Any Best Practices for Equity and Commission Structure for Start-Up Search Firm?

Good afternoon, Everyone! I have a couple questions that I could really use your help with because I have no idea where to start (particularly the first one). Putting together a team of All-Stars is a lot of fun, but certainly needs some planning! Without further ado:

1. Are there any best practices (or best model) you'd recommend for providing equity to original founders of a start-up search firm?
[Note: My instinct would be to issue 40% in initial equity to original founders with the other 60% earned, however this may be flawed. I'm extremely interested in your suggestions.]

2. What type of commission model would you recommend?
[Note: I'm familiar with the common models, but what do you feel is the best? Further, is there a model more beneficial to 'starting up', at which point you'll revert to a more conventional model when certain benchmarks are met?]

Thank you and I look forward to your thoughts, input, and expertise!

Josh

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Permalink Reply by Tim Sackett on December 30, 2009 at 11:27am

Josh - I've been thinking about this and trying to determine what is going to be the most difficult in getting a start up off the ground - I keep coming back to the sales side (especially in this market). If you have all-star recruiting pros, finding the talent will be the easy part - getting the openings will still be the tougher sell. So, from a commission standpoint - this has to be kept in mind. Also, getting business that doesn't have others spinning their wheels is critical - so some sort of semi-retained search agreement is almost a must.

The equity question is a great one - because in very short order - that could become a big issue - when success happens. Better to have it taken care of before the first contract is signed! I'll have to think on that one...

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Permalink Reply by Mark Waschek on December 30, 2009 at 12:06pm

To me, equity is something that should be purchased, not earned. I'd want employees to own stock only if they are willing to put some "skin in the game" themselves. However, purchase options and discounted rates on shares could be earned. Volume of shares offered are be a funtion of individual success and the long term plan of the company (for example, have 25% employee ownership in x years). However, the actual shares still need to be purchased by the employee. Stock price should be a equation based on total sales and profitability. Assuming the company is successful and grows, share prices should increase in value over time, giving the early entrants/risk takers a greater reward. Purchase options are great rewards for new recruiters. Even though they have earned the right to purchase, new recruiters may not have the cash flow to purchase in the first year, but will in the following season.

Commission in a start up is critical to feeding the racehorses. You need them off and running! If you've got historically high producers on board, I would give them 2 options: 40% (30 for placement, 10 for search authorship) and company covers all job related expenses (travel, office supplies, cell phone, etc) or you give them a 50% option in which company expenses are now shared by employee and company, but they have additional money to use towards hiring a researcher or trainee/assistant and can pay them some salary or draw against future commiss. to get them started.

If it's less expereinced recruiters, the 40% option is the only one. The 50% model only cashflows if they are producing at a decent level of at least $325k in my market. Anything below that and they are giving up money due to the expense load.

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Permalink Reply by Brian Reddick on December 30, 2009 at 5:50pm

I would agree that the sales side, especially in a start up where you are hunting for all new business, would be the most difficult part during this economy - much more difficult than in the past. The quality of the job order, # of other recruiters you are probably competing with, reduced fees, etc. also need to be taken into consideration. For this reason, I say 50% commissions with 25% being from the placement and 25% for search authorship.

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Permalink Reply by Feargall kenny on December 31, 2009 at 10:30am

Josh,

I might have some ideas for you on question #1 but I need more context - are you the original founder or are you setting up this firm with a few others? Is there startup capital involved? will there be equal contribution of that capital from all founders? will there be equal effort from all founders? Anyway, those are just for starters - might be better to ping me offline as you might not want to post that stuff.

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Permalink Reply by Craig Fisher on December 31, 2009 at 11:42am

Josh, I know what you are looking for but don't have time to type it all out right now. Call me when you get a chance. 214-394-0909. Happy New Year!

Cheers, CF @fishdogs