Unrealistically low levels of cash compensation weaken their ability to attract quality managers. The five prospects had unreasonably high expectations about how much stock they should receive. Roughly, for every additional $1 million raised, a startup CEO will take home between $4,000 and $5,000 more in annual salary. Group life insurance is important, although coverage levels should start small and increase as the company gets stronger. These programs can get complicated, however, and they require thorough accounting reviews. The plan provided the company with tax deductions on any options exercised in the future (assuming the fair market value at exercise exceeded the stockâs fair market value when the company granted the options) and avoided any charges to book earnings in the process. As your company scales, however, managing an ever-growing set of priorities can prove difficult, even impossible. How much cash is reasonable? As with most things in life, managing compensation issues inside of a startup is all about balance. 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. 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. Of course, if companies generate taxable income before their executives exercise their options, lack of a deduction is a definite negative. No shares actually trade hands; the company compensates its executives to reflect the appreciation of its stock. Executives with excess cash could exercise all their options right away; executives with less cash, or who wanted to wait for signs of the companyâs progress, could wait months or years to exercise. Typically, equity — a percentage of ownership in the company — is the anchor of a solid compensation package for a potential chief executive, so let's dive a little deeper into the details of what this may look like. An executive making $5 million per year would not be happy hearing about a competitor executive making $30 million per year. Even if you have raised an initial round of equity financing, there is seldom enough working capital to go around. Private companies estimate the market value of their stock.). For these and other reasons, companies usually issue NSOs as well as ISOs. How to proceed? This dizzying array of choices notwithstanding, startup companies face three basic questions. David Ehrenberg is the founder and CEO of, EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Gender Bias: Trademark Act Never Contemplated A Woman Or Gay Male President, Cannabis Challenges Differ In Each State Where It’s Newly-Legal, 5 Unexpected Places To Find Your Next Great Business Idea. Equity compensation is the practice of granting partial ownership in a company in exchange for work. Compensation and benefits plans can be expensive to design, install, administer, and terminate. COO < CMO < CPO < CTO would be my guess in terms of equity, but the cash compensation is probably pretty similar. The best strategy is to keep benefits modest at first and make them more comprehensive as the company moves toward profitability. But two problems arose. February 4, 2010. One service company in the startup stage adopted an insurance-backed salary plan for its key executives. As an alternative to traditional hourly billing, we offer flat fees and monthly subscriptions. Research and development, facilities and equipment, and marketing costs all make priority claims on resources. One of the toughest questions a startup founder can ask themselves is, "Should I hire a CEO?" Cafe Classic: It's a New Year and I Have an Urge -- Don't You? All Rights Reserved, This is a BETA experience. 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. Is there any way to match the array of benefitsâretirement plans, child-care assistance, savings programsâher current employer provides? If not, does it make sense to reward executives based on the companyâs appreciating share value or to devise formulas based on different criteria? While the vice president of marketing watches marketing, the CFO keeps tabs on finances, and the CEO snuffs out the fires that always threaten to engulf a young company, who is left to mind the personnel store? What is the accounting impact? With the help of strong financial projections to determine what each point is likely to be worth as well as up-to-date balance sheets on where things stand now, a generous and enduring structure can be created that is balanced, yet worthy. And the resale restrictions created golden handcuffs without forcing executives to wait to buy their shares. The founder of a temporary employment agency used this approach to attract and motivate key executives. Your business plan is based on sound strategy and thorough market research. Other creative policies may not only cost less but they also may better suit the interests and needs of executive recruits. He planned from the start to sell the business once it reached critical mass, and let his key executives know his game plan. 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. However, as a quickly growing firm, providing equity is the strong point to counter those realities with. What should independent directors expect in the way of compensation for serving on a startup’s board of directors? Use the previously mentioned factors to choose which end of that range makes more sense. Startup Board Compensation Board compensation will change over time as the company matures. 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. But any program has costsâand costs of any kind are a critical worry for a new company trying to move from the red into the black. The choice of whether to issue actual or phantom shares should also be consistent with the companyâs strategy. The compensation of the founder-CEO should be benchmarked to the market after benchmarking the rest of the function heads to the market. Some founders take the other extreme. After working with startups for over a decade, I have dealt with many founders who are presented with the tough decision of handing off the role of CEO to an outsider. You may opt-out by. When it comes to issuing stock, startups should always be careful not to sell the store before they fill the shelves. Critical to the companyâs success were five software engineers who would write code for the first product. 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. 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. The company gladly obliged. So you begin the search for a topflight engineer to head product development and a [â¦], From the Magazine (JanuaryâFebruary 1989). They can be issued to directors and consultants (who cannot receive ISOs) as well as to company employees. So it established a 401(k) and assumed the administrative costs, but it saved money by not including a matching provision right away. Any startup that is either not turning a profit yet or just beginning to after a lengthy period of developmental costs simply cannot compete with that on a dollar-for-dollar basis. No startup is an island, especially when vying for talented executives. Tax laws impose stiff technical requirements on how much stock can be subject to options, the maximum exercise period, who can receive options, and how long stock must be held before it can be sold. Equity establishes a commitment from the CEO through personal stake-holding, but there’s another significant factor that makes it a substantial component: potential return. In such cases, it may make sense to create an artificial market for stock. Your background and training have prepared you for the challenge. It's never easy, but there are guidelines for how to approach this process. 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. If so, should the company use restricted stock, options, or some combination of both? Events at a Boston software company illustrate the potential for flexibility in startup compensation. 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. Margaret O'Hanlon has some Classic tips for making career headway in the New Year. One small but growing high-tech company used a combination of stock techniques to achieve several compensation goals simultaneously. The executive otherwise enjoys all the rights of other shareholders, except for the right to sell any stock still subject to restriction. The list of traditional employee benefits doesnât have to stop hereâbut it probably should. What are the tax implications? The goal should not be to come as close to what IBM offers without going broke, but to devise low-cost, innovative programs that meet the needs of a small employee corps. Unrealistically high levels of cash compensation can turn off potential investors and, in extreme cases, threaten the solvency of the business. Self-insuring smaller claims also conserves cash. But never are the challenges more difficultâor the stakes higherâthan when a company first takes shape. It did not make sense for the company to raise venture capital to pay the engineers their market-value salaries. YEC members…. Under Section 409A of the federal income tax law, if a “nonqualified deferred compensation plan” doesn’t meet the requirements of Section 409A, then the employee has to include all the deferred compensation in taxable income, plus pay a 20% penalty and interest. Since 2008, there has been a secular trend to increase cash compensation and decrease equity to startup management teams. 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