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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 venture-
backed 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) When the options are granted
b) When the options are exercised
c) When the stock is sold
d) 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) When the options are granted
b) When the options are exercised
c) When the stock is sold
d) 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