In raw, pre-revenue startups the need for staff almost always is far greater than cash to pay them. One or two founders may build a product, but if they are both engineers, for example, and have absolutely no facility with marketing and sales, the obvious solution is to hire a sales person.
But how can you hire a sales person if you don’t have the money to pay them? You and your partner have bootstrapped the company, perhaps with your own or friends and family money – which is now long gone.
If you are hiring a sales person bringing them into the company on a pure commission on sales basis can work with the right person. But the key is having a product ready to sell. Great sales people are very short-term focused and very focused on making money. (Marketing types typically focus on the long term vision for the company.) Sales people are quite used to working on an incentive basis, but normally have what’s called a “draw” – a monthly cash payment to cover at minimum their travel expenses and usually their living expenses as well. So if you are recruiting a sales person and you lack funding, for even a draw, here’s what you can need to do:
- Have your product ready to go. Sales people can not sell vaporware. Don’t waste your time trying that.
- Provide sales support. Whether that’s having collateral material that can be left behind after a sales call, leads you have generated on your own, or sending an engineer or even a founder to help close the sale.
- Know your competition. If you want your sales person to hit the ground running provide them with up to date strengths and weaknesses of your competitors. Even if the competitor is a only a manual or in-house solution.
- Be aggressive in your comp plan. If you lack any funding at all a 50% sales commission might be necessary. You can limit that high commission level in one of several ways: until you get funding, until sales revenue equals a fixed amount, or for a fixed period. Remember your sales person is taking a huge risk if your product doesn’t catch on. They will play a critical role in keeping your company alive.
- Don’t create competition for your sales person. You may have opportunities to work with a channel partner who can sell your product for you. But you can’t have a channel partner competing with your own sales person. Carve out a geographic territory or type of market, such as K-12 versus higher education, so each party has an exclusive for a large and ripe market segment.
But what if you just have to have that back-end engineer or marketing maven? They aren’t going to work on a sales commission. What else can you offer?
- Equity – stock options – in your company. Compensating new hires with equity when the company is pre-sales and has no investors is very tempting for a lot of founders. However, as my VC friends used to say “They are only making 100% of equity.” So you need to pay attention to these factors: how much equity do the founders have? Have you reserved a large enough block for new hires, usually about 20%? There a various types of equity and it’s beyond the scope of this post to go into them all. Get good advice from your mentors, advisors or experienced friends on how much equity to give a new hire and what should be the terms and conditions governing the stock.
- Salary accrual. If you have a product in the market and are making sales but your revenue isn’t enough to pay a new hire market rate you can offer them the ability to accrue their salary. What this amounts to is an interest-free loan of their salary for either a fixed period, when revenues enable you to pay back the salary they have accrued or when you raise a Series A round, enabling you to pay a competitive salary and reimburse your new staffer for their accrued salary.
- Convertible note. CNs are loans that can convert into equity in your company. CNs are typically used with angels or for seed rounds. But they can be much more attractive than salary accrual, depending on how the individual values stock in your company. Here’s an explanation of how convertible notes work.
If you can’t persuade a key hire to come on board with any of these approaches there is one way that you can accelerate hiring when you have no cash – an agreement to join on funding. When I started Mainspring there were two candidates I wanted to hire, but we couldn’t afford either one of them – their total salaries were in excess of $300,000 – real money in the early 1990’s. They both were very excited about the company but neither had worked at a startup before and they couldn’t see giving up their very secure and well-paid jobs to work just for equity. However, I was able to work out a deal with each of them for both a competitive salary and stock options if they would agree to join us when we received our Series A round. I had them both interview with the VC firm we believed would lead the Series A. This was a double win for us. These guys were so impressive and added so much value to the management team they basically closed the Series A for us. At the same time the VC impressed them with what a great opportunity they would have by joining us that it cemented their resolve to join upon funding, which they both did.
The formula for recruiting when you have no cash in the bank boils down to two things: a really compelling opportunity for job candidates and a product far enough along towards generating revenue that job candidates can easily envision that pot of gold at the end of the rainbow that you are painting for them. As with so much in the early days of a startup, success will depend on your ability to sell the vision of your company.