Can you elaborate on Number 11 for this little Irish guy please? Reads the same to me but maybe I don't get it.
#10 is referring to the base salary (without bonuses).
#11 is referring to total compensation (including salary, bonus and possibly other perqs)
I think he meant for #11 that you say "Non-founder CEOs" versus "non-founding CEOs"...
Very interesting and very realistic I think on the equity points. CEO salaries around $237K for a startup.. I am assuming this is quite an advanced startup because I can't think of one - including ours - and we're funded! The main reason being, I could justify 5 billion other things to spend those $ on in startup phase and my investors wouldn't wear me pulling that salary at this stage. Be interesting to see this study for the 4th QTR.
Sorry about that. Problem in #11 now fixed.
#5 What does "grant" mean in this item?
I'm English, so maybe "grant" is a US term for something in this context?
Interesting data points that actually leaves me befuddled. I have heard many startups say "we are a great company with awesome potential and hence you have to take a paycut and we all have". But if this is what the top guys are making and the equity these folks are holding (and it has increased YoY) what are the folks in the trenches working for - if they have to take a paycut and lower equity? Is it just a bunch of baloney they are being told?
Would love to hear perspectives on this - what am I missing?
I am part of a founding team in a startup about to close funding. I am the principal architect for the startup. I have worked on this FT for 6 months without pay [as with the other founders]. What do you think would be a reasonable equity percentage for someone like me?
This is interesting but seems only applicable to start-ups after they raised venture capital. I am 5-months into a start-up and spent about 2 months building a labor for equity framework which has allowed me to reach agreement with other founders on a market-based labor for equity exchange. The goal was to raise equity capital needed to attract and retain highly talented people, at varying levels of time commitment, for the first 12 months of company operations. Here are the assumptions underlying this framework:
1. The company is now a pre-institutional start-up and has a 75% probability of securing an adequate amount of seed capital, from angel investors to launch our first product.
2. The firm is an “average” start-up, having the same chance of success or failure as any other start-up, and will be valued, pre-money, at the start-up mean of $2.8MM in the angel round and 1,000,000 shares outstanding for $2.80/share.
3.The fate of start-ups is: 40% return 5 or more times invested capital, 40% return 1-5 times capital, and 20% go out of business.
4.The labor of highly talented people should be valued at the 75th-percentile of market rates for the positions they occupy.
5.The most tax-efficient method of delivering equity to employees is through qualified at-the-money American call options with a 10-year expiration.
6.The easiest and most broadly distributed and accepted method of pricing the value of stock options is the Black-Scholes method which assumes stock prices follow a random walk; an assumption we will adopt.
7.In order to be eligible for employee stock options, we need employees… so, some part of employee compensation must come in the form of taxable wages.
8.This framework does not attempt to price the illiquid nature of stock options in a private firm as compared with a public firm but adopts a comparatively short vesting schedule to improve liquidity.
9.The volatility, or standard deviation of the historical prices of a venture-backed firm is calculated based on the average changes relative to the previous round.
Once I ran the numbers through a Black-Scholes calculator, I found that value of an option is the value of the stock (because the volatility is >200%) so, we ended up swapping options for labor under this framework. I would not suggest trying to derive option value using bi or tri-nomial option pricing models, I found it akin to solving a Sedoku puzzle on steriods and in the end, you'll be the only one in the room who can understand what you did. At least people can find a B-S calculator on line and plug in the pricing and standard deviations themselves -
This seems to be a more coherent way to divvy up equity than the way I did with my first start-up; which was essentially a wild guess at firm and labor value.
In rereading my above post, I don't think I was very clear with the practical application of all this so, let me try again with example. A 75th percentile VP of sales can earn, all in — and including insurances — about $300K/year. If this VP of sales agrees to work full-time and to take $20K in cash for the first year of employment, s/he is due $280K in equity or 100,000 shares at $2.80/share. You'll have to think about vesting schedules and repurchase terms under separation but, this is the basic idea in practice. I hope that's clearer and perhaps useful.
This is a good source for executive compensation data ... does anyone have any recommendations with regard to a source for similar types of information for the general employee at start-ups?
I was asked to join a start-up as their CFO and I am looking for information on what type of compensation I should be looking for. The CEO is looking to close on their first round of financing within 30 days and the prototype is not yet complete. Based upon the above information it looks like I will draw very little if any cash salary and I can expect mostly options which as mentioned will get diluted in the next round of financing. Do I understand this correclty? I would welcome a conversation on this if anyone is interested.
Barbara - re: "Based upon the above information it looks like I will draw very little if any cash salary and I can expect mostly options which as mentioned will get diluted in the next round of financing. Do I understand this correclty?" Yes, you do understand correctly. If you'd like to have a more detailed conversation around how much ownership you should reasonably expect - email me at firstname.lastname@example.org. Cheers, Devon
This post was such perfect timing. Thanks so much. It's great to see that we as a start up have already done many of those things.
I'm so glad I joined the OnStartup group through LinkedIn.
I'm now in the process of reading through all your previous blogs and every single one resonates!
You've made my day
This blog is so generous. It is amazing how much insight is shared. Thank you!
When I and my two business partners started KMD Science we had no market ready product, had invested over 700K in actual cash and in kind labor. Our initial compensation was 250K yr each which was below the norm for San Francisco Bay area start ups. Many VC's that we spoke with would have rather seen our compensation set to 150K and I had the distinct impression that they really wanted to see us work for free. Our coarse of action was to forget them and focus on getting strategic investors in our industry where the value of the principles was recognized. In doing so we gave up very little equity, shared development costs and share equally in the net.