Compensation Plan for Advisors/Lead Generators

Why not just go with straight % of revenue, straight equity, or a combination? I ask because I have always found that a)simpler is better and b)incent them to do precisely what it is you want them to do. On point "b" that means pay them to bring in revenue, not to drive profit. Unless they are advising you on operations as well as sales they will not have any control over profitability of your deal (unless you are allowing them to negotiate pricing for you - good luck if that's the case).

Equity gives them a longer-term commitment to the company and may make them work harder with an eye towards the long term, just as it goes (in theory at least) for regular employees.

Straight cash is nice in many ways and is certainly familiar to all, but it does have a certain ephemeral quality and their connection to you could sever at any moment if they get a few bucks more putting their efforts elsewhere. If I think they will drive a lot of sales (a good problem to have) then i will put in place a stepped commission plan of, for example, 10% of revenue on the first $20K/month, 7.5% on the next $20K/month and so on, so that there is always incentive to bring more, but you don't give away the shop if they turn into a great producer.

Equity vs. cash is a mgmt call, but I like using a combo in earlier stage companies and going towards all cash later stage. And if I bring on an advisor to drive sales, I pay them directly on sales they bring in or lead us to, not on profitability. In any case, they must have very clear guidance as to what their goals are and what operating constraints they have.

Finally, remember that if the deal is too attractive from the company's perspective it probably won't be nearly as attractive from the other side. If you really want someone working for you you need to make the benefits of doing so both clear and compelling. Hope this was useful.

My experience in the construction industry is that a revenue based model tends to drive bad bids on projects. Your revenue goes way up, but you can't make any money on the jobs. If you are project based, I suggest that you come to an arrangement based on something easily measurable like revenue, but pay it in steps. So they get paid for bringing in leads and introductions, paid more for landing the project and a final payment based on whether or not the project made it's projected fee. Admittedly, this makes their money contingent on a number of things outside of their control and may not work, but I believe profitability of the work has to be factored in.

Instead of basing the compensation on top-line revenue, why not base it on gross profit generated? This would certainly solve the problem in the construction industry described by Michael and, since gross margin is usually mainly impacted by variable costs, it is a better way to measure the value of the "contribution" of whatever the person brings to the table. I use "contribution" in parantheses becasue it really comes down to the contribution margin of what the person is bringing to the table. Hope that makes sense.

How do you get paid?

If you incent the referral source 100% with your compensation model a lot of the conflicts go away. This means YOUR model, not the money’s model. If you manage OPM and are getting paid a fee for funds under management, then the referral source should participate in the fees as compensation for bringing a deal that you are getting paid to evaluate, even if the deal fails.

A reduced management fee and a carry interest, if you like.

You might also offer a buy down for the carry interest at a very deep discount.

Anything less and you will not be getting the best deals and what you do get is likely to be conflicted with the referrer getting paid by the prospective portfolio company.