Jason M. Lemkin explains how early-stage startups should pay sales reps: invest heavily upfront by letting new reps keep 100% of commissions for the first three months. Use a 50/50 base-to-bonus split, and hire reps only if they'll bring in 3-5x their take-home pay. Focus on monthly base salary, not the headline OTE number.
At, at scale, when you're extremely mature, extremely mature and very profitable, you really gotta tweak this stuff very carefully. Okay? And we, we could talk about that if that's relevant. But in the beginning, we get this all wrong. What matters is can a sales rep close more than they, than they take home? In the very beginning, that's all that matters. It's just you selling, right? The first three months of a new rep, you're, you're lucky if they can close as much as their take home pay is their ot. Okay? And so in the really early days, my early, early day comp plan is, look, your first three months, you keep 100% of what you close. Of course that's not profitable for the business, but you got to invest in them, right? You keep 100% of what you close. And if, if you have enough going on in your business, usually that's enough to put, to put supper on the, on the stove. And that's without a salary. No, no, you pick a hotel, a salary, but you gotta. Okay, let's step back for a minute. You gotta pay market. You gotta pay market. And this in the early days, if you're bootstrapped or really this stresses folks out. Like I just talked to this great rep, Lenny, but, but he wants 150k OTE, right? And in fact it's a step down. He had 170k at slack, but he knows this isn't a startup. He wants a hundred, he might take 140. And OTE is total comp. Overall total comp. And the founder panics. I don't have a, I mean I'm only making 60. How can I pay 140? Well, let's break it down for a minute. First of all, let's be tactical. It's usually 50, 50, right? 50% base, 50% bonus for a sales rep. So they're really only taking home a 70k base trying to make another 70. Okay. And then 70 divided by 12. Help me do my math. It's not quite 6k a month. Well, maybe with taxes it is. You're really only paying 6k a month for a couple months to see if this experiment works out. You're investing 20,000. You don't have $20,000 to do sales. Then don't do sales if you can't find $20,000. So people freak out too much about this top line number, this, this, this base and bonus, the on target earnings ote. And they're not more practical about what am I committing to cash upfront. Two, you Need a plan where it's a win win. So. So if you. This person makes 1:40 but ultim. Ultimately a sales reps gotta bring in four to five times what they take home. Okay, so that 1:40's gotta be 500, 600 or more. The more enterprise you are, the bigger the multiple has to be and the, and the higher the comp. But it's gotta be 3 to 5x at a minimum. 3, 3x for small businesses, 4x for mid market, 5x. You gotta get there. But you don't have to be there on day one and two. When you get there, the reps should be accretive, shouldn't they be? If they make 150 and they bring in 450. Unless your marketing costs are out of control, which can happen. But that's not sales fault, is it? If your marketing costs are reasonable and you pay a sales rep150 for closing.450. If you engineer your plan right, you should be smiling, not frowning. Where it gets tough is when you have a ton of folks not closing. When you have a lot, when you have a ton of folks not closing and you have extremely high marketing costs, then it all breaks. Your cat breaks, your. Your payback period breaks. But if you have inbound leads, if you have demand and you have sales reps that can sell you this pen, they're going to be accretive lending because of that math. And don't take the pressure off. Don't make them close 5x their take on their first quarter. Make them close 1x. Let them put points on board, let them eat. And so negotiating, here's the point if you think about it. Negotiating someone down from a 150k OT to 130, it's not going to make any difference. You want them to close 600 or 700, it's not going to matter at scale. Does it matter for Mongo maybe, right? Maybe. But you want it. What you care about is how much can. How much more can they close and they bring in and then you. That's why you want them to make a lot of money. You want them to be rich. You want them to take home a lot for a whole bunch of reasons. And so don't freak out about the acronym OT what they take home. Figure out what it's really going to cost you and would you buy from them. And if you would, they're probably going to bring in more than they take home, right? And on the marketing side, like in their leads, you're lucky if you can find a marketing channel that is that accretive. Amazing. Okay.
