I'm a serial high-tech entrepreneur who has started, financed, grown, and sold companies in the networking and security sectors. Today, I lead and advise high-growth management teams, putting his public company executive management and private company entrepreneurship experience to work. I'm 54, and I live in Newport Beach, California. I hold Bachelors and Masters degrees in Computer Science from the University of Calgary. Experience Venture Advisor, iNovia Capital (http://inovia.vc), 2008 - present. iNovia manages about $1.2 billion in capital across five funds. My role is to work with portfolio companies on strategy, sales, and marketing, and also to review and provide feedback on each investment iNovia makes. VP Security Products, McAfee, 1996-1997 At McAfee (then the 10th largest PC software company in the world), I held responsibility for expanding the company’s offerings beyond anti-virus, to cover the entire network security and encryption sectors. Co-Founder, Launchworks, 1999 I co-founded and sat as a board member of Launchworks, Canada’s highly acclaimed keiretsu-style venture investment house. Launchworks made 11 investments prior to the Internet crash of 2000, and had three successful exits after that crash, including IPO’s of Guest-Tek (the largest in-room Internet provider in the world), 180 Connect (6,000 employees, $400m in revenues, the largest installer of satellite television reception equipment, ultimately sold to DirecTV), and the acquisition by Computer Associates of Control-F1. Co-Founder and CEO, Jasomi Networks, 2001-2005 I co-founded and led Internet telephony equipment provider Jasomi Networks, and grew it into an award- winning multi-million dollar leader in that industry, before it was successfully acquired by Ditech Networks in 2005. Co-Founder and CEO, FSA Corporation, 1989-1996 I founded and grew the company into a profitable, internationally recognized network security product powerhouse serving Fortune 100 companies. Some of its product lines were acquired from 1994-1996 by Unison Tymlabs (now IBM) and Symark Software (now BeyondTrust), and the entire company was acquired in 1996 by McAfee.
Any suit run by a competent lawyer will ensure that the parties named in the suit include everyone who might be able to pay. So, while your LLC might own some products, it may not be the only entity sued. You might be sued, along with all kinds of other people and companies. I'm not saying there's nothing you can do, but you certainly cannot escape having to defend a suit. Anyone can sue anyone else, even if the suit will ultimately be unsuccessful.
You ask how can you handle being sued without going to court? The answer is negotiate a settlement that results in the lawsuit being dropped. So, what have you got to trade? What damage could you do if they continue to sue you, and so on.
Personally, I'm a fan of sales comp plans being tied to ongoing performance. Sure, the salesperson should get some of that long tail, but only while he continues to work productively at the company. Once he leaves, he should lose the tail, since someone else will likely need to step into the relationship with his customers. But there are too many variables to give a universal answer.
The true answer is this: You need to pay your salespeople enough so that they are motivated to keep working for you rather than seeking alternative employment. This means you need to analyze at-quota pay, and ensure that your base and commission structures provide a market-level of compensation at quota. You can muck with anything you want as long as that goal is met.
I don't have a direct answer to your question, but I'd like to add this to the mix:
Rural regions without colleges tend to have populations focused on production, not R&D. Can these regions produce startups? Of course. But it won't happen in the quantities it does in urban areas.
I think the recipe for high quantity/quality startup production is: High population (populous areas will have more of everything, including startups), high education (startups require a R&D mentality), high salary (someone's got to pay for those startups), and high number of head offices (management experience).
Depending on how key this individual is to the company's success, the answer is likely to be in the mid single digit percentage points. For example, he may end up owning 5% of the company in stock options.
But since he is working for equity, you need to compensate him for not taking a salary too. I usually calculate this by figuring out how many shares his salary would have bought him if he'd invested his salary in the company (which is really what he is doing). Then, to compensate for the illiquidity of stock versus cash (salary), I up the result by 50% or perhaps a factor of 2. While there's nothing scientific about this calculation, it has worked well for me in the past.
Stock or options in lieu of salary should vest on a monthly schedule, as if salary were being paid, and there should be no cliff.
Stock or options given as an incentive (not as a substitute for taking a cash salary) should vest over 3 or (preferably) 4 years, and there should be a 1 year cliff to weed out employees who don't hang around or don't work out.
The practical answer is that if the company fails, the note holders will get nothing. Holding a note can be good if the company has a small exit in the future. Note holders will get first dibs on that exit cash. And in a big win, the ability to convert into shares means the note holder can still participate in those high-multiple returns.
All major business decisions are made on the basis of either trust or desperation. Both can be useful for the small consultancy. Trust can be surprisingly easy to build. For example, if you become a speaker at the local luncheons held by the various professional associations in your town, such as accountants, HR, lawyers, and so on, you will establish a reputation for yourself. Assuming you come across as competent, business will begin to find you, since your name will stick in people's minds as someone competent and trustworthy.
As for desperation, this happens to all companies at some point. You just need to be a known quantity that the company can reach out to when that sense of desperation ("we are not going to meet our deadline without bringing someone new on board") happens.
The easy answer is to give them something that they want. Although this could be money, it could also be access to your audience. Find out what they are interested in achieving with their speaking engagements, and then make that available to them.
Are they a spokesperson for cancer research? Agree to donate a portion of your conference fees to cancer research. You get the idea - find something they are passionate about, and help them.