Startups: How can a startup provide the necessary diversity of projects to its employees?

Question from Quora

As a software developer I worked at companies both large as well as small and I can tell that the former have a greater diversity of projects and technologies compared to smaller ones.

I consider diversity of experiences an important part of a professional’s improvement because I met people that mastered well one technology but lacked the overview that a wider range would give.

Having said the above, do you consider wise to join a small startup (before A series) early in your career (after college)? If you were to stay for 4 to 5 years there, I think that lack of diversity can put an upper bound on one’s learning. For senior guys (10+ years) it might not be a problem to go deep into an area but for a graduate, diversity is quite crucial.

What’s your opinion about this?

Dan Walter’s Answer

Diversity of projects at a small company comes in a far different form.  I wrote an article about this a few years ago and thought it might be good to provide a summary here.

At a small company you may be focused on a single technology or single product, but you will likely be involved in far more aspects of that single thing.  It is common to have a voice in the product name. But at a small company you may also find yourself designing a logo, or working directly with internal or external market experts to get the word out. You will learn more about the nuances of sales and finance and probably how to change a roll of toilet paper and how to make good coffee.

As a company grows your job become more focused, even as you use more (and sometime better) technology. Some people love the ability to contribute to almost every piece of a company.  Some people like the deeper dive that a big company has to offer.

When hiring people it is a good policy to dig into these questions.  Hiring a people that matches the reality of your company is the best way to succeed.

my article: Offer the World First and Money Second. “Small Company, Big World”

What are the salaries and benefits for early stage employees in a startup, such as the first ten hires?

Question: I am writing my business plan now and I want to do some analysis on what other startups in Silicon Valley or other cities in the USA offer. Thanks! (see orig,. post on Quora)

Answer by Dan Walter

I work with a ton of early-stage companies.  This is a “Top 5 Question” for nearly all of them but the answer can be a bit murky

Industry is a huge driver.  Since this is Quora I am going to assume you looking for info on Tech start-ups, but even that may be too broad.
Location is likely to be just as big a driver.  A tech firm in the Midwest, will generally not effectively pay in the same way (or the same amounts) as a tech firm in the Silicon Valley.
Funding is also a big player.  Bootstrapped? Looking for Angel / VC in the short term? Your source of initial funding will likely drive the type and levels of pay far more than you would expect.  For example.  Many VC firms have a basic “formula” they use for nearly all of their clients.  They have preferred types of equity, preferred sources for compensation data and preferred percentages to be set aside for equity, bonuses, etc.
Most importantly, if you can navigate that other stuff, is to determine who you will be competing with for talent, and how you can clearly communicate what makes you better (not just different.)
To answer your actual question: “What are the salaries and benefits for the first ten hires”.  Salaries, will be as little as possible while still brining in the best talent.
“Best” is a relative term.  Your first ten hires are likely to be the foundation of any success your company will EVER have.  They will establish levels of excellence, work habits, general work culture and far more. In today’s tight labor market these people will likely need to get paid close to the same amounts as public companies. Any salary will be augmented, or replaced by equity compensation. This is most likely to be in the form of stock options, is always not be the best choice for every company.
If you are hiring tech veterans who have already earned a few (or more) million, you may be able to get away with far less up front cash, in return for offering better equity compensation packages.  This is a cheap way to get moving, but can be a very expensive method if you take the average 7-10 years to real liquidity.
If you are hiring recent college grads/drop outs you may be able to get away with paying less, but you take several big risks. 1. Not a proven work force in many cases. 2. May be striving for somewhere else from the day they start.  May require far more management and guidance, which can cost far more than money.  BUT, you may also get potential upsides. 1. May be the “next great [insert name here] and what you get from them will exceed anything you will ever pay them. 2. You can “build” the work environment, culture etc. you want, rather than import it from veteran employees’ past experiences. 3. They usually require less in living expenses as they are less likely to have kids, houses etc.  That being said, great talent will get hired away if you can’t or won’t pay them what they need or want.
DON’T give too much credence to Salary dot com or  GlassDoor compensation levels.  When comparing these against more robust industry survey data it is clear that many “self-reporters” provide “aspirational” numbers to these services.  Compensation survey data exists, from many sources, but is still not perfect for the first 10 people.
Using a PEO (like Trinet or Accretive Solutions) can give you better benefits at lower costs.  They often have customer groups will may be willing to share information about compensation levels.
Lastly, be economical, but don’t be cheap. You do not employees who are the equivalent of a Black Friday $59 TV. They will seem great for a few weeks, but the missing functionality and lack of quality will become apparent, then annoying, then frustrating, then simply terrible in short order.

For a pre-revenue, pre-seed, C-corp, what is the recommended form of equity compensation for advisors and independent contractors?

Question (orig. on Quora):

What factors should be considered when deciding between NQSOs, ISOs, RSUs, etc.?  Also, what is a reasonable valuation method for determining the FMV without doing a formal 409A valuation?

Answer: The recommended type of equity will vary based on your long-term goalls

The easiest for company that is pre-revenue, pre-seed, C-corp is basic restricted stock. 
You can award this at no cost, you can have people purchase it at a nominal cost, or you can do a little of both.  Restricted Stock (not RSUs) are exempt from 409A, including the valuation requirement.  People can file an 83(b) election (What is an 83(b) election?) at the time of award to limit ordinary income and associated taxes at the time of vest.  The awards should have a vesting schedule. Try to align that with your expectations of time to liquidity (of some sort.)
But…Restricted Stock may not be the “best” solution.
Restricted stock means making someone an owner / shareholder at the time of award.  This may give them rights, or the perception of rights, that you did not intend.
There are many factors that should be considered (some of the more critical things can be found this document Performensation Top 11 Considerations for Start-up Equity Compensation) .
Since you have specifically referenced Advisors and Contractors (non-employees)…
You can’t use ISOs (Incentive Stock Options.)  These can only be granted to employees.
NQSOs can be granted to non-employees.  You can even arrange to allow for them to exercised before they are vested (essentially allowing people to create their own restricted stock, including the possibility of filing an 83(b) election.) They are common, relatively simple and generally well understood by attorneys and many start-up veterans.  They offer great upside potential, but can be difficult to link to specific performance metrics and goals.
RSUs can be granted to non-employees. They act a lot like restricted stock, but people do not become owners until a vesting event.  These are the easiest form to link with performance metrics and goals.
SARs (Stock Appreciation Rights) are another possibility.  But, they are less-well understood in the Silicon Valley. If you can use NQSOs instead of SARs (which provide almost exactly the same economic value) you probably should.
Phantom Stock is another synthetic form of equity.  These awards can be modeled so much like RSUs that they are essentially interchangeable.  RSUs are better understood (and sound less like a villain in comic book) so you should probably use RSUs in most cases.
All of that being said, take the time and a little money to bring in an expert. This is not a great area for DIY work. It’s a bit more complex than making a bookcase from IKEA, and we have all seen some disasters with those.
The Equity Compensation Design and Use Matrix is also a useful reference tool (2012 Equity Compensation Design and Use Matrix)

The Mind Heart Body and Spirit of Total Rewards

Stickman Mind Heart Body SpiritWorld at Work defines Total Rewards as:

“All of the tools available to the employer that may be used to attract, motivate and retain employees. Total rewards include everything the employee perceives to be of value resulting from the employment relationship.”

We have invented more tools with corresponding rules, regulations and variations. And our employees have become more diverse. Explaining the totality of Total Rewards has become increasingly difficult for many in and Continue reading

The Beowulf of Compensation

Stickman BeowulfMost of you know of the poem Beowulf. Legend has it that it was passed down through oral performances for nearly 1,000 years before it was formally documented in Old English. The poem is long and provides details that most people skim through, if they read it at all. But, it is documented and any literate person can look it up and read if they are interested. The more ambitious can (and do) even memorize it and perform it live.

Let’s first state the obvious. No compensation plan, Continue reading

How Often Do/Should Start-up Employees Get Raises?

Dan Walter’s Answer from Quora

Raises at start-ups are an interesting phenomena.

First. If a company can afford annual raises to at least stay current with cost of living, they should do so.
Second. Start-ups often consider cash to be a basic foundation with all incentives coming in the form of an increase in value of equity compensation (stock options, etc…).
Third. Raises are given for three common reasons, 1. Cost of Living Adjustments (COLA) increase in the cost of just being a living human being (see the first comment above) 2. Merit. Better pay related to better performance, skills, etc.  3. Promotion. You have new responsibilities, title etc that drive a new level of pay.
Merit increases may not happen at most start-ups.  This is mostly because people are just expected to perform well.
While most public companies give promotional raises as they occur, start-ups may give them infrequently or never. But, the cool thing about a start-up is that they don’t need to  follow “the rules”.  They can give a raise to someone in advance of a promotion.  They can more easily give a far bigger promotion (skipping multiple levels) if it is warranted.
Mostly people at start-ups need to be prepared to ask for, and defend the need for, raises.  If you cannot define a reason better than “but I can make more someplace else”, you really aren’t trying hard enough.

What is a “Restricted Stock Unit”

Dan Walter’s Answer on Quora

Restricted Stock Units (RSUs) are a form of employee equity compensation that is an analog for restricted stock.  RSUs are NOT actually stock, until they are fully vested and released.  Between the Award Date and the Vesting Date RSUs are simply a contract between the the company and the participant. The contract defines how and when the company will deliver the value of the units to the participant.  As a general rule: One Unit has the value of One Share of company stock.

RSUs may vest based only on time elapsed (“service based vesting”) or, performance conditions (company growth, Relative-TSR and just about anything else), or upon a corporate event (Change in Control, IPO etc…) or a combination of these.  When a performance condition is included the common vernacular is Performance Unit.
I wrote an introductory article on the topic that readers may find useful.  Equity Compensation – Restricted Stock Units (RSUs), Downside Protection with a Couple Downsides
For those of you more visually inclined:  Here’s a presentation that compares a wide variety of equity compensation instruments. Equity Compensation – Comparison of Plan Types: Including Stock Optio…

 

Startup Compensation: How much equity is appropriate for the first employee (and first designer) to get when they join a company?

Question:

I’m talking with a two-person team (both founders) about joining as their first employee (and first designer). They’ve made me a cash + equity offer, and I want help analyzing and evaluating the offer. What is a reasonable amount of equity to receive, assuming market salary? What are the best resources on the topic?

Dan Walter’s Answer

Here’s the basic issue.
To make a good estimate on equity you need to know a lot of things.  The most important is what it the REALISTIC potential value of the company/idea.  Next is How much investment will it take to get there?.  Next, how much work? Next, How many people?  Next, How long?
1% may be perfect.  But 30% may also be perfect. 1% of a company with a potential IPO value of $1B is super-fantastic.  30% of a company with a potential acquisition value of $20M is fine, but not earth-shattering.
Here’s my suggestion:
Figure how much cash you need to maintain and survive (and make sure you know how long you can survive this way). You need to get at least this much cash or you will end up quitting before the equity is ever worth anything.  Then determine how much it will take to make up the difference between your survival and your comfort (and finally your celebration.)
The difference between survival and comfort is a good place to structure your equity value.  If you are unlucky or unsuccessful you will still survive. If you are lucky and/or successful you can celebrate.
If there is simply no way to bridge the gap between survival and comfort your are either at the wrong company or doing the wrong job for that company.
Orig. Question on Quora

The Secret Life of Equity Compensation at IPO

Stickman IPO Equity Secret LifeThe IPO market has remained strong for a while now. Equity compensation is a huge part of compensation at IPO. Yet, for all the publicity stock-based compensation receives, it is still mostly a mystery to those involved. Most of us know that an Initial Public Offering is a way to get your company’s stock into the hands of outside investors. But, how does this process impact equity compensation?

This is a bit simplistic, but for many it will be eye opening.

Many people don’t realize that a company sells only a portion of its outstanding stock into the public market. Sometimes this portion isn’t even a majority of all of the stock held. Founders and early investors will include some or all of their shares in the offering. Much of the stock held by founders and insiders prior to the IPO will remain in their possession for months, years or longer.

The shares that are offered for sale must be priced with two considerations. First, the bankers and company must determine the total value of the company and the value of the shares that will be sold in the IPO. This is the expected value of the IPO to the company and its investors (and bankers). Second, the price per share is then determined by dividing the expected value by a reasonable IPO offering price. For most companies (not the outliers like Facebook), the IPO price will be between $12 and $15 per share.

All of that seems obvious to those who watch the IPO markets. So, how does this impact stock options, restricted stock units, employee stock purchase plans and other equity compensation?

It is important to note that most companies perform some sort of reverse stock split just prior to their IPO. This means the number of shares outstanding will go down. In some cases, privately-held companies may have billions of shares outstanding prior to their IPO and will need to do a reverse split of 1:10 or far more to get the number of shares to a level where the per share value equals the IPO price.  When the number of shares goes down, the relative exercise price goes up.

Those stock options with an exercise price of a penny or two may end up having a strike price of several dollars. RSU awards with hundreds of thousands of units may end up being just a few thousand. This can surprise participants who are doing back of the envelope calculations and planning on retiring to their new yacht when the final value of their grants may only be enough for a down payment on a mid-priced car.

In addition to the reverse split and IPO pricing adjustments, many companies have preferred stock that converts to common at unusual ratios. All of this can make it nearly impossible for an employee (or compensation professional) to accurately predict the potential value of equity compensation. Add this confusion the simple fact that these calculations will be different for nearly every company.

As the IPO market continues to power forward, you need to start planning at least 12 months ahead of your hopeful IPO date. For some companies, this means dialing back equity usage and preparing for the inevitability of newly minted millionaires leaving the company. For other companies, it means adjusting compensation philosophy to prepare for a talent battle of post-IPO proportions. It may also mean communicating that “thousandaire” is still a pretty good goal.

While an IPO is a great thing for most companies that achieve it, it may not always mean something spectacular for employees. It is important to fully understand your company’s capitalization table, and potential IPO value and the impact it will have on grant sizes and values.

With a goal of keeping this to a reasonable length for the Compensation Café, I will wrap it up for now. Please feel free to join in the discussion in the comments and I will expand and provide details where it makes sense. I can always make this a multi-part series if the interest warrants it.

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with corporate strategy and culture. If you appreciate Dan’s thoughts on compensation you might want to get a copy of the new book from 3/8ths of the Compensation Cafe: “Everything You Do in COMPENSATION IS COMMUNICATION.” Written by Ann Bares, Margaret O’Hanlon and Dan Walter. Dan has also co-authored of several other books including “The Decision Makers Guide to Equity Compensation”“If I’d Only Known That”“GEOnomics 2011”and “Equity Alternatives.” Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Continue reading

Which shares are included in an IPO?

Question:

Dan you say that only a portion of the shares are sold at IPO. Does this portion include all the shares that have been awarded to all the employees? Or just the top management group?

Dan Walter’s answer

Great question. The shares sold at the time of the IPO are usually reserved to those held by outside investors, founders and a portion of what is held by executives (most of their shares are required to be held after the IPO). Sometimes former employees who hold actual shares will be allowed to participate.

Shares must be registered with the SEC (or eligible for an exemption to registration) in order to be sold after the IPO. Most of the shares offered are registered using a S-1 filing. Shares from employee plans are registered using a S-8 filing (a bit less onerous). Shares may also be subject to rules like 144 (defines post purchase holding periods) or 701 (an exemption from registration for certain pre-IPO shares associated with employee stock plans) that cover the issuance of shares that are issued prior to the SEC filings (pre-IPO shares).

The shares that are awarded to employees through approved employee stock plans are filed using an S-8. (https://www.sec.gov/about/forms/forms-8.pdf)Once properly registered ior exempted they can be traded publicly.

In most cases shares that are not allowed to participate in the actual IPO offering are subject to a 180 day, post-IPO lock up period. This adds additional risk and mystery to the value of employee equity. Will the IPO price be the highest price for years? Will the IPO spark a feeding frenzy that drives the price higher and higher? Allowing the employee to reap greater gains down the road> Will the stock price lep for a few days or a week then drop to a level lower that than IPO price?

Like the end of an old Batman episode, there are as many questions at the time of IPO as there are answers. A smart person once explained it this way. All the work to get to the IPO is like and athlete or student working to be a star in college. Once they are hired or drafted the REAL work begins.