Success-Based Sales Consultants – it’s about the cash flow (again)

Especially in the beginning, B2B startups often find themselves without the capacity or network to hit up potential customers on their own. A common practice of having an external consultant or expert in the market help with introductions and sales pitches can be very helpful, provided the contracts with him are done correctly. The typical agreement is that the consultant will help with lead generation, follow up calls, introductions, and material preparation and in return receives some percent of the revenue that results from a successful deal.

The problem with this solution is that most of the time the consultant is owed his percentage or flat fee at the time of closing with the customer, while the customer pays the startup based on some other schedule. For example, at Day 0 the startup and the customer sign a contract for 100T€ over 12 months, payable by month. If the consultant has a 10% success fee (or flat fee), then depending on how is agreement is worded, the startup owes him 12T€ immediately at Day 1, before the customer has paid anything! At Day 30, the customer finally pays the 1st month’s payment of 8T€ to the startup, but the startup is still had a negative cash-flow for the month. Now imagine it was a 500T€ contract payable by quarter over 3 years. In this case, the startup has to pay the consultant 50T€ even though he will see his first payment 3 months later! For a startup with very little working capital this can be deadly. It becomes even worse for the startup if the 1st XT€ of income go to the consultant up to his percentage amount or if he has a flat fee per customer.

As bad as this can be, it can even be worse if the output of the consultant’s contract is not perfectly aligned with the startup’s input needs. In the example above, there was at least an alignment in the consultants output (a closed revenue-generating deal) and the startup’s needs (a closed revenue-generating deal). But all too often the consultant’s deliverables are not directly tied to revenue (or whatever other metric the startup needs). For example, if a consultant is promising to open up his network, it would be very easy to agree to a flat fee of 2T€ per introduction in the market vertical that the startup is trying to penetrate. But what happens after 10 introductions and no follow up? Now the startups pays 20T€ and received zero economic benefit for the consultant’s work. Or think on the situation where an app startup agrees to pay a marketing company based on the number of clicks on its website or the number of downloads of its app. If the revenue model of the startup is based on usage of the app, then this could be a very bad deal. At the extreme, the startup pays the partner for downloads but the app is never used.

So bottom line is to make certain that the contractual incentives for the consultant are exactly aligned with what the startup needs.

(By the way, the amount of effort that goes into partnering with such a consultant should be the same as any hiring decision, make sure you know what you are paying for. A founder cannot say “well, we only pay him for success, so what’s the worst that can happen?” but rather should establish his experience and contacts in your target market. Keep in mind, this consultant is going to be representing you and your company, make sure he does it well. )