Startup Equity: In Conclusion (Part 14 of a 14 part series)

Stickman Startup In ConclusionIt feels odd to be wrapping up this series on Startup Equity. I started the series almost six-months ago, and although I have written around 10,000 words, I still have nearly endless things that we can discuss.

My goal was to provide some insight into the variations, complexity, power and hurdles that come along with equity compensation focused specifically on startups and other private companies. The information available is often too unreliable, too high level and too inconsistent to be useful. I hope this series has given readers multiple different perspectives and can provide the start for better conversations, better plan designs, and more successful companies. I am going to follow through on the suggestions from readers and colleagues that I turn the series into an ebook. If you are interested in getting a copy of the ebook, please shoot me an email (dwalter@performensation.com).

  1. You should know that determining grant size can be a challenge and that traditional techniques used for cash compensation do not translate well to the more variable nature of equity compensation. Using more refined methods can create much better results. 1
  2. You should know that NO ONE agrees on the value of equity compensation. Not ever. But, that’s OK as long as each party communicates the reasoning for their valuation. 2
  3. I hope you a have better understanding of the concerns of Venture Capital firms and similar early investors. Also, that you can better explain your case for equity and how it can drive their goals as well as yours. 3
  4. You should have a better understanding of how to use equity as your currency. You must also be willing to embrace your equity uniqueness, and why you shouldn’t put too much focus on comparisons to other companies (especially publicly traded) 4
  5. You may be able to evaluate better when you can accomplish your equity compensation goals with only a synthetic instrument. Sometimes polyester can outperform silk. Knowing when and how is the key. 5
  6. You should have a better grasp of when it makes sense to give additional equity grants and when it may be a recipe for failure. Most importantly, you should be clear that other companies’, entrepreneurs’, or thought-leaders’ formulaic methods or proven processes are unlikely to work perfectly for your company.6
  7. You should be fully aware of the MOST COMMON MISTAKE startups make when using equity compensation. 7
  8. You should be confident that your employees don’t understand their equity compensation any better than politicians understand the Internet. 8
  9. You should know that the variables that have the most impact at startups are Vesting, Termination Rules and Change in Control provisions. If you get these right for your goals and timeline, you are more than halfway to success. 9
  10. Performance-based equity shouldn’t be that scary to you. Yes, there is more to it than time-based equity, but it can be far more effective at getting you to your destination. 10
  11. Staying private and using equity compensation in a world obsessed with IPOs should no longer seem crazy. Equity compensation is very a useful tool and can even offer significant design advantages if you are willing to explore the possibilities. 11
  12. Hopefully, you know more about the evolution of cash pay and equity compensation levels over the past decade or two. Equity may no longer give you the savings that it once did, but that can offset by its long-term competitiveness. 12
  13. You may better understand more technical issues like Rights of First Refusal, Tag Along Rights and Drag Along Rights. Not everyone goes public, and not everyone stays at your company forever. Proper planning and documentation can lead to less stress and angst. 13

You will notice that I have touched on some of the more commonly covered topics like accounting and taxation issues. I have barely talked about things like ISOs and NonQuals. And, I haven’t gotten into the final 12-18 months in the run-up to IPO. There are at least one hundred other topics that tend to only come up in very specific conversations, but I think the foundation has been laid and hope that you will share any other specific topics that you may want me to cover in the future. Thanks, and I hope you will come back and read my future articles whether or not they cover startup issues.

Startup Equity: But Can’t I Pay Less Cash? (Part 12 in an n part series)

Stickman Startup Cash ValueThis series of articles has covered a lot of ground, but this particular article touches on a critical component that we have not really discussed. When equity first began to be used in Silicon Valley, prior to the boom of the late-1980’s, the goal was getting senior players to have some skin in the game. This is still a major objective of equity.

As the stock market took off in the late 1980’s and flew through the 1990’s, equity became a cheap replacement for cash. The accounting rules ensured equity barely touched companies’ books. The stock market ensured that equity delivered far more, far faster that any form cash compensation. These high growth companies were able to keep cash pay low. This allowed the to easily compete for talent against large mature companies. This is no longer the case.

Many things have changed since the 1990’s. When it comes to equity compensation, the biggest change is that you only see lower cash pay at the earliest of startups. Far more Angel and Venture Capital money is being spent on staff than in the past. This means that less is going to research and development, or larger investments are required to build companies with no better potential than those in the past.

Remember that the accepted “value” of startups is based on recent investment rounds. Very few consider that a far great percentage of these investment rounds is being spent on staff than ever before. In fact, below the very top roles, we see very little differentiation in pay between public and private companies. The startup discount no longer exists for most industries.

What does this mean if you are an executive, HR leader of compensation professional? First, you need to budget the essentially the same base pay, and perhaps cash short-term incentives regardless of whether you have just finished your B-Round or your IPO. Second it means you need to be far better at using equity intelligently and efficiently. You can no longer throw a basic equity plan out there and expect to also get away with sub-par salaries.

Add to all of this the rapidly changing workplace and experience. Companies are spreading out more quickly. Employees at all levels are looking for more workplace (and time) flexibility. Housing prices are skyrocketing in nearly every location where equity compensation is a strong component of total rewards. The fundamental equation has changed and companies, and their leaders, must learn and adapt. They must understand that the bargain garage-based startup is far different when a garage now costs $1 Million.

So, in answer to the question: “How much less can I may my employees if I also give them reasonable equity?” If you are a typical startup, equity will not give you any direct cash savings. Of course, if you are in any industry where equity is uncommon it may still have some capability to reduce cash pay, but those industries are becoming increasingly rare.

The next pieces of this series will touch upon some of the most technical equity issues that are often not included in terms of compensation. These include: Call and Put Rights, Drag Along and Tag Along Rights and Rights of First Refusal. Let me know what else interests you in the space as I am wrapping up this series in the not so distant future.

Applying Pixar’s “22 Rules of Storytelling” to Pay

untitledWhat do ‘Up’, ‘Cars’, ‘Inside Out’, ‘Monsters, Inc’, ‘Ratatouille’, ‘Toy Story 3’, ‘The Incredibles’, ‘Finding Nemo’, ‘Toy Story’ and ‘WALL-E’ have in common? First, they are 10 of the best animated movies made by Pixar. Second, they all follow Pixar’s “22 Rules of Storytelling.” As it turns out, these rules adapt well to the world of compensation plans and philosophy. Continue reading

FABulous Pay Improves Talent Acquisition

untitledHow are great salespeople able to seamlessly turn every one of your concerns into a demonstration of the prowess of their product? Are they really just that convincing or is there some type of method to their success? The best salespeople personalize every discussion. The trick is years of practicing a simple process until it has become part of how to explain everything. Your recruiters, staffing professionals and talent acquisition stars can do the same with your compensation plans (and you can easily help them).

The key in the absolutely fabulous method is the F.A.B.

F = Features

A = Advantages

B = Benefits Continue reading

What Do You REALLY Know About Pay?

6a0134836082f8970c01bb09208a94970d-200wiBefore there were photographs, sailors would return from long trips and describe animals to artists who would then create “official” images. These images helped people feel like they understood what was “out there”. But, in reality, provided almost no useful information. Check out the drawing of the rhinoceros.

You get reports from the Big 4 and compensation consultants. They have pretty charts and easily digestible info-bites. You get market data from survey providers and professional organizations. They include tons of little boxes of information on enormous spreadsheets. There is enough granularity to make you feel like you have everything and can build anything new with grains of sand that are at your fingertips. You have articles from established and new media. They provide insight and new perspective that allow you stay ahead of the trends. You follow twitter and read blogs.

But how much of what you know is factual? You may be surprised.

An article published by Continue reading

Why Equity and Not Just a Bigger Salary?

6a0134836082f8970c01bb0904b74f970d-200wiThis February, the Harvard Business Review published Stop Paying Executives for Performance” by Dan Cable and Freek Vermeulen. The basis of the article is that we do away with all executive incentive pay and replace it with high (in cases much higher) salary. Their argument is that there is no evidence that pay for performance works and some evidence that it is dangerous. Since this post is part of my ongoing “Stock Options on the Precipice” series (earlier articles: 12345678, 9, 10, 11), I will try and focus only on that one aspect of incentive pay. Perhaps some of you will add additional information in the comments.

Note: We are not arguing that top managers such as CEOs should be paid less. That may very well be the case too, but that’s not the focus of our analysis. HBR , Cable, Vermeulen, Feb. 2016

Let’s start with the premise that pay for performance does not work. There is Continue reading

How Will The New Overtime Rules Affect You?

34899216_l (2)Is your mind already racing about how the new overtime regulations will affect your company? The media is buzzing about today’s release of the U.S. Department of Labor’s new rules regarding overtime pay.  The recent DOL publication highlights the following changes: Continue reading

That List of the Highest Paying Companies is WRONG!

money greedy guy sq (2)A report from 24/7 Wall St. touting the “25 highest paying companies in America” is being passed around the internet as factual news. Unfortunately, like so many compensation stories, the report is all sizzle and no meat. People love to cheer or complain about pay. The list that was provided makes it easy by using “facts” that are not really “facts”.

The report claims that Continue reading

Parental Leave in San Francisco: Another Pay-Related Reason to Hire Baby Boomers

hand and baby feet-sq (2)San Francisco just became the first city in the US to ensure 100% paid leave for new parents. This covers both mothers and/or fathers. This new rule is effective January 1, 2017 for employers with more than 50 employees. Companies with between 20 and 49 employees have until January 1, 2018. While this is a great thing, is it just another reason to avoid hiring Millennials? Perhaps this is all a conspiracy to improve the long-term retention of baby boomers.

55% of parental pay was already covered by a statewide initiative. Companies will be responsible for Continue reading

Equity Compensation Triage Assessment (Stock Options on Precipice Part 2)

6a0134836082f8970c01b7c8140d49970b-200wiThe first article in this “Stock Options on the Precipice” series covered some of the main issues that are currently impacting employee stock options (check it out here). This article will discuss some of the paths you might take if you are having stock option concerns. For many executives, human resources and compensation professionals, this may be the first time to experience the trials and tribulations of stock options. For others, the questions below and the assessment process may be a new way of addressing this issue.

Luckily, Continue reading