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Compensation in a very early stage company

29 October, 2008

Q: What should my compensation be?  I’m going to be the first full-time employee of a new startup.  As it is so early stage, it is hard to say what the title is, but the role is certainly similar to a CMO or VP BizDev type person.  The company just raised around $500k in an angel round that is convertible debt to be converted at the valuation of the first VC round but better terms.  I’m more interested in equity than a market salary, but I do have a mortgage, wife, 1 child and another on the way.

A: The good news is the company has a little money in the bank.  That gives you (and them) the ability to have a rational discussion about the trade between cash and equity.  If you recognize this is a trade (e.g. the less cash comp you take, the more equity you get), you can have an intelligent conversation.

The mistake I see most often is that the early employee doesn’t recognize this trade.  The conversation goes something like “I’ll take a 20% discount to market salary but I was 5x the normal equity I’d get if I was getting a full salary.”  This irrational.  While you can make the argument that cash is worth a premium to equity, it’s not worth this kind of a premium.

The normal dynamics tend to end up between the two end cases – full salary and no equity at one end and 50% salary and 2x normal equity at the other end.  My recommendation when people ask me this question is to say “figure out the least amount of cash comp you can afford – ask for that – and then ask for roughly 2x the equity package you would normally get.  Oh – and expect that the equity will have normal vesting terms on it – you shouldn’t get better vesting because you are taking a salary cut.”

 

Follow-up Question

Q: If comp is at say 50% with 2x equity vesting over a standard term, then in 6 months a series A is completed and there’s more comfortable level of cash in the bank, salary can be renegotiated but options cant, so the scale doesn’t shift accordingly; to, for example, 1x comp and 1x equity. How can the shareholders in the company not overextend their cash capability, but without over-diluting investor stake? Have you any experience where a balance was made to make both investors and early hires content?

A: I don’t think this is a reasonable concern for the founders to take. Specifically, the reason the early employee is willing to make the trade discussed is because he is taking the risk that the financing isn’t going to get raised in any reasonable period of time.

One way to manage this is to set expectations with the person getting this trade that it will last for a specific period of time (say – one or two years.)  This addresses the “hey – we raised money faster than expected.”  Alternatively, you can put a structure in place where if compensation goes up in some period of time a certain amount of the equity granted gets canceled.  I personally don’t like these approaches because they both (a) create weird incentives and (b) generate additional complexity.  If someone is willing to take a risk like this early one, reward them!


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Compensation in a very early stage company

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