Archive for the ‘Compensation’ Category

Where Can I Find Information on Starting Salaries for a SaaS Startup?

Q: Where can I get some good starting salary information for a SaaS startup?  I need the information for CEO, CFO, CIO, CINO, Director of Sales. How much should the starting salaries vary for a startup with $5 million vs $10 million gross revenue?

A (Brad):  First of all, you can find a great deal of info on structuring employee compensation right here on Ask the VC. We have posted about this topic many times in the past and have often covered specific aspects in great detail – take a look at the Compensation archive. Although many of the posts found within the archives relate to the question, the few listed below are a targeted to your question.

The CompStudy report, written by Harvard University Professor Noam Wasserman, is also extremely good. It’s a yearly report on the current equity and cash compensation within private companies. Noam also has an excellent book related to startups (but not to compensation) titled The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.

The numbers we list here on Ask the VC or those found within published market reports are based on average market data and should therefore be used as a general guideline. Many variables like the company’s age, current revenues, profitability, geography and others all come into play when structuring compensation packages.

Finally, I have a belief that most of these compensation studies have a frustrating survivor and reporting bias that tends to cause the numbers to be inflated. So, use them to calibrate, but not justify, your numbers.

Warrants In A Deal With An Advisor

Question: I am a startup about to receive a convertible loan investment. My friend has been advising me on an adhoc basis re. the financials on a barter basis with me. Now he’d like to formalise his agreement with the company. He has made his money as an entrepreneur and now travels alot but will be available for consultancy for us. His deal feels harsh: 1) he’d like to consult for 2 days a month at £1,000 per day. He travels alot so, this would be around his availability etc etc 2) he’d like to be paid not in cash (we can’t do this) but ‘via warrants’ priced at the same price and on the same terms as the deal done with our first round financier. He has stated that any entitlement to warrants earned cannot be revoked upon any subsequent termination of the contract by me. 3) He’d like to be a ‘commercial manager’ with a lot of involvement in the business exchanges with other professionals (something I’ve done to date) but I feel it’s too heavy-handed at this very early stage of the business. Please could you explain what ‘warrants’ mean?

Valuing his work in the first 12 months at £24,000 (2 days per months @£1,000 per day) at the same as our financier would mean he’d get approximately 5% of the company. This seems high for us. I wonder do you have any thoughts on an alternative proposition? We have raised investment for the first 7 months of business. And we’ll have to raise more immediately. To date, my friend hasn’t made any introductions here and doesn’t intend to. He sees himself more as a ‘safe pair of hands’ for investors with his background in finance. What would be a better deal to expect from a professional with this sort of experience to bring to the company?

Your friend is essentially asking for the right to invest at the same price (known as the “exercise price”) that your financier is investing in. The amount of warrants he is asking for is mathematically linked to the amount of time that he’s working based on his day rate.

While it’s a strange ask, it’s not inappropriate. Another way to look at is that he’s asking for the right to invest £24,000 in your company on the same terms as your investor. So he’s not actually getting equity, just the right to buy it at a later date. The terms associated with this matter – if the time he has to exercise the warrants is long enough (say 10 years) then it’s likely he’ll never have to shell out the money to actually buy the stock. Instead, when the company is acquired (or goes public) he’ll get the difference between the share price at that time and the exercise price of the warrant.

It sounds like your post money valuation is around £500,000 (if £24,000 is about 5% of the company). Another approach would be to simply offer him warrants for a percentage of the company that feels good to you for his contribution. If you feel 2% is adequate, rather than him earn the equity monthly, just make him a grant of 2% in warrants on the same terms but vest them monthly over a year.

Participate in the 2009 Startup Executive Compensation Survey

Furqan Nazeeri put up a post titled 2009 Startup Executive Compensation Survey OpensIt in he points to a compensation study produced by J. Robert Scott, Ernst & Young, and WilmerHale in collaboration with Dr. Noam Wasserman, Professor at the Harvard Business School. CompStudy covers more than 25,000 executives at 5,000 companies and is the largest study of its kind.

If you are a CEO or CFO of a startup in the US, China, India, Israel, or the UK in the technology or life science industry, consider taking the survey.   The 2008 results are up on Furqan’s site.

Healthy Ways to Tighten the Corporate Belt

Our friend Amy Hartman, who recently started her own law firm specializing in employment matters wrote a great piece called "Feel the Burn."

It’s a very informative, yet easy to read piece on strategies for cutting your company’s burn rate during these challenging times.

Most of her advice is with her employment law hat on, which is certainly a chief concern when contemplating cost reductions.

Take a read- it’s a good one.

Compensation In A Very Early State Company – Follow Up Question

(Brad) In response to the post Compensation In A Very Early State Company I got the following question:

Q: If comp is at say 50% with 2x equity vesting over a standard term, then in 6 months a series A is completed and there’s more comfortable level of cash in the bank, salary can be renegotiated but options cant, so the scale doesn’t shift accordingly; to, for example, 1x comp and 1x equity. How can the shareholders in the company not overextend their cash capability, but without over-diluting investor stake? Have you any experience where a balance was made to make both investors and early hires content?

A: I don’t think this is a reasonable concern for the founders to take.  Specifically, the reason the early employee is willing to make the trade discussed is because he is taking the risk that the financing isn’t going to get raised in any reasonable period of time. 

One way to manage this is to set expectations with the person getting this trade that it will last for a specific period of time (say – one or two years.)  This addresses the "hey – we raised money faster than expected."  Alternatively, you can put a structure in place where if compensation goes up in some period of time a certain amount of the equity granted gets canceled.  I personally don’t like these approaches because they both (a) create weird incentives and (b) generate additional complexity.  If someone is willing to take a risk like this early one, reward them!

What Kind of Benefits Can I Expect Working at a Startup?

Q:  What kind of benefits do start-ups typically offer? I don’t mean salary or equity: about which you already posted a lot of information. I am talking about health and life insurance, disability insurance – all of the typical benefits one receives when working for a large and established business.

Do you recommend a particular benefits package configuration to your companies? Are benefits ever a part of your conversations with your companies about the ‘costs’ of running the business?

How do you see startups dealing with a regulatory landscape designed for an entirely different type of organizations?

A: (Jason)  In order to best answer your question, I asked Dan Cutler from TriNet to opine.  Dan and TriNet have been great partners to our portfolio companies – so much in fact that we decided to switch our own benefit offerings over to TriNet.  Here are some of Dan’s thoughts, below of which I agree with completely.

A typical VC backed company will offer to pay 100% of a good benefits package for the employee and between 0-50% for dependent coverage.  A good package will include medical options PPO and HMO and dental, long-term disability and a minimum of 10K life insurance with an option to buy more.

In order to hire and retain "A" players the savvy entrepreneur will use a PEO (Jason note:  "professional employee organization" like TriNet) that can offer self-help HR, online enrollment, several benefit plans to choose from,  a PeopleSoft HRIS,  tiered pricing,  and will pay a flat rate administrative fee.

Regarding compliance issues.  All energy spent by the business owner to keep compliant is a waste of time when you can outsource HR and allow your outsource provider to shoulder the risk.  The business owner’s job is to move the business forward and select good partners that will provide assistance in areas that are not core.

What Are Typical Employment Contract Terms and Severance Benefits for a Startup?

Q:  I have read the your article on typical compensation for senior management of venture backed companies.  There was no mention of severance and length of contract terms. Can you opine?

A: (Jason)  Most everyone in the startup world is an at-will employee and does not have an employment contract.  For those of you unfamiliar, “at-will” means “can be fired at any time for any reason.”  Most employees have offer letters which outline basic terms of their employment, but are silent with regard to severance benefits.  Basic terms include provisions on confidentiality, assignments of inventions and the like. 

I’d estimate that less than 10% of folks working for startups have employment contracts.  The contracts are usually one year in nature.  The ones that I have seen still make it clear that the employee is at-will, but provide some sort of severance benefits, whether this is accelerated vesting or some small cash payout.  Sometimes for high level executives you’ll see 3-6 months of vesting and / or cash comp, but it is not the norm. 

Remember, startups are normally resource constrained – they don’t have extra cash or equity to pass out to people, so don’t expect any types of severance benefits that you would see at a large company. 

Compensation In A Very Early Stage Company

Q: What should my compensation be?  I’m going to be the first full-time employee of a new startup.  As it is so early stage, it is hard to say what the title is, but the role is certainly similar to a CMO or VP BizDev type person.  The company just raised around $500k in an angel round that is convertible debt to be converted at the valuation of the first VC round but better terms.  I’m more interested in equity than a market salary, but I do have a mortgage, wife, 1 child and another on the way. 

A: (Brad): The good news is the company has a little money in the bank.  That gives you (and them) the ability to have a rational discussion about the trade between cash and equity.  If you recognize this is a trade (e.g. the less cash comp you take, the more equity you get), you can have an intelligent conversation. 

The mistake I see most often is that the early employee doesn’t recognize this trade.  The conversation goes something like "I’ll take a 20% discount to market salary but I was 5x the normal equity I’d get if I was getting a full salary."  This irrational.  While you can make the argument that cash is worth a premium to equity, it’s not worth this kind of a premium.

The normal dynamics tend to end up between the two end cases – full salary and no equity at one end and 50% salary and 2x normal equity at the other end.  My recommendation when people ask me this question is to say "figure out the least amount of cash comp you can afford – ask for that – and then ask for roughly 2x the equity package you would normally get.  Oh – and expect that the equity will have normal vesting terms on it – you shouldn’t get better vesting because you are taking a salary cut."

How Much Equity Should an Early Stage COO/CFO Get?

Q: We are a virtual company that will operate very lean. I am hiring a COO/CFO at the moment, and am wondering what share grant would be appropriate. I have seen CEOs recruited into startups receive something like 5%. Are there rules of thumb?

A (Brad): We’ve got plenty of posts around this general topic in the Compensation archive.  The most specific one is titled What are typical compensation numbers? although it doesn’t really address the direct question.

Every situation is different, but a non-founder COO/CFO recruited early into a startup (say – pre-financing) will usually get options for between 1% and 5% of the company.  COO’s tend to get more than CFO’s – although at the very early stage I’d assert that the same person should be able to do both jobs (which seems to be implied by the question.)  If this is the case, I’d err on the high side.

As part of this, I’d be very focused on vesting.  We cover this in Equity Compensation Terms and on Feld Thoughts in Term Sheet – Vesting.  When you hire someone on early in a startup, you want to be obsessed about making sure their stock / options have vesting terms on them in case they do not work out and you have to fire them.  This is especially important in situations where you hire on someone into an early stage COO or CFO position – while everyone hopes things will work out, they often don’t.

How Do You Negotiate a Carve Out With Investors?

Q:   We are in the midst of negotiating a carve out with an investor on the East Coast.  Two stumbling blocks have occurred.  The first issue is what is an appropriate option pool size and does it vary from East to West coasts?  The investor tends to believe that there are a significant differences in sizes of pools for Boston based companies vs. Bay Area-based companies. 

Secondly, we are debating whether or not it’s appropriate/acceptable for management to have a carve out and maintain participation in the ESOP should an exit be large enough to be in the money?

A:  (Jason).  Most of the compensation reports that we’ve seen, as well as evidence from our own portfolio would indicate that there are not significant differences in option pool sizes between coasts.  That being said, the range of option pools can be anywhere from 10-30%, so the there is a wide variance, but our opinion is that this is fact specific, not location biased.  It really depends on how many rounds of financing the company has consummated and, to some extent, company performance.  Recaps tend to decrease the size of the pool to the minimum amount to keep current employees properly incentivized and not much extra.

With respect to your question regarding the carve out and employee participation in the ESOP (Employee Stock Option Plan), we assume the following:

1. The company has enacted a carve out plan for employees on the assumption that a liquidation event will not properly compensate employees due to the potential size of the liquidation event and the liquidation preferences ahead of the common stock underlying the employee options.  For background on management carve out plans, see our prior post here; and

2. The employees have options / stock issued from the ESOP, which depending upon the size of the liquidation event may or may not yield any return.

The way we’ve seen management carve out plans and options mix at the time of liquidation events are fairly standard.  In short, we’ve seen a reduction in the aggregate carve out once the employee options are in the money.  Let’s create an easy mathematical example and look at two potential outcomes.

Example:

- Carve Out Plan:  10% of aggregate liquidation proceeds.

- Range of liquidation events that would return nothing to employee options / stock:  $0 to $50M dollars.  (In other words, any event that would return $0 to $50M to the company would offer no return to employees due to liquidation preferences).

- Employees would receive 20% of any amounts of consideration above $50M.

From $0 to $50M, the carve out provides 10% of proceeds to the recipients of the carve out plan.  At $50M, $5M would be the carve out.  With a $60M dollar deal, the employees would receive $2M on their options.  So what happens to the carve out?

The carve out is normally reduced – how much is a negotiation.  In some cases, it’s a dollar-for-dollar reduction.  In our case that would mean that at $50M, employees get $5M and at $60M employees would get $5M, but at $60M, the carve out piece would only be $3M, while the option payout of $2M would pick up the rest.  In this case, you’ll note there is a “flat spot” for employee return until the deal size is above $75M. 

One could argue that in order to incentivize management to maximize the value of the deal above $50M, there should be a “sharing” of the proceeds.  Instead of a dollar-for-dollar reduction, maybe it’s a 75 cents reduction for every dollar.  Again, it’s a negotiation.