Startup Equity: What About Performance? (Part 10 of an n part series)

Stickman Startup Performance Dashboard“But, how do I make sure that the person is a great performer before I am forced to give them equity?”

This question gets asked by nearly every Founder, Investor or Compensation Committee Member very early in the development of an equity compensation plan. Sometimes it is expressed more genuinely as, “I don’t want to give away part of my company to someone who hasn’t carried their fair share.” Either way, the concern is valid. Sometimes the answer is very simple, and sometimes it is not.

Your equity compensation plan should be aligned with Continue reading

Startup Equity: Three Crucial Variables (Part 9 of an n part series)

stickman startup three crucial thingsStartup 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.

  1. Vesting Schedule

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

Startup Equity: No. They Don’t Get It. (Part 8 of an n part series)

stickman they dont get itDuring 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

Startup Equity: The Most Common Mistake (Part 7 of an n part series)

untitledHere is my 2017 gift to you. I truly believe that equity compensation helped build the technology industry, and therefore the world as we know it. But, an unfortunate number of startups make the same error when using this complex and powerful tool that drive corporate success.

If you browse the internet, ask entrepreneurs or receive guidance from someone at a VC firm, you will get similar answers when asking about equity awards for the first twenty, or so, employees. This information, while accurate at a generic level, is likely to be incorrect for your specific circumstances.

The answer looks a bit like this. Outside of the founders, the C-level hires should each get Continue reading

Startup Equity: Isn’t It Refreshing? (maybe not) – (Part 6 of an n part series)

untitledThe historically long periods between the startup and “big event” for companies has given rise to many issues that were never considered when stock options and other equity tools first became the preferred startup incentive tool. Among these unplanned issues are things like:

  • Wealth inequality between the first 20 employees and employee 5,000 or 12,000 or more
  • Grants expire when the company has not yet made its move to IPO
  • 409A Valuations
  • Dilution and burn rate issues long before IPO
  • Grants becoming stale
  • Downward movement in stock prices
  • (Ugh, this list can take the maximum 800 words allowed for this post)

This post we will discuss the controversial issue of “refreshing” grants for long-term employees. To clarify, these are not grants for promotions or company-wide performance. These are equity compensation awards that are given simply because Continue reading

Startup Equity: Synthetic Equity or Sharing Without Sharing (Part 5 of an n part series)

untitled4When you hear “equity compensation” and startups, you immediately think of stock options. More recently RSUs (restricted stock units that settle in company stock) have also been popular. But, what if you aren’t the “sharing” type? Or what if your company doesn’t have stock? LLCs are a good example. How does your business compete when it doesn’t have access to the same tools? Synthetic equity is becoming an increasingly popular answer.

Synthetic equity refers to any type of incentive plan where the value delivered to participants fluctuates based on the value of the enterprise. For corporations, the most common tools are Continue reading

Startup Equity: Comparing Your “Currency” to a Competitor’s (Part 4 of an n part series)

untitledComparing base bay is relatively easy, equity not so much. A dollar is a dollar. And, if a dollar isn’t a dollar (let’s say it’s a Franc), there are published exchange rates to help convert values. But, with equity compensation, the base currency is your stock, and its value is not easily translated (or even agreed upon). This fundamental disconnect is one of the most challenging issues faced by anyone dealing with equity compensation at a start-up.

Let’s start with the oversimplified example above. There are exchange rates from dollars to francs, but they are not as consistent as the prices available for Continue reading

Startup Equity: Why are VCs Getting so Stingy with Equity? (Part 3 of an n part series)

6a0134836082f8970c01b7c8b0ac08970b-200wiDoes this familiar?

You had a great idea and turned it into a company. Somehow you got to the point where Venture Capitalists were willing to invest. You may have had less than 50 employees and less than 15% of the company committed to non-founder employees. You grew and kept innovating. Equity compensation was the currency of the day and the hope of tomorrow. Your value grew and more investors came on board. Then the equity spigot became a trickle.

What’s up?

Many VC returns have shrunk in 2016. When VCs see their value melting, they react exactly as you might expect. They become more Continue reading

Startup Equity: 409A vs Investor Value (part 2 of an n part series)

untitledfWe have all seen the headlines, “XYZ receives $100M in funding at a $3B valuation.” We seldom see the “other” valuation showing the same company is worth $350M. For publicly-traded companies, value is determined by investors working as a group in a real-time market. They are generally purchasing the same kind of stock. Values are based on a combination of publicly disclosed information, supercool computer models and gut feel. But in the world of the pre-IPO start-ups, values take on a life of their own.

Investors in startups are buying stock with more risk and more upside potential. Companies only sell stock to investors on Continue reading

%-#-$ – Startup Equity: It’s Enough to Make You Swear!

untitled7Figuring 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 the 11 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