This is part four of our six-part guide for how tech companies should think about selling into the enterprise. In the previous posts we’ve helped you identify whether your company is enterprise-ready; created a roadmap for how your product will adapt to fit enterprise needs; and discussed how the roles of your marketing organization and sales-development reps will shift. In this post, we’ll cover finance/G&A expenses, HR and talent; and the legal ramifications of growing into the enterprise.
FINANCE / G&A
Preparing your finance team is part of the enterprise motion. A few areas to explore:
You may have had a simple sales plan to this point, with one or two types of reps and a single quota. As you grow up enterprise, your planning process will evolve. If your average sales cycle is six months for an enterprise sale, then a newly hired sales rep won’t close a deal much before eight to nine months into their employment. Will you offer a ramp of quota? Will you offer guarantees or a bonus to offset unearned commissions? Will you plan for productivity fluctuations? What about accounting for attrition in your plan? Attrition can be a killer, especially when you have only a small number of enterprise sellers and you lose one. In fact, it can be devastating: Quota on the street disappears immediately, and the hiring and time to full ramp could be 12 months.
This blog post about building your sales plan addresses some of these items and will give you additional food for thought.
Most enterprise AEs know that when they start in a new company, they’re a long way away from the first commission check. That’s why they ask for draws or guarantees of the variable portion of their compensation. Or they’ll ask for a sign-on bonus, a higher base salary, or perhaps a comp plan that’s not 50/50 in terms of base salary/variable compensation. (I’m going to make a leap here and assume that most SaaS sales-comp plans operate on the 50/50 model.)
My suggestion: Draws and guarantees are one-time events, while changing base salary or the base to variable mix is forever. If you’re going to extend some help comp-wise to enterprise sellers, do it one time in the form of a bonus or draw. Draws can be paid out as the AE ramps up, so I lean toward this model as opposed to a one-time bonus.
It’s also fairly common to see draws decline over time, meaning the draw will be higher in month one than it is in month six. That’s a good sign that the AE is being weaned off her salary and growing dependent on commissions.
Comp is connected to quota, so give your ramping AE a sales quota. It may be zero dollars in month one or two, but it should start tiering up as she reaches independence. Quotas motivate AEs, and you don’t want to be in a position where someone is closing a deal against a zero-dollar quota. (Simple math tells us zero quota translates into zero compensation for your AE who’s just landed a deal.)
And you’ll need to think about recognition of a deal. Do you sell deals with a signature date of today, but a delayed start date? Does the implementation take two to three months, and you don’t start the contract until the customer exits the quick-start phase? These questions factor into how you quota, retire and pay your enterprise AEs.
Systems & Metrics
Enterprise deals bring added complexity to systems and metrics—and it can be surprisingly difficult to quantify expansion with your old metrics unless you’re planning for that change. Landing a new logo is pretty straightforward, but expansion can mean several different things. Expansion could take the form of organic growth—your customer added people and therefore their license needs to increase from 100 seats to 120 seats. This is upsell.
Or the customer can decide they want to buy an add-on product (you sold product A, they now want to buy product B). This is cross-sell.
Catch that? Upsell and cross-sell are both forms of expansion. But they are not the same thing. As you move toward the enterprise, you’ll want your CRM, your ERP and likely your BI tools to all be ready to calculate these new kinds of expansions.
Expansion is the lifeblood of the enterprise. One key metric to track here is the annual contract value (ACV) of your enterprise deals. Now add to that your ARPA—average revenue per account. If you started life selling to small- and medium-sized businesses, your ACV will likely be higher than your ARPA. But keep an eye on ARPA each quarter, because if you’re successfully penetrating the enterprise, it should be growing. NRR, or net revenue retention, is also critical here. You may be able to land big deals, but do you have the expansion motion perfected? An NRR that’s increasing demonstrates that you are, in fact, succeeding in your expansion efforts.
Ever do a stub renewal? Or a stub add-on? This refers to the situation where you are, say, seven months into a 24-month agreement, and the customer wants to add more product. You’ll want to co-terminate the new deal to the existing deal, but this scenario brings up questions, such as: How much quota did the AE retire, and how do we compensate it? Most companies build a set of rules to address this. For example, if the time left on the agreement is less than three months, then the new product needs to be bought for 12 months minimum (and therefore, you should early-renew the original deal + co-terminate). If the time left is greater than three months, then go ahead and sell the stub deal, then annualize the ARR (with revenue recognition, or “revrec”) and annualize the amount of commission/quota retirement. Sounds logical, but many, many companies have wrestled with this topic more than they should. Just handle it in the way described above and move on. It’s a best practice and not worth overthinking.
And since you’ve segmented your teams, you need to think about lead distribution too. Your systems will need to recognize who is an enterprise lead, and then determine geographic territory, possibly industry and maybe even who sells which product.
Lastly, you need to think about services. Does the AE get paid on them and if so, for how long? Here are some dynamics to think about: If you sold a big deal, you’ve also sold professional services. Six months go by and the customer needs more services. Does the AE sell them now, or is that package sold by CS? And regardless of who sells, does the original AE get paid? The exact answers are specific to your organization, but these are policy points to consider as you go to the enterprise.
Bottom line: Growing up enterprise successfully means evolving systems and metrics, too. Most initial deployments of a CRM don’t anticipate these scenarios, so if you can think about some of these factors before you make your move upwards, you’ll be ahead of the game.
Payment & Terms
Enterprise is where the big-dollar deals are, so you need to think about the terms you extend to these customers. What are your payment terms? Will you accept net-90-day payment, for example?
Payment frequency is also in play here. Do you allow enterprise customers to pay quarterly, or do they need to pay annually in advance?
You need to consider the length of contract terms, too. If you’re spending six months to acquire an enterprise customer, do you really want to sell 12-month contracts? Or is it smarter to sell 24-, 36- and 60-months deals?
Consider what happens in the “out year” of the contracts, or the final year of a multi-year deal. Does the price stay consistent with the agreement price, or does it increase annually? What happens when the customer wants to add new products or users—is that concept memorialized in the contract?
And lastly, you need to think about NRR. Enterprise deals should fuel your best NRR, and therefore this becomes a great health metric for your products’ success inside big accounts. The good thing about NRR is you can model it. If your modeling suggests NRR is staying flat or decreasing, you may have a product or customer-satisfaction issue on your hands. But preparing for NRR as your company matures and your motion moves upwards is always smart.
HR & TALENT
This one is tricky.
Let’s say you’re gaining momentum in selling to the enterprise and hire a recruiter to help you get enterprise-sales talent. In your first interview with a promising-looking AE, she asks:
- How many enterprise AEs are there in your org?
- How many made quota last year?
- What did the top rep earn?
- What’s the biggest deal the company has closed?
- Who are the top enterprise references?
- What’s the segmentation model?
- What’s my territory?
- Can I see a comp plan?
Why? Because that’s what enterprise AEs do—they qualify. Joining a company early in its enterprise motion is risky. They want to know what level of risk they are coming into. Be prepared, because a savvy enterprise AE will ask these questions.
You’re looking for someone who knows how enter at a low level and work up to power in an org. You’re recruiting for someone who can work across boundaries: divisions, functions etc. You’re seeking a seller who can lead a team of SDRs, SEs, CS people and executives and corral them at the right time. You’re searching for someone who thinks about the land as the first mile, and the expansion plays as the extra miles. This person knows how to sell a solution—product + services to make her customer successful. These are skills and should be part of your job spec.
A lot of founders look to hire someone with a “Rolodex” of customers they’ve sold to previously. My opinion: If you sell a verticalized product, this may make sense; otherwise don’t sweat it. Hire skills over a contact list. I recently met the CEO of a company that sells to a specific buyer: the FP&A portion of the finance team. She said she doesn’t look for people from a finance sales background and instead looks for pro-level SaaS killers. If they have finance skills, then that’s a bonus, but she wants someone who knows how to sell sophisticated products to a sophisticated buyer.
Growing up enterprise means more legal work. You’ll need to think about your agreements, the terms within the agreement and what kind of deal support you give to the sales organization.
Our lead-off batter here is in-house counsel. In moving to the enterprise, you’ll spend a lot of time in legal, procurement and security. You’ll want this skillset inside your four walls, so it’s time to post the job spec on a deal attorney.
The next piece, especially for companies that started in the world of clickwrap agreements: You’ll need an MSA that can be red-lined. Most orgs don’t get this right at first, so a recommendation is to produce your MSA, and then iterate on it. Each quarter, look back at the terms that got red-lined and look to see if you can adjust your default terms to be more customer-friendly. I’m aware of one org that looks at all agreements each quarter; if they conceded the same term two to three times in that quarter, they adjust that term to whatever got the deal done.
The big items for legal are indemnification and limitation of liability. They are the big-risk areas if a catastrophe were to occur—say, a massive security breach due to negligence or mistakes on your part. There is normally a dollar amount associated with these sections—liabilities that you would be eligible to pay if a breach occurred. This is the most important part of your legal agreement. In my experience, the business teams tend to negotiate most terms in the MSA, but indemnification and limitation of liability are what you employ legal experts to handle.
Enterprise companies will ask what cap you’re willing to indemnify them for. Most software companies reply with the answer of 1X fees paid. The challenge here is that, like you, the buyer expects this agreement to grow. So even offering 3X or 5X won’t get it done. They will look for a dollar amount like $1M, $3M (or even unlimited caps, but that’s a definite no-go). You should look at what your corporate insurance policy provides and be prepared to increase it. Starting at $1M is a decent initial position.
Terms like right-to-terminate and usage are, in my opinion, business terms, not legal terms. They reside in the MSA. But having legal determine whether you can do this often doesn’t make sense. It’s common for these terms to be owned by the CFO—meaning the head of sales negotiates and approves the deal terms, discounts, payments and so on, but the CFO negotiates and approves anything that could result in revenue-recognition issues. And legal negotiates the legal aspects.
The information contained herein is based solely on the opinions of Bill Binch and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity.
This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build their businesses and not recommendations or endorsements of any particular business.