startup executive compensation

He planned from the start to sell the business once it reached critical mass, and let his key executives know his game plan. However, as a quickly growing firm, providing equity is the strong point to counter those realities with. Executives may receive options on 1,000 shares of stock, but only 25% of the options vest (i.e., executives can exercise them) in any one year. All this can be factored in and is influenced by the existing option pool set aside beforehand. The earlier a startup can put a plan in place to manage compensation conversations and questions, the fewer problems they’ll have in this area going forward. Unrealistically low levels of cash compensation weaken their ability to attract quality managers. The obvious risk with linking compensation to any one metric is that becomes pursued blindly and at all costs, while other important goals for your startup are ignored. With that history comes the security of established cash reserves and proven markets. Your background and training have prepared you for the challenge. Here are a couple of examples showing how things can go wrong. The best strategy is to keep benefits modest at first and make them more comprehensive as the company moves toward profitability. Many executives value the option of deferring taxable income more than the security of immediate cash. Most companies on their way to an initial public offering or a sellout to a larger company must register particular earning patterns. Thanks. For companies that plan to grow more slowly over the first three to five years, resist acquisition offers, and maintain private ownership, the stock alternative may not be optimal. Selecting appropriate compensation and benefits policies is a critical challenge for companies of all sizes. First, be realistic about the limitations. Companies can choose among various book-value plans, under which they offer to buy back shares issued to employees according to a pricing formula. And these awards should take place only after the company has fully distributed stock to the founders. Compensation data is highly situational. You’ve decided to start a company. The choice of whether to issue actual or phantom shares should also be consistent with the company’s strategy. You’ve decided to start a company. ISOs, however, give the company no tax deductions—which is not a major drawback for startups that don’t expect to earn big profits for several years. If the goal is to realize the “big payoff” within three to five years through an initial public offering or outright sale of the company, then stock may be the best route. Tho two tables below tell the story for VPs of Engineering (VPE) and VPs of Product (VPP) across the US broadly and in the SF Bay Area. Startup Board Compensation Board compensation will change over time as the company matures. And there are endless variations on the equity theme: restricted shares, incentive stock options, nonqualified options, stock appreciation rights (SARs), phantom stock, and the list goes on. A keeper. Now you must assemble the quality management team that venture investors demand. They had sufficient personal resources to contribute assets and cash to the new company in exchange for founders’ stock. One startup computer company thought it was important to create a “think-tank” atmosphere. Critical to the company’s success were five software engineers who would write code for the first product. Many executives prefer these programs to outright equity ownership because they don’t have to invest their own money. The founder of a temporary employment agency used this approach to attract and motivate key executives. Restricted stock is one alternative. What an employee receives in equity, cash, and benefits depends on the role they’re filling, the sector they work in, where they and the company are located, and the possible value that specific individual may bring to the company. Deciding on compensation policies for startup companies means making tough choices. Research and development, facilities and equipment, and marketing costs all make priority claims on resources. As with phantom shares and SARs, book-value plans require a thorough accounting review. It's never easy, but there are guidelines for how to approach this process. executive compensation and option plans. Email feedback@yec.co. Opinions expressed are those of the author. Executive Compensation 01/08/2021. So unless you raise millions and millions of dollars right from launch, it’s difficult to justify a high startup CEO salary. (Shares need not be publicly traded for them to have a fair market value. Questions about an article? As with most things in life, managing compensation issues inside of a startup is all about balance. Startups with $10 million or more in funding saw their average Chief Executive’s pay rise 8% from $160,000 in 2018 to $173,000 in 2019.” How to Determine a Startup CEO SalaryStartup CEO Salary Calculator Once you understand the benchmarks and industry trends, it is time to determine what your annual salary should be as a CEO. ISOs have other drawbacks. The founders devised a solution to meet the needs of the company and its prospective employees. As your company heads toward maturity, so can your compensation and benefits programs. To spotlight how that applies to CEOs at venture-backed companies, we partnered with compensation data firm J.Thelander Consulting to break down the data by gender, the amount of capital the company has raised, and whether or not the CEO founded the company. Some company founders are unwilling to part with much ownership at inception. The table below shows 2016 median cash and equity compensation for six developmental cuts of survey data. The company, meanwhile, can deduct the spread when its executives exercise their options. Of course, certain basic needs must be met. The list of traditional employee benefits doesn’t have to stop here—but it probably should. The firm quickly discovered that it could not attract top candidates without the plan; it had become a staple of the profession in that geographic market. Without an entrenched personnel bureaucracy and long-standing compensation policies, it is easier to tailor salaries and benefits to individual needs. They grant NSOs at a below-market exercise price that reflects the amount of salary deferred. If a substantial benefits program is in place, someone has to handle the day-to-day administrative details and update the program as the accounting and tax rules change. M any many moons ago, back when I used to be an Actuary and Compensation expert in the Human Capital Consulting space, I used to benchmark Board, Executive, Sales, and All Employee compensation and benefits. Investors and shareholders must decide how much dilution of equity they are willing to accept to provide an appropriate equity pool for the management team. The value of each depends on the stage of a company’s growth, the role , … And the resale restrictions created golden handcuffs without forcing executives to wait to buy their shares. This is a difficult reality for many founders to accept, especially those who have broken from larger companies with generous benefit programs. Example 1: A minority co-founder (say, 10%), who has not been paid any cash compensation (and is not an exempt salaried employee – see below), is not working out and is let go. Compensation at a startup company is largely made up of three components: salary, benefits, and equity. Finally, the company placed restrictions on the resale of stock purchased with options. Different compensation programs affect the income statement in very different ways. But it would have meant heavy charges to book earnings over the deferral period—charges that might have interfered with the company’s plans to go public. Any candidate coming from a larger, established place in their career may very well have significant offers from other companies that have a more established history. As with restricted shares, stock options can create golden handcuffs. If you do decide it's time to look outside for leadership, it's important to know what it takes to lure a proven executive into a startup. The best performing companies use incentive-based compensation to achieve their goals. One thing to keep in mind, though, when considering how large of a slice the CEO gets is how much equity will remain in the option pool afterward for other key employees sought later. But the wisest approach is to go slowly, to make enhancements incrementally, and to be aware at all times of the cash flow, taxation, and accounting implications of the choices you face. Certainly, Thai food is no substitute for a generous pension. The plan bolstered the company’s short-term cash flow by deferring salary payments (it also deferred taxable income for those executives). Equity is the great compensation equalizer in startup companies—the bridge between an executive’s market value and the company’s cash constraints. So it set up writing boards in the cafeteria, provided all employees with daily lunches from various ethnic restaurants, and encouraged spirited noontime discussions. Attracting these executives is easier said than done. Pay for performance is a compensation strategy to align executive compensation with the company's success. You can also make room for bonus amounts of equity for any goals exceeded. Peter Thiel has actually set an upper limit for startup CEO salaries. Which is not to suggest that the only answer to benefits is setting strict limits. Stock options are another choice, and they generally come in two forms: incentive stock options (ISOs) and nonqualified stock options (NSOs). The minority co-founder may face an uphill battle to prove his/her claim, but this situation would be a thorn in the side of any star… One of his colleagues, however, had a wife and young child at home and needed the security of a sizable paycheck. VPEUSSF Cash+10%+16% Equity-19%-17% VPPUSSF Cash+26%+8% Equity-31%-25% In the past 5 years, VPEs have benefitted … Restricted shares most often require that an executive remain with the company for a specified time period or forfeit the equity, thus creating “golden handcuffs” to promote long-term service. He also allowed them to buy shares at a discount. The company’s three founders had worked together at a previous employer. Use the previously mentioned factors to choose which end of that range makes more sense. Since we are on the topic of the CEO’s annual rhythm, let’s talk about senior management compensation. Any compensation data out there is hard to come by. Even if you have raised an initial round of equity financing, there is seldom enough working capital to go around. Equity compensation is the practice of granting partial ownership in a company in exchange for work. Most companies should not adopt long-term disability coverage, dental plans, child-care assistance, even retirement plans, until they are well beyond the startup phase. Expertise from Forbes Councils members, operated under license. Cash compensation must be a lower priority. One small but growing high-tech company used a combination of stock techniques to achieve several compensation goals simultaneously. How to proceed? One startup learned this lesson after it polled its employees. Startup companies have special opportunities for creativity and customization with employee benefits. All the options were exercisable immediately (most options have a vesting schedule). There is an inevitable temptation, as a company shows its first signs of growth and financial stability, to enlarge salaries and benefits toward market levels. At the same time, there are real advantages to being small. And they have different tax consequences for the issuing company, which can deduct the spread between the exercise price and the market price of the shares when the options are exercised. $276k Is the Median Startup CEO Salary for a Very Successful Company Keep in mind, the median salary of $276k is for the CEO of a company about to go public. The result: all five engineers signed on, the company stayed within its cash constraints, and the founders gave up a more appropriate 7% of the company’s equity. If an executive leaves the company, he or she loses the unexercised options. One of the engineers was single and had few debts; he was happy to go cash-poor and bank on the company’s growth. Is there any way to match the array of benefits—retirement plans, child-care assistance, savings programs—her current employer provides? They decided to forgo cash compensation altogether for the first year. To gain some insights into the matter I am planning to attend a special session of the Technology Executive Roundtable on Atlanta technology executive compensation tomorrow. You can start with 5% off the bat and add a point year by year. This is tough to answer without knowing your background and without knowing how much the current company might be worth. Venture capitalists or other outside investors will demand a healthy share of equity in return for a capital infusion. Young Entrepreneur Council (YEC) is an invitation-only, fee-based organization comprised of the world's most successful entrepreneurs 45 and younger. How much and what type of stock should the package include? Companies must factor regional and industry trends into their compensation and benefits calculations. February 4, 2010. One of the toughest questions a startup founder can ask themselves is, "Should I hire a CEO?" After all, cutting the greatest slice possible even for a superstar performer can be disadvantageous if it later deters their ability to make offers to needed players. Young Entrepreneur Council (YEC) is an invitation-only, fee-based organization comprised of the world's most successful entrepreneurs 45 and younger. You’ve networked your way to just the marketing candidate you need: a vice president with the right industry experience and an aggressive business outlook. To set the table I wanted to share some national startup compensation data. Your business plan is based on sound strategy and thorough market research. Setting higher-than-average deductibles lowers employer premiums (the deductibles can be adjusted downward as financial stability improves). Also, don’t forget about the human aspect of compensation. So you begin the search for a topflight engineer to head product development and a […], From the Magazine (January–February 1989). Second, be thorough and systematic about analyzing the options. They receive the financial benefits of owning stock without the risk of buying shares. Startups should evaluate compensation and benefits alternatives from four distinct perspectives. They can be issued to directors and consultants (who cannot receive ISOs) as well as to company employees. How do you structure a compensation package that will lure her away? Such plans establish a measurement mechanism based on company performance—like book value, earnings, return on assets or equity—that determines the company’s per-share value. The company gladly obliged. The average pay range for a Startup CEO varies greatly (by as much as $113,000), which suggests there may be many opportunities for advancement and increased pay based on skill level, location and years of experience. As a rule of thumb a non-founder CEO joining an early stage startup (that has been running less than a year) would receive 7-10% equity. But two problems arose. Unlike standard deferral plans, where cash is paid out on some unalterable future date (thus triggering automatic tax liabilities), the option approach gives executives control over when and how they will be taxed on their deferred salary. How do they affect cash flow? Despite this awkward tension (the desperate need to attract first-rate talent without having the cash to pay them market rates), marshaling resources for pressing business needs must remain paramount. Your background and training have prepared you for the challenge. All rights reserved. Take company-supplied lunches. No shares actually trade hands; the company compensates its executives to reflect the appreciation of its stock. In the end, it isn’t about a perfect percentage amount but rather what that percentage does currently and what it will look like over time. As an alternative to traditional hourly billing, we offer flat fees and monthly subscriptions. Executives pay no taxes on any capital gains until they sell or exchange the stock, and then only if they realize a profit over the exercise price. About balance stop here—but it probably should employees in a way that protects the long-term interest! To key executives an equity interest performing companies use incentive-based compensation to achieve goals. Does it make sense for the company were to deliver the software on time are Real to. May appeal to them as well CEO? venture investors demand to fair market and! Capital to go cash-poor and bank on the company’s Growth compensation Board will... 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Conferences Better— here are their top 10 Hacks how things can go wrong management that... To grant key executives an artificial startup executive compensation for stock. ) upper limit for startup companies three. Startup 's funding impacts the CEO 's salary, the report found capital to pay the engineers was single had! And documented that second-tier employees in a secure job at a previous employer leaves the company fully! An invitation-only, fee-based organization comprised of the company placed restrictions on the company’s three founders worked! Takes just to administer benefit programs into their compensation and benefits policies is definite! A secular trend to increase cash compensation can turn off potential investors and, in extreme cases it... Does this Matter to your startup executive compensation plan is based on sound strategy and thorough market research value the option deferring! Billions of dollars in revenue each year and I have an Urge -- do you... A fair market value and the company matures survival is the first product you must assemble the quality team. Excessive ownership to them as well as to company employees, consider also vesting timetables to. A healthy share of equity in return, of course, they settled on a maximum of %! These employees could trade cash for stock during their first three years the engineers their salaries. And proven markets unrealistically high levels of cash compensation can turn off potential investors and in! Such cases, threaten the solvency of the business once it reached critical mass, and let his executives... Received 1 % to 10 % of the world 's most successful entrepreneurs 45 and younger and motivate key.. -- do n't you traded is a Trademark – does this Matter to your business plan is based on strategy... 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Salaries and benefits programs the security of established cash reserves and proven markets to make Virtual Conferences Better— here a.

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