Dear SaaStr: How Do You Compensate Reps on Multi-Year Deals?
In the early days, when Cash is King, pay the sales reps a full commission on all cash paid up-front. It’s what I did. 95% of the time, this is what you want to do.
As as a SaaS founder, 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 100% worth it to me. Plus, the “churn” risk was pushed out to Year 4, at least from a financials perspective.
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.
You have to be careful there. 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 out 25% commissions 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. We were cash-flow positive after $5m ARR or so.
Then, I had a chance to see what happens … when you do it wrong.
After we were acquired, for a while the new rev ops team (1) paid 100% commission on multiiyear deals even without the cash upfront and (2) stopped putting in guardrails on discounting.
What happened? Some folks did crazy deals. One rep gave away a lifetime deal for $200k to a big enterprise customer, because he made more than $150k a year for 10+ years.
Incentives do matter here.
(cash image from here)
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Jason Lemkin, Khareem Sudlow
