Founder Questions: How and When Do You Hire Your First Salesperson?
Spencer Rascoff is an entrepreneur and company leader who co-founded Zillow, Hotwire and dot.LA, and who served as Zillow's CEO for a decade. He is currently executive chairman of dot.LA and a board member at Zillow and TripAdvisor. In fall 2019, Spencer was a Visiting Executive Professor at Harvard Business School where he co-taught the "Managing Tech Ventures" course. In 2015, Spencer co-wrote and published his first book, the New York Times' Best Seller "Zillow Talk: Rewriting the Rules of Real Estate." Spencer is the host of "Office Hours," a monthly podcast on dot.LA featuring candid conversations between prominent executives on leadership, diversity and inclusion, and startups.
The other day I had a call with a founder in my portfolio of angel investments who is preparing for a Series A round. His question was: At what point should he step back from personally leading sales and hire a real sales team?
Every seed or Series A company will go through this important step. There's no question that a founder's passion and knowledge of the product usually makes for a great salesperson. But at some point, it's time to let go and bring in the experts: true salespeople.
The challenge is, unless you cut your teeth in sales or have direct experience with the inner workings of a sales organization, many founders don't know much about recruiting or structuring a sales team. So where do you start?
First, with people:
There are many different types of sales professionals out there, all with different strengths, and in an unlimited capital situation you'd want to hire a bunch of different types and see which one performs best for your startup. But most companies at this stage can't afford to run that experiment. Here are the four types of salespeople you can start with as your first hire:
- Cheap and scrappy. This is your straight-out-of-college, hungry-to-prove-and-perform individual with no industry or sales experience but great coachability and drive. This person will need investment up front, but the right pick will pay off.
- Seasoned sales pro. This person has lots of sales experience and can be a vital asset in structuring and leading the sales team as it grows, but they have no industry experience or connections and will need to develop those.
- Seasoned industry pro. This person has both experience and connections within the industry you're operating but no sales experience. While this person can still be successful, arguably skill gaps are harder to fill than knowledge gaps.
- Sales and industry pro. This is a turnkey hire because of their sales experience within the industry, giving them the knowledge and connections to hit the ground running with the least amount of upfront investment.
I advised the founder that #4, a sales and industry pro, is probably the easiest place to start. That said, any one of these types of sales hires can be successful; ultimately it comes down to how much you can invest in them (less experience requires more time, training and coaching), and also who you come across in your search. You may find the perfect fit for your company's purpose and values in any of these buckets, and any additional investment or ramp up is worth it for the right hire.
The right compensation model helps you not only attract great professionals but help them do their jobs more effectively with the right incentives. But make peace with the fact that you will make a lot of mistakes in this area, and you will need to adjust and pivot throughout the growth, maturation and life cycle of your business. It's just part of building companies. With that disclaimer, here are two crucial pieces to sales compensation:
1. Compensation model. Your structure consists of a base salary plus commission, and understanding the right base salary depends on the type of salespeople you're hiring. A good guideline is a $40-60K base salary (remember, I'm talking about startups here), but it could be as high as $100K depending on experience and field.
Once you've established that base, the next step is to determine what percentage of total compensation is variable based on a commission, which is paid out if the salesperson meets or exceeds quota. A good rule of thumb here is setting the variable comp at 25% of the base salary and up to another 25% for exceeding quota. That means a sales person on a $50K salary will make an additional $25K for meeting quota and up to another $25K (double the salary) for crushing it.
2. Quota and revenue churn. This second piece is vital not just for the earning potential of the employee but also for the long-term health of the business, and you'll find much of your adjustments over time happen in this area. Quota and churn are inextricably linked; if you don't consider revenue churn when setting quota, your salespeople will "sell hot" into accounts that won't last — which will over time bury them in a hole that makes it difficult for them and the business to recover. An example: Say you set quota at $10K of new revenue per month, and in the first month your sales person meets it. But in month two, you see 10% ($1K) of that new business churn. To make quota, your salesperson will need to sell $11K, or quota plus 10%. Should this pattern continue, the hole gets deeper and more difficult to scramble out of. Churn guardrails are crucial.
Incorporating churn into quota is overall healthier for the business. Not only does it disincentivize "commission hole-digging," it also forces your salespeople to form more consultative relationships and take greater care in onboarding and account management since churn and quota are both front of mind in their efforts.
While there's no prescribed path to success with your first sales organization, you need to have a plan to scale from founder evangelism to mechanized sales that scale revenue. Founders should always be selling their own product, but even more important is their ability to create a scalable sales org beyond themselves.
Subscribe to our newsletter to catch every headline.
Proptech startup Pacaso emerged from stealth mode Thursday, aiming to make it easier for a larger swath of the population to own a second home, or at least a portion of one.
The company announced a $17 million seed round led by venture capital firm Maveron, with participation from Global Founders Capital, L.A.'s Crosscut and individual investors such as former Starbucks CEO Howard Schultz, real estate coach Tom Ferry, former Zillow executive Greg Schwartz, and Amazon CEO of Consumer Worldwide Jeff Wilke. Pacaso also raised $250 million in debt financing to purchase homes.
BAM Ventures, the early-stage, consumer-focused fund co-founded by corporate lawyer-turned-L.A. serial entrepreneur-turned-venture capitalist Brian Lee, has filed paperwork with the SEC indicating that it is in the process of raising a third fund with $50 million in dry power.
Lee and Shamin Rostami Walsh, BAM's managing director, declined to comment on the offering. Companies are barred by SEC regulations from "general solicitation" while they are raising capital, which includes speaking to the media.