Management’ Compensation Packages
A venture capitalist’s perspective
Each year, either when the year ends or just when it begins, compensation package’s negotiations take place. As a venture capital investor, I would like to share my perspective on:
- CEO Compensation package (founder and not founder)
- Who receives stocks options
- Role of a compensation committee
1.CEO Compensation package
Founding CEO: LOW SALARY + EQUITY COMPONENT
…. So, there are maybe periods of your life, personal situation, where I would not suggest to found a start-up!
Founding managers keep their salary below market standards, especially in early-stage companies. CEOs with ‘below-market’ salary, build lean organization and demonstrate their capacity to develop cash efficient businesses.
Then we can debate on whether or not founding CEO’s salary should include a variable part, at least when the founding CEO still owns a large part of the equity. I am personally in favour of a 10–15% variable part in companies mature enough to be able to define clearly KPIs to achieve.
Equity component is the part for which Founding CEOs rightfully fight. Their ownership is an important item for investors when assessing risk. It should reflect a community of interest between management team and investors.
Founding CEO owns shares and obviously will be diluted at each financing rounds. The more capital efficient he is when running his business, the less dilution he will have. Granting stocks to a founding CEO is exceptional. When this happens, stocks are not allocated to compensate the founder’s dilution but to re-incentivize the founding CEO, as a key person up to the exit.
Externally recruited CEO: HIGHER SALARY THAN FOUNDING CEO + STOCKS
… Not too high either! As per France Digitale /EY 2016 Survey, average magnitude between the lowest and the highest salary is below 2,4x for French start-ups.
You want to hire the best and it is most likely that if you recruit someone with a strong track record, he will ask for a good salary. So, you need to make sure that you can afford her/him and that the candidate shares the company’s risk. As previously discussed, an ‘overpaid’ CEO will recruit an ‘overpaid’ team.
Variable component and stock option plan, are a way to create community of interest between management team members and limit cash impact!
Variable part can go up to 50% for non-founding managers with quantitative and qualitative parts. For quantitative parts (representing between 75%-100% of the variable part), no more than 3 targets to achieve and based on budget with minimum thresholds under which part or no variable part is earned. For the qualitative parts (0–25% of variable part), you should also define 1 or 2 targets to be reached.
Stock allocation, which will be in most cases, lower than what the founding CEO owns. He was not the founder, the one who had the idea. The CEO receives a number of stocks (and not a percentage of the company!) when hired and potentially over time.
- Push back on severance package !…not for start-ups!
- Discuss potential investment in the company, a good way to demonstrate the new CEO’s trust in the company’s success
2. Who receives stock options?
TOP TALENT: absolutely key to create value until the exit
Stock-based compensation are used by start-ups to attract and retain top talent with the hope that their contribution will increase the exit price for the company. This complement to traditional remuneration should be restricted to team members whom you absolutely need to create the value, who will be hard to recruit (scarcity of talents) or who are too expensive for the company, should you solely propose a salary.
In their vast majority, stocks will be granted to ‘key people’. However, sharing the value creation is the founding basis for start-ups. Stocks can also be used to create a team spirit. So you may want to dedicate a limited envelop of stocks to employees. But make sure that everyone is aware of what stocks mean. Stocks are risky, may never materialized so they are different from an annual bonus!
Ventech was the fortunate investor of StickyADS.tv sold in 2016 to Comcast (US) and we had a long list of stock option holders on the captable!…the number of employee shareholders represented more than 80% of the total number of shareholders.
3. Role of a Compensation Committee?
YES, a Compensation Committee is worth setting up, not an administrative burden !
Even when the investors have developed excellent working relationship with management teams, discussions on remuneration can be very emotional. My suggestion is to limit the audience to the CEO, one investor’s representative, eventually adding an independent board member.
You may decide to create a specific committee but whether or not you structure a specific committee, it is healthy to have the discussion on remuneration once a year. It gives you the opportunity to work on a mid-term plan which details the career development of your current team and anticipate your recruitment needs.
Then as per numbers on salaries themselves, you may want to check the nice initiative of Buffer’s Transparent Salary Calculator.
Congrats to this company for its transparency! And thanks to Jean-Daniel Guyot from TrainLine (former Captain Train) who mentioned it to me!