How to Compensate a VP, Sales at a Tech Startup

March 6th, 2012 by Sean Black 6 Comments

A friend of mine, the Founder & CEO of a fast-growing online media company, is getting ready to hire his first VP, Sales. He emailed me asking about compensation ranges. For context, his company’s platform accesses millons of highly engaged consumers and it sells targeted advertising to brands and the advertising agencies that represent them. Here is the question he asked:

“Quick question regarding sales compensation. I am looking to hire a VP of Sales, and have a couple really solid candidates coming who I am likely going to make one offer to. Both have asked about compensation for the role, and both are pretty heavy hitters (with 15+ years experience).

One worked in top positions dating back to Lycos… the other is the current EVP of Sales for (a six-year old, 100+ person media company in NYC) who started when they were a few guys. Trying to get a sense of a compensation package (salary, % sales/bonus, equity) for both that they won’t balk and at the same time we aren’t shooting the moon on either.”

I asked a few key questions to better understand and assess the situation:

Q: Are you hiring this person to build a team, sell or both? If build a team, how big and how fast?

A: Person would likely start by helping us continue to refine/pitch, the packaging of the story to brands/agencies. We’ve already got a couple people who would report into them (who are already making inroads with agencies). For team, would think adding a couple more people over next few months is about right. This would give them 4 people under management, which hopefully would get our foundation pretty solid as we then really look to scale out.

Q: How far along is the product you are selling? Have you sold a bunch already and proved it works and just need to scale or are you still in customer development?

A: In terms of existing traction, we’re in some good conversations and already have some very early cash coming in around advertising (~$50k/mo). Have only started a couple months ago though, so idea is to bring in someone who can take the helm on sales and push ball even faster, while helping us optimize existing guys on team selling, as well as get us thinking about other resources we may need.

Q: Are they going to manage ad operations as well or is that going to live under someone else?

A: Yes, our current ad ops person would be reporting into them.

Ok, so before putting a number on this position, let’s talk a little about the kind of team this VP, Sales is likely to manage. I am going to use ad sales in this example, but these numbers hold as true for salespeople selling Software-as-a-Service (SaaS), traditional software (if it still exists) and most other high-tech products as they do for online media. Sales reps calling into large brands and agencies can make between $100k to $650k on the high-end. Yes, you saw that correctly – $650k on the high-end. Let’s say they don’t have any experience selling online advertising, but they worked as an account manager or on a sales operations team and know the mechanics. You can expect to pay a salary of $50-$75k with an opportunity for them to make up to another $50k+ in commission the first three years. Their quota is likely between $500k-$750k a year. A friend of mine ran a team of 30 reps on the national ad team at Google. They would often train people right out of college and they fell into this camp with a OTE (On Target Earnings) of $100k on the high-end their first few years. Once they have 3-5 years experience, they should be expected to sell ~$1-$2M a year and their OTE is somewhere between $125-$175k with ~$100k of that in base salary and the rest in commission. If they have 5+ years experience and are good, they should be selling anywhere from $2M-10M on the very high-end. If they are selling $5M, their OTE is somewhere around $350k, $125-$150k base and the rest in commission. It is the exception rather than the norm, but I can think of two people off the top of my head that were selling more than $10M and who where making $650k+/year. One was at Shopping.com (eBay) and one was at a fast-growing ad exchange. Both had 10+ years experience and both built very deep relationships at most of the brands and agencies in their space. In other words, they owned the customer relationship and they got paid handsomely for it. That is somewhat unique to the advertising world. Its a great situation for the rep, but not so great for the company, as it watches its highest paying accounts walk out the door every day. A topic for another post.

So now you know a little more about the people on the team this VP, Sales will hire and manage. How much do you think they should make? More than the sales executives they manage? Not necessarily. The irony of becoming a sales manager is that you get a ton more responsibility, but you often make less money than your highest performing reps. In fact, the highest performing reps are often the highest paid people in a company with under $100M in revenue. How is that for career advancement? Comp for this level of VP, Sales at a fast-growing tech company losing money is $200k-$250k+ plus equity. For comparison, comp for a VP, Sales at an established, profitable online media company can be $300-$500k plus equity, more if they manage a really big team. I actually found the below VP, Sales Compensation Survey on the Boston Search Group website after writing the above. It proves these numbers hold up for SaaS as well as online media. To determine the equity portion on the startup side, I use Fred Wilson’s model for all positions at a startup company. It comes very close to what I was doing historically and it’s a nice, objective third party source you can point candidates to for credibility.

So now the question is how do we structure the compensation for our new VP, Sales to drive the desired behavior? There are at least two common models to comp a VP, Sales:

Base salary + commission override on the team – basically, they get a smaller percentage on every deal their team closes.
Base + bonus.

Whatever you do, you don’t want the VP, Sales to own any accounts. If they own accounts, the sales team will see their manager as competition who gets to cherry pick the best accounts instead of a coach or a resource to help close deals. At the early stage of the company, you want a player/coach who is selling side-by-side with each rep. I don’t like option #1 at an early stage because it forces the VP to focus too much on short-term revenue at the cost of the long-term product, customer and team development. I like #2 with the bonus based on no more than 3 key performance indicators (KPIs), as its impossible to focus on more than 3 in any given quarter. Also, I suggest bonus be paid quarterly so the VP is motivated by the KPIs and so those KPIs can be changed quarterly with company priorities. The 3 KPIs early on might revolve around 1. Revenue 2. Recruiting 3. Ramping existing reps. You can modify these as time goes on to focus on new priorities. For example, the revenue KPI might be more specifically targeted to new accounts if the priority is to broaden the base of customers. If your VP is managing sales operations, as is the case above, then one of the KPIs could target customer satisfaction to make sure ops is filling orders and managing customer well on the backend.

By the way, none of this addresses the type of person you want in an early stage company as your VP, Sales. Despite conventional wisdom, you do NOT want a veteren sales executive from a large company in your space. You want an evangelist that knows how to deal with uncertainty, a complete lack of structure and can manage the customer development process. I go into more detail about this in my post “Startup sales: The Missionary Position” and in my interview with Steven Blank “Tips for Hiring your First VP, Sales at a Startup“.

6 Responses to “How to Compensate a VP, Sales at a Tech Startup”

DirtySexyMoney says:

March 7, 2012 at 4:01 pm

[...] This post originally appeared on the SalesCrunch blog. [...]

Reply
Peter says:

March 12, 2012 at 10:01 pm

You mention that reps should be selling b/t 1M and 2M after a few years in sales, and you mention that some might be selling as much as 10M in annual quota. That’s just not true for SaaS where the numbers are all over the place depending on SMB vs Fortune 500, though it may be true for selling advertising to big brands. In SaaS, you’ll see payout ratios usually between 4:1 and 8:1. In other words, 400K in quota nets 100K in total comp, or 500K in comp would require at least 2.5M to 3M in annual quota. The lower the ratio, the more expensive the sales operation is for the company.

Reply
- Sean Black says:
  
  March 12, 2012 at 10:28 pm
  
  Peter, you’re right that there is a wide range in SaaS depending on if you are selling to SMB’s vs large enterprise. 4:1 (25%) is extremely generous on a quota as low as $400k, but 8:1+ seems a lot more typical at that level in my experience. 5:1 or 6:1 on an annual quota of $2.5M+ is definitely in range, as the more you make the more you take. 10M+ individual contributors are definitely outliers found far more often in online media sales than in SaaS. Most companies break down territories and divide accounts before the numbers for any one rep get that high unless they are very large enterprise deals.
  
  Reply
sean says:

October 10, 2012 at 3:42 am

We need a simple model to help us properly slice the pie. It needs to be flexible and fair. By fair I mean it needs to give each founder what they deserve. And by flexible I mean it needs to adapt over time to re-allocate the startup equity so that the distribution stays fair until the fledgling company takes flight. check out Mike Moyer’s book slicing pie it talks about 50/50 share and how to divide it through his grunt calculator.

Reply
Sales compensation for startups | says:

April 30, 2013 at 8:42 pm

[...] there are no well-established precedents to guide compensation practices. Crunched recommends evaluating the role to be filled when creating a sales compensation plan as a first step. Will the new hire be working to build a [...]

Reply
Ali says:

May 14, 2013 at 8:19 am

Nice blog post. We’re looking for a salesman at ezofficeinventory.com and have been trying to figure out both a competitve comp plan and a place to advertise for the req. Any recommendations on the latter?

Reply

Crunched Blog