Business Strategy (July '11)

To properly structure transaction compensation involving shared revenue, start with the expected revenue for the next few years, the gross margin, EBITDA and earnings, as well as the sharing party's expected contribution to the numbers. Surprisingly, executives often begin discussion with percentages against a gross or net number, without a context of the dollars involved or a definition of revenue contribution. This approach distracts the parties with potentially premature concerns and speculation over fairness and value of contribution. You can unnecessarily end up with ill will, as well as a poor compensation structure (cutting in either direction).

Focusing first on numbers and common benchmarks can lead to a satisfactory conclusion without stress and drama. The answer often presents itself when you start with numbers - and the parties are looking to be fair with each other.