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: 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

Broadway Acts on Sharing Success

untitled12You build it. You buy it. This may become the new mantra on Broadway. The original cast of Hamilton was recently followed by the new cast of Disney’s Frozen in receiving a share of the success of the shows they helped create. Similar to a great tech company building towards an IPO, a Broadway company has to do a whole lot of work before it ever gets to the starting line. Beyond the original idea, words and songs are the testing, tweaks, enhancements and embellishments that can make or break a show.

For years the formula worked like this. Continue reading

A Small Problem for Compensation Professionals

6a0134836082f8970c01bb090d7e4a970d-200wiThis is not the article I intended to post today. I had something else ready to go, but realized this was more important. I am sitting in my hotel room in San Diego, California getting ready to head over for the second day of the annual WorldatWork Total Rewards Conference. Total Rewards is a BIG category.  In three days it is not possible to dive into every type and flavor of “reward”. But one important family of compensation, equity, is almost completely missing from this year’s event.

Don’t get me wrong. There are some 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

Why is it SO DIFFICULT to Get Equity Amounts Right?

6a0134836082f8970c01bb08f49b59970d-200wiLet me start this by saying that there is little new in this post. If you have been a senior compensation professional during a market downturn, this should sound familiar. If you have not had this exciting and seldom pleasant experience, buckle up and let’s go!

The main selling point of equity compensation is that it provides unequaled compensatory upside through its extreme variability, while allowing a Continue reading