In the early days, when Cash is King, I paid the sales reps a full commission on all cash paid up-front.
And I paid nothing on multiyear deals without cash upfront, because we had basically a 100% renewal rate at term expiration. (We had churn, but it wasn’t due to contract expiration).
This is relatively uncommon, apprarently < 10% of startups pay a 100% commission on Y2/Y3+ prepaid cash: How Much to Compensate SaaS Sales Teams for New Sales, Renewals and Expansions
But at this time, cash was king. And bringing in $400k for 3 years of product now instead of $150k for one year that I had to renew twice was worth it to me. Plus, the “churn” risk, at least from a GAAP-perspective, was pushed out to Year 4.
Later, cash becomes a bit less important, and if nothing else, you worry a bit about incenting too much discounting just to get the multiyear cash deal. Which is a fair and real concern, even with firm boundaries on discounting. After all, why would a customer prepay multiple years, if not for a substantial additional discount? So if your renewal rates are very high, you are robbing the future a bit here.
Ultimately, after $10m ARR, we moved to a format where we paid at 25% commission on Year 2 and 3 cash up front, instead of a 100% commission.
Either way, Year 2 and 3 didn’t count toward quota per se. Those years don’t impact your ARR in this calendar year. So I don’t like to see them claimed as “bookings”. But I did pay out on all years where we got the cash.
And it worked. I was cash-flow positive after $4m ARR or so.
