OnStartups

One of the questions I get asked most often here at OnStartups surrounds the issue of how to determine compensation (cash and equity) for the founding team. As you might imagine, this is a non-trivial issue and numbers can vary greatly from situation to situation. This is one of those perfect examples of where some realistic data across a large pool of technology startups would be immensely helpful. All we sometimes want to know (absent the absolute perfect answer to the question) is what other startups are doing.

Earlier this year I participated in a relatively detailed survey of entrepreneurial technology firms by the folks at http://www.compstudy.com. In return for my participation, I received the full report titled “2006 Compensation & Entrepreneurship Report in Information Technology. It arrived in a nice, printed and what seems to be really expensive brochure. I thought I’d share some of the more interesting elements of the results with some editorial commentary on specific points that I found particularly interesting. Note: I am in no way affiliated with CompStudy and I do not benefit in any way should you choose to visit their site, ask for a report or pay them any money (don’t even know what the price is). Enough of the preamble, let’s dig in.

Startup Compensation: Dividing The Cash and Equity

1. Survey Summary: The report is based on 319 complete responses with data from over 1,500 executives. This is the largest sample size the organizers of the survey have had to date. The report is broken out into categories including those companies that have raised 0-1 institutional rounds, 2-3 rounds and 4+ rounds. It would have been helpful if the study actually separated out companies that have raised zero institutional capital is that is a common (and interesting) case. The behavior profile of startups that have not raised any institutional capital is possibly different from those that have raised even one. 56% of the respondents were software companies (great to see that there are still entrepreneurs starting software companies). The data leans heavily towards early-stage companies (67% of them had $5 million or less in revenues).

2. Founder Status: 29% of the executives completing the survey were founders of their company. CTOs and CEOs were the most frequent founders of their companies.

Not too surprising that the CTOs and CEOs are the most likely company founders (particularly since the survey was focused on IT companies).

3. Cash Compensation: Average base salary across all positions increased about 3.8% from the prior year. Base salary for the CEO increased slightly above the average (4.3%). Average total cash compensation (including bonus) for the CEO $373k. For the CTO or head of technology, $192. The average total comp. for the Head Of Sales is $255k. Looks like even startups still need to make sales and the sales professional is not out of style.

4. Equity Grant at Time Of Hire: On average, the non-founding CEO receives a 5.04% grant to join the company (the highest of all positions surveyed). ISOs (incentive stock options) are the most common form of equity granted. Stock options are increasing with frequency as a vehicle (where as restricted and common stock grants are declining). Companies have reserved on average 16.26% of their fully-diluted equity for grants to employees and directors. Outside of the CEO and President/COO, the non-founder CTO holds the highest average equity percentage at 1.5%.

5. Impact of Fund Raising: With each additional financing round raised, the company moves towards a non-founding team. 62% of companies with 1 or fewer financing rounds had a founder as CEO. This drops to 44% for those that raised 4+ rounds. In general, founding executives earn less in compensation than their non-founding counterparts. In companies that have raised one or fewer rounds of capital, the founding CEO owns about a third of the shares. After two rounds of financing, this drops to an average of about 13%.

6. Base Salary: The CEO base salary increased 4% from 2005-2006 from $211k to $220k. Personally, I found this number to bit on the high side. My anecdotal evidence and discussion with other people from the startup community suggests that CEOs in early-stage startups make on average $150-$200k. From the survey, the base CEO salary increases with the size of the firm. $168k for companies with headcount of 1-20, $217k for 21-40, $232k for 41-75. CEOs of service-based startups (Services/Consulting, Systems Integration, etc.) make more in compensation than those in other segments like software and Content/Info provider. But, these same CEOs have less equity than those in the other segments. Interestingly, the average total compensation for CEOs by geography indicates that California and New England don’t have the highest numbers – but it’s in the South. I found this surprising (but it still mapped to my personal experience as I spent considerable time in the South as part of my first startup).

There’s a lot of other good data in the report (divided up by the various other positions like CFO, VP of Sales, etc.). If you would access to more detailed “unfiltered”, you should contact the folks at http://www.compstudy.com (Once again, no affiliation). If there is sufficient interest, leave a comment here and I can see if we can get some sort of “bulk discount” for the OnStartups readership.

Let me know what you think about the data points overall. Personally, at HubSpot, we’re not paying ourselves near the “average” levels for founder compensation (but, we have not raised any outside funding either). We’re conserving cash and growing the company ourselves at this point.