Principal vs. Agent – When Are You Really in Control?

Every fast-growing startup eventually faces this question: should we recognize gross revenue or net? Behind that question lies a complex accounting determination that many CFOs and boards underestimate—principal versus agent. It sounds theoretical, but in practice, it can swing revenue by millions, shape investor perception, and redefine your business model’s economics. For startups operating in marketplaces, SaaS with third-party integrations, logistics platforms, or e-commerce models, this is not just about optics. It’s about control.

In my years leading finance in sectors as diverse as AdTech, B2B2C commerce, and gaming, I’ve seen companies get this wrong not because they lacked intelligence, but because they lacked structure. They treated revenue as a sales KPI, not a reflection of risk and performance obligations. Under ASC 606, the principal-agent framework helps fix that—but only if you apply it with discipline.

Defining the Question Clearly

At the heart of the issue is this: are you the principal in a transaction, or merely the agent facilitating it?

If you are the principal, you control the good or service before it is transferred to the customer. You bear the risks and rewards. You recognize revenue gross—reflecting the full amount billed to the customer.

If you are the agent, you arrange for the good or service to be provided by another party. You do not control the good. You recognize revenue net—typically the margin or commission you earn.

That’s the theory. The challenge lies in applying it to real contracts.

Why the Distinction Matters

Gross revenue inflates the top line. It affects your revenue growth rate, your sales efficiency metrics, and often your valuation multiple. Net revenue shows a leaner top line but reflects economic substance more accurately. Many founders naturally prefer gross—it feels bigger. But investors, auditors, and acquirers will probe whether you are entitled to that number.

In one case, I worked with a Series C logistics platform that processed over $100 million in shipment value but passed most of it through to partner carriers. The founders booked revenue gross. The auditors disagreed. They argued the company acted as an agent—it neither controlled the freight nor bore the delivery risk. Revenue was restated net. The revised figures looked modest. But investor trust was preserved, because the story matched the economics.

Key Indicators of Control

ASC 606 outlines several indicators to assess whether a company controls a good or service prior to transfer. No single factor is determinative, but together they form a pattern. Here are the most critical ones:

1. Primary Responsibility: Are you responsible for fulfilling the promise to the customer? If so, you are more likely the principal. This includes setting delivery schedules, resolving defects, or owning the customer relationship.
2. Inventory Risk: Do you hold the product or service before transfer? Do you incur loss if it is defective or returned? Inventory risk is a strong signal of principal status.
3. Pricing Discretion: Can you set the price paid by the customer? If you merely accept what another party dictates, you are likely an agent.
4. Customer Perception: Who does the customer believe is providing the service? If they look to you for fulfillment and accountability, that tips toward principal.
5. Ability to Direct Use: Do you control how and when the service is delivered, or are you simply matching demand with a third party’s supply?

Each situation is facts-and-circumstances based. But applying these indicators early—before audit season—helps set expectations and avoid surprises.

Marketplace Models: Where Complexity Explodes

The classic case study is a marketplace startup. It connects buyers and sellers, sometimes facilitates payment, and may offer support. But who controls the product or service?

Take a travel booking platform. If the company simply connects users to hotels and takes a fee, it’s an agent. But if it negotiates bulk inventory, sets prices, and handles refunds, it likely acts as principal.

One Series B platform I advised launched a gig marketplace. In its early decks, it showed $40 million in GMV as revenue. When we analyzed the contracts, it became clear: the platform matched supply and demand but never controlled delivery. It earned a 12 percent fee. When audited, revenue was cut by 88 percent—but margin stayed intact. The story shifted from top-line growth to unit economics strength. The board embraced the change. So did future investors.

Software Platforms with Embedded Resellers

In SaaS, the question often arises with white-labeled or embedded offerings. Suppose a SaaS company embeds a third-party API—say, payments, maps, or AI—and charges the customer a bundled fee. If the company has discretion over pricing, support, and delivery, it may be principal. If not, it’s likely an agent.

Documentation is key. Reseller agreements, SLAs, support obligations, and pricing controls all matter. I once worked with a SaaS analytics firm that bundled third-party data services. Their contracts gave them pricing control and indemnification rights. Auditors ruled them principal. That decision added $5 million to top-line revenue. But without that contract detail, the outcome might have reversed.

Third-Party Logistics and Fulfillment Services

In 3PL and e-commerce, control is often shared. A company may own the inventory but outsource delivery. In such cases, the company often remains principal, as it owns the product and fulfills the customer promise.

But if the company never touches the product and just facilitates orders, the agent model applies.

One cautionary tale: an e-commerce startup treated all revenue gross, even for drop-shipped products. Their auditors pushed back, noting that they never owned the inventory or bore shipping risk. The adjustment required restating three years of revenue and rewriting their S-1. The IPO delayed by six months.

How the Determination Affects More Than Accounting

This decision impacts more than revenue. It affects your KPIs. If you shift to net revenue, your CAC-to-revenue ratio may spike. If you shift to gross, your gross margin percentage may shrink. Your valuation multiple may adjust based on investor preferences.

Boards need to understand the logic. Presenting both GMV and net revenue can help. But clarity is crucial. Never let the top line get ahead of your actual economic rights.

It also affects tax. Sales tax and VAT obligations differ based on whether you are principal or agent. International jurisdictions often follow similar frameworks. Misclassify your role, and you may underpay or overpay taxes.

Proactively Managing the Discussion

Smart CFOs document their principal-agent analysis annually. They revisit it when business models evolve. They brief their auditors early. And they align with legal and tax advisors to avoid blind spots.

This is not just an accounting call. It’s a board-level conversation. It’s a messaging issue. And it’s a credibility signal.

Principles Before Optics

It’s tempting to optimize for optics—maximize revenue, stretch the narrative, push the envelope. But ASC 606 demands substance. It asks whether your company really owns the transaction or merely facilitates it.

The answer lies in control. Control over price. Control over delivery. Control over obligations. When you have it, claim principal status. When you do not, embrace the agent role. In either case, clarity trumps appearance.

Own the Role. Tell the Story. Avoid the Surprise.

Principal versus agent may seem like a footnote in accounting literature. But in startup finance, it shapes how your business is perceived, valued, and understood. Get it right, and your revenue story becomes a strategic asset. Get it wrong, and it becomes a liability.

Own the role you play. Document the reasoning. And make sure your story matches your economics.