What’s more common – paying commission on first year annual contract value or on first year plus subsequent year contract values for the initial term?

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JASON LEMKIN

A few general practices:

  • It’s pretty common in start-ups to pay commission on all years under a multi-year contract IF all the cash is received up-front, and the contract is uncancellable.  Generally, the commission will be smaller for the second+ years, but only a bit … and not always.  This is a great deal for start-ups.  Pull Y2 and Y3 cash in early!!  You will probably trade a little MRR off here, b/c of a multi-year discount, but it’s almost always worth it for start-ups.
  • Start-ups rarely pay material commissions on multi-year contracts if only the first year is paid up front.  Maybe a little, but not too much.  Cash is king and the customer remains “at risk” no matter what the language says.  And really, for start-ups, this can be a bad deal because the rep will have to give a multi-year discount, which will reduce the cash in the door up front (b/c they are only paying for Year 1 at first).  So, probably, don’t do this unless you have ample cash.
  • Start-ups rarely if ever pay sales reps on renewals 1+ year down the road.  Some get suckered into this by sales reps, however.

but …

  • Really big companies don’t care much about cash in the short-term (they have lots of cash) but do care about bookings, so they’ll pay full commissions on multi-year contracts even if all the cash isn’t paid upfront.  They love a 5-year binding contract most of all, even if only the first year cash is paid up front.
  • Really big companies often focus more on selling into existing “named accounts” that are already penetrated, so sometimes pay the reps on renewals as well for their named accounts.  This won’t really make any sense to you in a start-up.  But if you are at a F500 company, I mean, often they’ve already sold something, at some point, to every company of the planet already … so you have to incent reps more to farm in some cases than really to hunt …

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Published on March 20, 2016
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