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Startup Salary vs Equity Compensation

Bob McCarthy's Profile

startup salary vs equity compensationWe are a private, venture capital backed company.  in a recent meeting with our Comp Committee there was discussion about increasing use of stock grants to high performers to mitigate the effect of lack of significant cash compensation increases.

I am trying to see if that thought process is “market”

Answers

Topic Expert
John Kogan
Title: CEO/CFO
Company: Proformative, Inc.
(CEO/CFO, Proformative, Inc.) |
Yup, have done that many times, and with major VCs on the board blessing it each time. The focus was always on the high performers you just can't afford to lose, but give something to anyone you want to keep b/c word will get out. The reactions from recipients ran the gamut from "cool" to "who cares". It completely depends upon their view of where your company is going. However, I always felt that it was way better than nothing at annual review time.
Anne Sutardji
Title: CFO/Controller
Company:
(CFO/Controller, ) |
Definitely a good approach but you must also add one more thing and I think it is pretty vital. Stocks are only as good as the company's prospect so increase the responsibilities of these high performers and make them feel responsibile for the growth and survival of the company. Each employee who holds the company stocks/stock options must know that they get the stocks because you want them to be part of the team, not just because you don't have cash and that's the only way to compensate them.
Richard Connelly
Title: CFO
Company:
(CFO, ) |

I have been with many start-ups. The problem with stock in a start-up is liquidity. There is no ready market to cash out. Liquidity comes at an IPO or sale of the company. The employees receiving the options must understand this. Also make sure that management's exit strategy is to IPO or Sell and that it is communicated. If not, the options are worthless. In addition, the options are only valuable if the company increases in value. It will be important that employees work toward goals that increase value. I agree with a prior poster that all employees should get options even if they are only token grants.

Chris Sommerfield
Title: Associate Professor of Oceanography
Company: University of Delaware
LinkedIn Profile
(Associate Professor of Oceanography, University of Delaware) |

Regarding liquidity, there are ways to make equity in private companies more liquid. You can create a seperate class of stock, say called starter stock that when a funding event occurs, part of the funding will go to starter stock employees to liquidate part of their stock with cash, thus, making private equity more liquid.

Topic Expert
Mark Pieper
Title: Director, SCS Finance
Company: Premiere Healthcare Alliance
(Director, SCS Finance, Premiere Healthcare Alliance) |

I am CFO at a Private Equity owned company. Stock based Comp. is one of the key reasons to sign-on at Private Equity/VC backed enterprises. In exchange for the equity the overall cash comp. is usually lower than you might get at a public firm, but the hope is upon IPO or company sale there will be an significant pay-off (no guarantee of course). However, usually the PE firms tend to give the healthiest equity chunks to officers & key senior executives.

David Keepes
Title: Treasurer
Company: Self-Employed
(Treasurer, Self-Employed) |

This is not just "market", it is almost essential. But make sure that it is done right! Broad-based stock compensation programs based upon definable company performance is a huge benefit and your employees will recognize it as such as long as it is administered fairly and everyone understands, in advance, what their measurement metrics are.

Achaessa James
Title: Product Manager
Company: National Center for Employee Ownership
(Product Manager, National Center for Employee Ownership) |

The most important - and most often missing - element of an equity compensation program is the employee education component. Employees will only value what they understand and equity compensation, even in many high-tech companies, is a topic that is still much misunderstood, especially as to the tax effects of ISOs (still the most popular form of employee equity compensation). For example, how many ISO recipients really understand the AMT effect of exercising in the money options?

The National Center for Employee Ownership has great resources - http://www.nceo.org/ - that will help your compensation committee understand the strategic use of a wide variety of equity compensation instruments and help your employees understand not only the value of equity compensation to them, but also how different instruments can affect their personal finances.

Julio DiGirolamo
Title: CFO & Corporate Secretary
Company:
(CFO & Corporate Secretary, ) |

My experience tells me that this is a very good approach to retain valued employees BUT only if they see value in what you are offering. It's amazing how sophisticated someone can be in Sales, Marketing, IT etc. and yet be so unsophisticated when it comes to equity and equity-type compensation. Cash is definitely king and some education may be required. Also, value will only be perceived if they understand and buy-in to the corporate strategy and accept that by foregoing cash today a larger payout is possible.

Topic Expert
Ken Kaufman
Title: CFO
Company: Community Dental Partners
LinkedIn Profile
(CFO, Community Dental Partners) |

Julio, I agree with your point. Some people just do not understand or do not want to understand equity...they just prefer cash and anything else is viewed as a negative thing. It can be hard to try and motivate them to be excited about equity and not be too optimistic with the potential value of the stock to expectations realistic.

Perhaps the point here is that if they do not value equity then they are probably not the right fit for a VC-backed enterprise.

Roger Whitham
Title: Managing Director
Company: Bassett Bridge Associates
(Managing Director, Bassett Bridge Associates) |

One way to get employees to understand the value of the equity grant is to link it to a meaningful incentive plan that is linked to improvements in specific KPIs geared to measuring shareholder value. This way they'll see the correlation between their efforts and the value of the equity.

Robert Smith
Title: Sr. Dir., Benefits Accounting
Company: Hertz
(Sr. Dir., Benefits Accounting, Hertz) |

All good comments above, especially the need for education. Even some of our best senior execs do not understand equity compensation.

Another important point is that with a private company, the value of the shares is very important. You will need to have the firm valued in an objective manner by an outside service provider. The way that you handle this will affect whether employees trust the process.

Rajeev Seshadri
Title: CFO
Company:
(CFO, ) |

When 'going public', a long list of shareholders can be an issue for the bankers. Having said that, for senior execs, a stock option plan is attractive; possibly less so at a mid- or junior level where the smaller amounts and the lesser ability to influence value may not be a strong enough retentive or motivational factor....a POV having been at several companies where, in hindsight, the optioned stock has turned out to be worthwhile and in some where it was worthless!

Mark Stokes
Title: CFO
Company: Private
(CFO, Private) |

I will respectfully offer a counterpoint to a recent comment that "mid or junior-level" employees are less motivated by stock due to the smaller grant sizes and an inability of more junior employees to influence value.

I have found that lower level employees are even more attracted to the stock b/c they have the wonderful, energetic trait of believing they can, indeed, influence the value of their companies. And a little stock goes a long way with these folks. They don't expect a few percent of the company to do their job. Stock for them is like a lottery ticket and they are all too happy to play.

On the other hand, the more experience, more senior professionals are far more jaded b/c they know that there is only a small chance that their equity will end up paying off. Which is not to say you don't offer it to senior folks, just that it takes far more stock to make an impression.

Just my $.02.

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

There you have it - all in this thread heartily endorse Options (or in general "Stock" as compensation.) SO DO I.

But, you specifically mentioned "Stock GRANTS" in your question, and many of the answers were focused on OPTIONS or 'stock as compensation'. The use of GRANTS (typically Restricted Stock Grants or RSUs) as a form of L/T incentive compensation is trending upward since its easier for employees at all levels to understand. Microsoft switched over to GRANTS several years ago as a more effective way of compensating employees. Their rationale was that employees could more easily and directly correlate the financial opportunity of a grant (outright award of stock once vested) than an option (employee right to purchase the shares once vested.) Just be careful -- Pure Stock Grants have serious tax implications in the US and so you need to ensure you have adequate training and education for employees. Bone up on the 83b election issue, and understand the tax issues between Grants, ISO's, and NSO's. Happy to reply on these issues if desired.

Topic Expert
Ken Kaufman
Title: CFO
Company: Community Dental Partners
LinkedIn Profile
(CFO, Community Dental Partners) |

Keith, great point. Interesting that stock grants are on the rise. A lot of people really struggle to grasp how the options work, so I can see how the grants could be easier understood and potentially a more effective tool for aligning all of the key employees.

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

Here is an example:
http://sanjose.bizjournals.com/sanjose/stories/2009/12/28/daily45.html?ed=2009-12-31&ana=e_du_pub

Robert Smith
Title: Sr. Dir., Benefits Accounting
Company: Hertz
(Sr. Dir., Benefits Accounting, Hertz) |

At our company, execs were granted RSU's rather than options in late 2008. Be careful that execs know that they have taxable income when these vest and turn into "real" shares. With options, there are no tax consequences for the individual until exercise. This was a big change in thinking for most of our execs.

Anonymous
(President) |

I am joining a startup company as CFO/COO. The company has raised some initial angel financing, but needs to raise additional funds before salary can be paid. Salary would be accrued, and I realize it may get nixed as a condition of additional financing. I am being offered equity in the company, however I am not sure what the current thinking on percent to be received. In the past I have received anywhere from 4-7%. Any thoughts are appeciated.

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