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

OMG! You Were Right All Along!

untitled11Remember 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

The Real Cost of Mismanaged Incentives: Wells Fargo

untitledWell, so much for the warm-hearted caffeinated, pick-me-up from the Comp Café. Today is a steaming jolt of quadruple espresso in response to the Wells Fargo incentive pay mess. Let me start with the fact that I have been interviewed a few times about this story and even I was surprised by my response to the question, “What companies in the financial world are considered to have good incentive programs?” I answered that if I had been asked a few weeks ago, Wells Fargo would have been on the list. I guess it’s hard to know what you don’t know.

If you have been under a log for a couple of weeks, please start by reading a couple of earlier Compensation Café Articles (my own When Incentive Pay Goes Rogue! and Jim Brennan’s Excessively Successful Incentives). That foundation will help you understand the following summary.

A couple weeks ago, Wells Fargo was fined about $185 million for fraudulently opening millions of accounts. They also fired 5,300 employees and were the media poster-child for why incentive plans are terrible. At the very least, the plans in question ended up costing more than they delivered. In the past few days, the real costs of these programs are starting to reveal themselves. Recent developments are listed below. Continue reading

When Incentive Pay Goes Rogue!

untitledA friend of mine likes to say: “It’s not that incentive pay doesn’t work well, it’s that it works TOO well. It usually does exactly what it is designed to do, even if that wasn’t your intent.”

Wells Fargo just paid $185M in fines and penalties because its employees fraudulently opened additional accounting for people who were already customers. Often when issues like this arise, someone will blame pay programs. When this happens, compensation professionals usually Continue reading

Why Should Employees Care About Investors?

untitled3Apple’s stock price is somewhere around $108 today. Over the past five years it has been anywhere from $50 to $132. Medpace was the most recent Initial Public Offering (IPO) on NASDAQ. Thursday, August 11, 2016 their IPO price was $23. By Friday, August 12, the price was above $28 by close of the market. Both of these are great stories, but why should their employees care?

Many people have the misconception that the company gets some piece of the price paid for the stock on the public market. This isn’t true, even at the time of an IPO. At an IPO, the company sets a price to begin initial trading. They get that price for a block of shares sold in the offering. Once the stock has been sold, any gain or loss goes to or from the investors, not the company. This remains true for every one of those shares that remains outstanding after the IPO.

So, in the case of Apple, the price of the stock does Continue reading

Executive Pay Has Been Fixed on Both Sides of the Pond!

6a0134836082f8970c01bb09238e9f970d-200wiIn the past week there have been two major reports describing how to fix executive compensation. The first is from the UK report and comes at the end of a project by the “Executive Remuneration Working Group” (those Brits love their whimsical names) This project was publicly announced September 8, 2015 as an effort by The Investment Association. The second report “Commonsense Principles of Corporate Governance” is from a group of executives in the US. It covers a broad list of corporate governance issues. For the purposes of this post we will focus only on the section titled “Compensation of Management.”

Here’s the basic run down: 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