Compensation In Venture Backed Startups

Venture-Backed Startup Compensation Overview

Who we are • Tim Wenzel • Marlowe Rondoni • Saar Gur

Agenda • • • • •

Common questions and surprises Options overview: A short test Options overview: Getting rich Expectations: Market data Negotiating an offer

Not covering • How to evaluate a start-up • Private companies that are not venture-backed (e.g., partnerships) • Compensation as a founder or pre-VC funding

Question 1 • Should I expect a serious pay cut when I join a venturebacked start-up?

Common questions and surprises

Question 2 • What should I expect in an offer letter?

Common questions and surprises

Question 3 • Can I expect an annual bonus? An increase in salary every year? More options?

Common questions and surprises

Question 4 • What is the compensation range for a recent MBA? Salary? Equity?

Common questions and surprises

An option is "in the money" if: a) It is vested and, therefore, exercisable. b) Its price is less than the stock's market value. c) Its price is greater than the stock's market value.

An option is "in the money" when its price is less than the stock's market value. Conversely, if the market value is less than the option price, the option is said to be "underwater.”

Options Overview - Test

With nonqualified stock options, taxes are triggered: a) b) c) d)

When the options are granted When the options are exercised When the stock is sold Both b and c

Usually you are required to pay ordinary income tax on the difference, or "spread," between the grant price and the stock's market value when you purchase ("exercise") the shares. Any subsequent appreciation in the stock is taxed at capital gains rates when you sell. Options Overview - Test

Employee stock options: a) Allow you to buy a certain number of shares of your employer's stock at a pre-set price within a certain time frame. b) Require you to buy a certain number of shares of your employer's stock at a pre-set price within a certain time frame. c) Prohibit you from buying any stock in your employer except at certain times. The pre-set price is known as the "grant," "strike," or "exercise" price. The time frame is known as the "exercise" period. Options Overview - Test

With incentive stock options, taxes are triggered: a) b) c) d)

When the options are granted When the options are exercised When the stock is sold It depends

The tax is deferred until you sell the stock, at which point the entire option gain (the initial spread at exercise plus any subsequent appreciation) is taxed at long-term capital gains rates, provided you meet certain holding period requirements (if you sell at least two years after the option is granted and at least one year after you exercise). Otherwise, the options are taxed as nonqualified stock options. Options Overview - Test

Which stock options may be granted at discounts to their then market prices? a) Nonqualified stock options b) Incentive stock options c) Both ISOs must be granted at prices equal to or greater than the stock's then market value. NSOs can be granted at a discount. Another unique feature of nonqualified options is that they can be transferred to children and charity, plan permitting.

Options Overview - Test

It is prudent to exercise your options early when: a) You have a lot of faith in your employer's prospects and, therefore, its stock. b) You are overdosing on company stock. General rule is to keep no more than around 10% of your portfolio in company stock. A quick way to estimate the value of your options is to calculate how much you would pocket after exercising them and immediately selling the shares, ignoring taxes for simplicity. If you are bullish on your company's stock, conventional wisdom holds that you should sit on your options until they are about to expire to allow the stock to appreciate and, therefore, maximize your gain. Options Overview - Test

How did you do? • In general, you’ll be granted new hire options (ISOs) when you join a start-up • Boards normally set guidelines for new hire grants • Typical is an immediately exercisable grant with 10 year expiration, vesting over 4 years (first year cliff, monthly thereafter) • Follow-on grants are common including performance and/or promotion grants, re-ups before IPO, new grants to ensure employees have unvested shares outstanding • Valuing your grant can be tricky – you’ll usually be told (and it is OK to ask) how many fully diluted shares are outstanding and the strike price. Not much more. Options Overview - Test

Question 1 • Can I expect more options beyond my initial grant?

Options Overview

Question 2 • Do I need to have cash on hand to buy my options when I join a company?

Options Overview

Question 3 • What happens if I get fired? If I leave? Can the company buy my shares?

Options Overview

Question 4 • How to I evaluate an option package?

Options Overview

Getting rich with options - Example • Grant of 50,000 options at exercise price of $0.10 • 10mm shares outstanding, fully diluted ▫ 50,000/10mm = o.5% ownership • 25% dilution before exit • Exit valuation

Getting rich: Options Overview

Getting rich with options - Example Exit

%

Proceeds

$50m

0.375

$187.5k

$100m

0.375

$375.0k

$500m

0.375

$1.9m

$1b

0.375

$3.8m

$10b

0.375

$37.5m

1. 0.50% ownership with 25% dilution expected = 0.75*0.50% = 0.375% at time of exit 2. Proceeds exclude the money used to purchase shares at the time of exercise and taxes 3. Excludes any liquidation preference (assumes conversion to common) Getting rich: Options Overview

Market data • The IPO market is not good ▫ 256 IPOs in 2007 worth $56b ▫ 46 IPOs in 2008 worth $28b ($10b if you exclude Visa) ▫ 1 IPO in 2009 worth $720m

• The M&A market is not great ▫ 1 venture-backed M&A transaction over $1bn in 2008 ($1.4bn - Equalogic) ▫ A handful of other private transactions in 2008: Billmelater ($945m), Bebo ($860m)

Expectations: Market data

Market data • Current start-ups are hiring. . .slowly and carefully, under mandate to conserve cash • What to expect? Competitive Base salary; not much other cash unless VP ▫ Manager level: $80k to $100k ▫ Director level: $100k to $120k ▫ VP level: $120k t0 $150k • MBAs usually found in Bus Dev, Product Mgt, Marketing + Specialty Roles in R&D/Product Development/Strategy Expectations: Market data

Negotiating an offer • Some perspectives from a 100 interviews and offers • Negotiable ▫ Salary (note with IPO market, hiring managers see more emphasis on cash and ability to pay it) ▫ Time off (asking for bump on service tier) ▫ Hours in office ▫ Options • Typical package beyond salary and options ▫ Health and welfare benefits (medical, dental, vision, life, ltd) ▫ 401k but matching not likely ▫ 3wks PTO; some vacation/sick combinations ▫ Still high tech traditions of free food, considerations for commute/parking expense. . .but massages, onsite childcare/gyms seem to be fading fast

Additional Resources • Salary information: ▫ www.jobnob.com ▫ www.payscale.com ▫ www.glassdoor.com

• CES/CMC