How do you structure compensation for 2 advisors that want to be very actively involved / invested into our business that has sale potential soon?

One of the start-ups I'm involved with does a lot of work alongside entrepreneurs building companies towards an eventual exit or sale... Here's a couple of recommendations, aside from the usual "research what typical sales people in your industry get paid" advice:

1. Incentivize unexpected business. In other words, don't pay them too much to solicit or close business that would have been easy for you to get or would have fallen in your lap anyways. Consider having two pay tiers, one slightly lower tier for business you probably could have attained with any salesperson's help and one that contains the dream deals that you'd need a star salesperson to get. Pay them to go after your white whales (Moby Dick reference for anyone who is wondering). This may result in greater overall marketshare than if you just hired a couple salespeople, who will naturally go after the low hanging fruit first.

2. Create a CONTRIBUTION FORMULA for the eventual buyout. If you're looking for a good long-term kicker, give them a piece of the company, based on how much they actually contribute to the bottom line over the period from when they're hired to when the company sells (or they leave). In other words, you may say something like you'll give them up to 5% of the sales price of the company, depending on how much of the revenue they generate. If they generate 50% of the revenue, you'd give them 50% of 5% (or 2.5%) when the company eventually sells.

3. Ask them what would motivate them the most. Duh. How do we not ask our salespeople this more? If there's an answer that excites them more than what we're offering, why wouldn't we consider it, right? We want them as motivated as possible. Of course, before you say "yes" to anything they propose, run it by your mentors, the folks on Clarity.fm and your legal and accounting team.

I'm happy to have a more in-depth conversation on the psychology of motivation and pay (I'll put on my psychology hat) or preparing a company to be sold for the best price possible (my MergerMatch.com hat).

Reach out to me through Clarity.fm if I can help.

Best of luck!

Ken Clark
Coach, consultant and therapist to entrepreneurs

Great question and I will try not to use the dreaded “it depends” answer to many times. I’ve been in several small companies and have advised several others that have dealt with this exact question. The specific answer is always different, but they have always involved the same basic levers: Pay, equity, and a bonus.

In terms of pay, hopefully you have a sense of their expectations or normal rate. That would be helpful to know before you put together your offer. I would encourage you to keep this piece to a minimum. You really want them to be incentivized on the back end of their efforts, not working for a fee. In fact, unless there is an expectation here I would recommend you not include it in your initial offer.

For equity, an advisor is typically in the .5% to 1% of the company range. I have used that range in a couple of small companies I have been involved with. Here again I don’t know if there is an expectation on their side or if they are even already on board with equity. I am assuming from the context of your question that your company is a start up? If not, you might have some constraints or tax issues that would make equity complex. If so, options may be a good route to go.

Finally, a bonus on the success of the transaction or any sales they bring is probably your simplest and potentially most motivating lever. Here also you have to calibrate to your business (for example I don’t know what your margins will bear) but I have structured a lot of “rainmaker” or senior sales types of agreements in the 10% to 15% of sales range. For the success fee on a successful sale of the business it’s tough to say without knowing the potential magnitude of your deal, but 2.5% to 5% is a good range to start with depending on all the specifics. Remember, f they have equity in the company they will get a pop there as well.

Hope that helps. Bottom line is there are a lot of things at play and you have several things you can use to get to a satisfactory deal. Just try to put most of the reward on the outcome you value the most. The most important factor (as in most things) is communication. Hopefully your advisor candidates are folks with whom you can have a transparent conversation about expectations and goals.

Good luck with it and don’t hesitate to reach out if you have more specific questions.

Ted

I would need to ask how close you are to a sale? Also when you say these advisors want to be "involved/invested" do you mean they will be investing in the company?