The pay ratios between CEOs and average employees are once again in the news. This is partly because proxy season always raises this issue and partly because there is a move in some circles to do away with the new pay ratio disclose rule that is part of Dodd-Frank. This year’s ratios will likely be bigger than last. The same will likely be true for most years in the foreseeable future. Here’s why.
The average annual increase for the average employee has been between 2.6% and 3.2% for several years. The use of equity compensation and other long-term compensation tools went down over at least the past decade. At the same time, executive base pay has increased between 5% and 8% most years over most of the past decade. During this period, the use of Continue reading →
It 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 (firstname.lastname@example.org).
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
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
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
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
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
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
You should be fully aware of the MOST COMMON MISTAKE startups make when using equity compensation. 7
You should be confident that your employees don’t understand their equity compensation any better than politicians understand the Internet. 8
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
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
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
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
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 has approximately a gazillion moving parts. But three of these variables are far more important than all of the others. These three components are what make your plan uniquely yours. They are the things that require real thought. They are also the elements that are most commonly viewed as “plug-and-play” in the world of startups.
Stock options are grants with four-year vesting schedules. Everyone knows this. RSUs have a three-year schedule. Everyone knows this as well. However, while these are the most common vesting schedules, they are not as “standard” or as scientific as you may think.
The truth about vesting is a bit more complex. Vesting should align with Continue reading →
During a recent presentation I did for industry professionals, an attendee claimed that his employees didn’t need additional education on their equity compensation because they worked in tech and “already understood” these plans. I pointed out that he was mistaken. I stated that most, and perhaps nearly all, employees misunderstand, or do not even try and understand, their stock-based compensation. This is especially true for startups.
Check out a site like Quora, or attend a Technology or Human Resources conference. The questions about stock options, restricted stock units, dilution, values, taxation and more are wide-ranging and numerous. For almost 30 years, equity compensation and startups have been a ubiquitous combination. This long-term relationship has lead us to believe that Continue reading →
Figuring out the right amount of equity compensation at startups is a challenge. How much should I grant? How big should the grant be? How should I size the grant relative to base pay? Investors, boards, executives, HR and compensation departments at start-ups have conflicts over these questions all the time. In the past I have written about the11 Reasons Your Equity Compensation Survey Data is Wrong. This article focuses on three common ways to determine equity at startups regardless of your survey source.
%Percentage of FD Outstanding Shares
This is where most companies start. The first 10 or 20 key players at a start-up are Continue reading →
Remember that time you spent weeks modeling a new incentive plan only to have it shot down? They explained that any goals needed to be based on RESULTS! You maintained that the reason interim goals were included, was to ensure that success could be achieved and communicated throughout the process.
Remember that other time you explained to your managers that they needed to have frequent conversations on the new pay for performance program? And, when it didn’t work they told you Continue reading →
What 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 →
“You won’t believe what this star from the ‘80’s look like now!” “The best banana bread EVER!” “This great trend is your next haircut!”
It happens to everyone. We see the headline and click through to see the interesting pictures or stories. When the new page opens up (and we get past the explosion of ads) we find nothing surprising, new or even interesting. In fact, we are disappointed and annoyed that we were fooled again. Before you stop reading, you should know that this is exactly what many of our compensation programs are doing during the recruitment process.
Attract, Motivate, Retain (and hopefully Engage). This is the mantra of Continue reading →
How 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.
Sales compensation is an uncomfortable area for many compensation professionals. Many of us have never been professional sales people. Many of us don’t have the technical modeling expertise to flesh out these plans. The plans don’t operate the same way as most incentive plans. Sales people do not react to pay programs the same way as most other employees. Sales managers often are simply great sales people who have been put in charge of similar, but less great, sales people. Often we are tasked with supporting or communicating a plan when we have had little interaction during the fact finding and design phases. With all the being said, let’s talk about sales comp!