone off at a 50% commission rate sounds like it would be motivation enough, but consider this. If your sales guy is content making $40-$50,000 a year, why would he want to spend the extra effort and resources selling above that? Even if you tell him he has to, he's not really motivated to. You need to keep your sales staff hungry for more sales.

If I were you, I'd change up your commission structures to push him into greater sales. Having a tiered system really helps in times like this. You need to force the sales staff to excel in their jobs to be able to make ends meet. I know this sounds a bit counter intuitive, but greed isn't the only motivator. There are extrinsic and intrinsic motivators for people. It all comes back to the personality of the sales staff. You also need to work with him to set realistic goals. If you, the owner could only sell $85,000 worth of product, how can you expect your sales guy to achieve over 300% sales growth? And then you say he should sell $1-$2m next year? Another 300-500% sales growth year over year? That's daunting for a sales person.

TLDR:

  • Work with sales guy to set realistic goals.
  • Talk with him to see what problems he's running into meeting his goals.
  • Adjust commission schedule to motivate sales staff to meet goals.
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A couple items: I was able to do those sales while expending maybe 10 hours a month. We happen to have hit on a very underserved market that is hungry for our product due to the economy. Without too much detail, our clients are laying off hundreds of people with no way to perform a task that is mandated by law and will result in severe penalties for them. We're much cheaper than rehiring regular staff (and the penalities for non-compliance) to perform these tasks. So, 300 to 500% growth is a minimum of what he can do. – Finding Trouble Oct 19 '11 at 1:07
up vote 1 down vote

Which leads me to my question: Am I smoking crack?

No.

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up vote -1 down vote

The best business advise out there is in this little book. I've read it twice and will return to it without a doubt.

About partners:

  1. Don't do it.
  2. Read 1.
  3. If you really must, look for someone you can trust (the rhyme is mine (twice, now))

Edit: I think the above does answer the question. The OP has been in business, without a partner, since ten years ago. He hasn't been interested in having a partner. His salesperson is pressing him into something he hadn't even thought about... Rule #1 applies, clearly, and #3 as well (IMO).

For other entrepreneurs, having a partner may seem like a good idea. There are very good examples both for and against partnerships, but that's not here and now. (Bill Gates or Steve Jobs vs Larry Page & Sergey Brin or Joel Spolsky & Michael Pryor).

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2  
Saying not to get partners at all is pretty naive advice Mr Junkie. Partnerships can be hard, and you can get into huge trouble. But if you do it correctly, a partner can add an incalculable amount of value to a company. You have to pick a partner with complementary skills, and with a personality you can work with. – bwasson Oct 18 '11 at 23:09
@bwasson: see my edit. – GUI Junkie Oct 20 '11 at 21:24

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