A well-connected person can do wonders for a startup by bringing the right relationships. Relationships are so important to startups that people usually wind up overpaying when using traditional equity splits because they are desperate. Similar to idea people, people with good relationships tend to want chunks of equity upfront. Like ideas, relationships are valuable when and if they generate revenue, investment or other financial benefit. In the Slicing Pie model, there are simple ways to calculate the fair market value.
A well-connected person who simply makes introductions may not deserve slices. But a person who can help convert them into value certainly does. Relationships turn into value when the lead to revenues, investments, or other formal relationships with the company.
When relationships turn into sales, the individual responsible for the sale is generally entitled to a sales commission on the revenue generated. Rates will vary by industry, but a commission of 5%-10% is typical. Pay the rate that is appropriate for your industry and make sure you pay the same commission to all salespeople.
Fair Market Value = Revenue x Commission Rate (%)
Not every person in your company will be entitled to a commission. A commissioned salesperson will usually receive a sales commission in addition to a base salary, which is often smaller than others in the firm at a similar level. Founders and other senior managers do not generally take a commission, for instance. Advisors usually don’t take commission either. In some cases, you can provide one commission rate on the initial sale and a lower commission rate on subsequent sales. Whoever is responsible for generating the revenue deserves the commission. If someone hands your sales person a business card from someone they met at a party and your sales person does all the work, your sales person deserves the Pie. Similarly, if someone introduces your sales person to a lifelong friend, but the sales person does the rest, the sales person still deserves the reward. Only offer slices to individuals who drive sales. A casual introduction probably isn’t good enough.
It’s important to determine, in advance, when you are going to recognize the sale. Some companies may want to do it at the time of the sale. Others may want to wait until the cash is actually collected. I recommend entering sales on a monthly basis and only counting cash collected during the month. Unless you are disciplined about this process, you will run the risk of inaccurate allocations.
Similar to generating revenue, when someone’s relationship creates a new investment, that person would be entitled to a finder’s fee. But again, they should do more than just make an introduction; they should stay active throughout the process as needed.
A typical finder’s fee would be 5% for the first $1,000,000 and 2.5% for every million after that.
Fair Market Value = (First Million x 5%) + (The Rest x 2.5%)
You may run into legal issues with the finder’s fee. In some cases, only a registered broker can collect a finder’s fee. Check with a Slicing Pie-friendly attorney. Finder’s fees are much less common than sales commissions. If your company is uncomfortable paying the finder’s fee you might consider paying a one-time spot bonus or something similar.
Partners & Vendors
It is not common (at least in the United States) to provide compensation for finding partners or vendors. For the most part, this is just part of the job we are hired to do.
In some cases, the partner or vendor will provide some sort of reward. For instance, a printing company might provide a sales commission to a contact who help them close a deal. It’s best to agree not to provide slices in exchange for relationships that turn into partnerships or vendors.
If a partnership or vendor produces a measurable savings over a previous solution, you can allocate a percentage of the savings (under 5%) to the person who helped find the vendor.
Fair Market Value = ~5% x Savings or one-time bonus or nothing
Sometimes, a relationship will turn into a new hire. In these cases, a referral fee may be appropriate. Choose an amount you are comfortable with and offer it to anyone who refers an employee. Typically, you would wait at least six months before providing the slices so you will have time to make sure the employee sticks around!
$250 to $500 is a good place to start. Referral fees are quite common in the United States and can be a great way to reward current employees for participating in the recruitment process.
Fair Market Rate = Referral Fee/Bonus