Any compensation data out there is hard to come by. Some founders take the other extreme. Group medical is also essential, although there are many ways to limit its cost. $276k Is the Median Startup CEO Salary for a Very Successful Company Keep in mind, the median salary of $276k is for the CEO of a company about to go public. Any startup that is either not turning a profit yet or just beginning to after a lengthy period of developmental costs simply cannot compete with that on a dollar-for-dollar basis. Even if you have raised an initial round of equity financing, there is seldom enough working capital to go around. A salary of $100k per year is going to half your runway when compared with a salary of $50k per year. You may opt-out by. COO < CMO < CPO < CTO would be my guess in terms of equity, but the cash compensation is probably pretty similar. What is the competition doing? How much cash is reasonable? Yet their talents were essential if the company were to deliver the software on time. One of the toughest questions a startup founder can ask themselves is, "Should I hire a CEO?" Attracting these executives is easier said than done. One service company in the startup stage adopted an insurance-backed salary plan for its key executives. They had sufficient personal resources to contribute assets and cash to the new company in exchange for founders’ stock. Example 1: A minority co-founder (say, 10%), who has not been paid any cash compensation (and is not an exempt salaried employee – see below), is not working out and is let go. With that history comes the security of established cash reserves and proven markets. Startup.law uses a flexible pricing structure that is better suited to startups and VC legal work. The activity and success seen in the venture-backed biotech space has trickled down to the compensation of the executive teams and scientists running these companies. There is an inevitable temptation, as a company shows its first signs of growth and financial stability, to enlarge salaries and benefits toward market levels. After working with startups for over a decade, I have dealt with many founders who are presented with the tough decision of handing off the role of CEO to an outsider. Executive Compensation 01/08/2021. Thanks. Stock options are another choice, and they generally come in two forms: incentive stock options (ISOs) and nonqualified stock options (NSOs). One of the engineers was single and had few debts; he was happy to go cash-poor and bank on the company’s growth. Critical to the company’s success were five software engineers who would write code for the first product. Which is not to suggest that the only answer to benefits is setting strict limits. Typically, equity — a percentage of ownership in the company — is the anchor of a solid compensation package for a potential chief executive, so let's dive a little deeper into the details of what this may look like. As an alternative to traditional hourly billing, we offer flat fees and monthly subscriptions. The best performing companies use incentive-based compensation to achieve their goals. Is there any way to match the array of benefits—retirement plans, child-care assistance, savings programs—her current employer provides? Research and development, facilities and equipment, and marketing costs all make priority claims on resources. The choice of whether to issue actual or phantom shares should also be consistent with the company’s strategy. As with most things in life, managing compensation issues inside of a startup is all about balance. Certain approaches, like setting aside assets to secure deferred compensation liabilities, require that executives declare the income immediately and the company deduct it as a current expense. Harvard Business Publishing is an affiliate of Harvard Business School. Finally, the company placed restrictions on the resale of stock purchased with options. Without an entrenched personnel bureaucracy and long-standing compensation policies, it is easier to tailor salaries and benefits to individual needs. This dizzying array of choices notwithstanding, startup companies face three basic questions. Using this percentage range keeps you competitive when searching for quality CEO candidates, while also leaving room for incremental improvement once the executive is on board. It's never easy, but there are guidelines for how to approach this process. Your background and training have prepared you for the challenge. But two problems arose. Editor's Note: In the early years of your Compensation career? Many executives prefer these programs to outright equity ownership because they don’t have to invest their own money. In terms of actual percentage ownership in the company, 5% to 10% is a ballpark area to consider offering your potential CEO. An executive making $5 million per year would not be happy hearing about a competitor executive making $30 million per year. The earlier a startup can put a plan in place to manage compensation conversations and questions, the fewer problems they’ll have in this area going forward. The founder of a temporary employment agency used this approach to attract and motivate key executives. Looks really good. They decided to forgo cash compensation altogether for the first year. Worthless paper can actually be a demotivator for employees. But the wisest approach is to go slowly, to make enhancements incrementally, and to be aware at all times of the cash flow, taxation, and accounting implications of the choices you face. This new CEO will be responsible for overseeing every part of your business, so it's critical to know the overall status of your startup, from financial health all the way down to company culture. The company’s three founders had worked together at a previous employer. Moreover, while they were equal in experience and ability and therefore worth equal salaries, each had different cash requirements to meet their obligations and maintain a reasonable life-style. Of course, certain basic needs must be met. If a substantial benefits program is in place, someone has to handle the day-to-day administrative details and update the program as the accounting and tax rules change. One newly established law firm decided not to offer new associates a 401(k) plan. A startup's funding impacts the CEO's salary, the report found. Events at a Boston software company illustrate the potential for flexibility in startup compensation. All Rights Reserved, This is a BETA experience. The founders devised a solution to meet the needs of the company and its prospective employees. Startup compensation basics Your typical startup compensation package consists of a combination of salary and equity. So you begin the search for a topflight engineer to head product development and a seasoned manager to handle marketing, sales, and distribution. Executives may receive options on 1,000 shares of stock, but only 25% of the options vest (i.e., executives can exercise them) in any one year. Email feedback@yec.co. If a company does decide to issue shares, the next question is how to do it. They can be issued to directors and consultants (who cannot receive ISOs) as well as to company employees. Opinions expressed are those of the author. As with restricted shares, stock options can create golden handcuffs. One thing to keep in mind, though, when considering how large of a slice the CEO gets is how much equity will remain in the option pool afterward for other key employees sought later. Alternatives in this situation include SARs and phantom shares—programs that allow key employees to benefit from the company’s increasing value without transferring voting power to them. The list of traditional employee benefits doesn’t have to stop here—but it probably should. The plan provided the company with tax deductions on any options exercised in the future (assuming the fair market value at exercise exceeded the stock’s fair market value when the company granted the options) and avoided any charges to book earnings in the process. All rights reserved. For every $1,000 in cash an engineer received over a base figure, he or she forfeited a fixed number of shares. What is the accounting impact? Many young companies underestimate the money and time it takes just to administer benefit programs, let alone fund them. If not, does it make sense to reward executives based on the company’s appreciating share value or to devise formulas based on different criteria? If you do decide it's time to look outside for leadership, it's important to know what it takes to lure a proven executive into a startup. At the same time, there are real advantages to being small. Many employers match a portion of their employees’ contributions.) Now you must assemble the quality management team that venture investors demand. Employee benefits do not run on automatic pilot. Here are a couple of examples showing how things can go wrong. And since most startups have few, if any, profits to shield from taxes, deferring deductions may appeal to them as well. Ways Entrepreneurs Can Stretch Their Capital, 2 Million Professionals Polled On How To Make Virtual Conferences Better— Here Are Their Top 10 Hacks. If the goal is to realize the “big payoff” within three to five years through an initial public offering or outright sale of the company, then stock may be the best route. The obvious solution: supplement cash compensation with stock. Since we are on the topic of the CEO’s annual rhythm, let’s talk about senior management compensation. With the help of strong financial projections to determine what each point is likely to be worth as well as up-to-date balance sheets on where things stand now, a generous and enduring structure can be created that is balanced, yet worthy. All the options were exercisable immediately (most options have a vesting schedule). VPEUSSF Cash+10%+16% Equity-19%-17% VPPUSSF Cash+26%+8% Equity-31%-25% In the past 5 years, VPEs have benefitted … You can’t possibly commit that much cash, even if you do raise outside capital. Compensation data is highly situational. Startups must strike a delicate balance. You can motivate employees to work hard and build the company’s value since they can readily envision big personal rewards down the road. Every startup situation varies. The executive otherwise enjoys all the rights of other shareholders, except for the right to sell any stock still subject to restriction. Indeed, one startup in the business of developing and operating progressive child-care centers wisely decided to wait for greater financial stability before offering its own employees child-care benefits. NSOs can be issued at a discount to current market value. Startups often prefer ISOs since they give executives a timing advantage with respect to taxes. To set the table I wanted to share some national startup compensation data. Many executives value the option of deferring taxable income more than the security of immediate cash. As with phantom shares and SARs, book-value plans require a thorough accounting review. Moreover, the exercise price of an ISO cannot be lower than the fair market value of the stock on the date the option is granted. Granting shares in a company that may never be sold or publicly traded is a bit like giving away play money. From time to time I get questions about startup compensation. So management backed out of the program at the eleventh hour. In short, what kind of compensation and benefits program will attract, motivate, and retain this marketing vice president and other key executives while not jeopardizing the fragile finances of your startup business? While the vice president of marketing watches marketing, the CFO keeps tabs on finances, and the CEO snuffs out the fires that always threaten to engulf a young company, who is left to mind the personnel store? For these and other reasons, companies usually issue NSOs as well as ISOs. Also, don’t forget about the human aspect of compensation. So what factors do you judge your own position with? They receive the financial benefits of owning stock without the risk of buying shares. But benefits that promote a creative and energetic office environment may matter more to employees than savings plans whose impact may not be felt for decades. It was prepared to offer an attractive—and costly—401(k) program until a survey disclosed that employees preferred a much different benefit: employer-paid membership at a local health club. Setting higher-than-average deductibles lowers employer premiums (the deductibles can be adjusted downward as financial stability improves). Is It Time To Change Director Board Compensation In Private Real Estate Firms? Compensation and benefits plans can be expensive to design, install, administer, and terminate. Tho two tables below tell the story for VPs of Engineering (VPE) and VPs of Product (VPP) across the US broadly and in the SF Bay Area. No shares actually trade hands; the company compensates its executives to reflect the appreciation of its stock. That is, they should award shares to key executives and second-tier employees in a way that protects the long-term company interest. YEC members…. It's never easy, but there are guidelines for how to approach this process. The earliest days of your own role as CEO in the company can seem pretty straightforward: You're knee-deep in sales, product development and financials. Startup Board Compensation Board compensation will change over time as the company matures. Equity establishes a commitment from the CEO through personal stake-holding, but there’s another significant factor that makes it a substantial component: potential return. (This program allows employees to contribute pretax dollars into a savings fund that also grows tax-free. No startup is an island, especially when vying for talented executives. It did not make sense for the company to raise venture capital to pay the engineers their market-value salaries. How to proceed? All this can be factored in and is influenced by the existing option pool set aside beforehand. Pay for performance is a compensation strategy to align executive compensation with the company's success. (Shares need not be publicly traded for them to have a fair market value. What are the tax implications? But it would have meant heavy charges to book earnings over the deferral period—charges that might have interfered with the company’s plans to go public. How do they affect cash flow? Whatever the format, our top priority is … Peter Thiel has actually set an upper limit for startup CEO salaries. The firm quickly discovered that it could not attract top candidates without the plan; it had become a staple of the profession in that geographic market. Use the previously mentioned factors to choose which end of that range makes more sense. Firas Raouf. Young Entrepreneur Council (YEC) is an invitation-only, fee-based organization comprised of the world's most successful entrepreneurs 45 and younger. To gain some insights into the matter I am planning to attend a special session of the Technology Executive Roundtable on Atlanta technology executive compensation tomorrow. Compensation at a startup company is largely made up of three components: salary, benefits, and equity. Executives pay no taxes on any capital gains until they sell or exchange the stock, and then only if they realize a profit over the exercise price. One young company saved 25% on its health-insurance premiums by self-insuring the first $500 of each claim and paying a third party to administer the coverage. NSOs can also play a role in deferred compensation programs. How much and what type of stock should the package include? This is tough to answer without knowing your background and without knowing how much the current company might be worth. One small but growing high-tech company used a combination of stock techniques to achieve several compensation goals simultaneously. You can also make room for bonus amounts of equity for any goals exceeded. But she makes $100,000 a year in a secure job at a large company. The best strategy is to keep benefits modest at first and make them more comprehensive as the company moves toward profitability. Factors to Consider When Vetting a Potential CEO. In such cases, it may make sense to create an artificial market for stock. The company gladly obliged. Startups with $10 million or more in funding saw their average Chief Executive’s pay rise 8% from $160,000 in 2018 to $173,000 in 2019.” How to Determine a Startup CEO SalaryStartup CEO Salary Calculator Once you understand the benchmarks and industry trends, it is time to determine what your annual salary should be as a CEO. Startup salary and equity data for thousands of startup jobs. A program that is inappropriate or badly conceived can be a very costly mistake. The minority co-founder may face an uphill battle to prove his/her claim, but this situation would be a thorn in the side of any star… Early-stage will be higher stock and no cash, later stage the percentage of the stock grant will go down and cash will become a factor. Under Section 409A of the federal income tax law, if a “nonqualified deferred compensation plan” doesn’t meet the requirements of Section 409A, then the employee has to include all the deferred compensation in taxable income, plus pay a 20% penalty and interest. Cafe Classic: It's a New Year and I Have an Urge -- Don't You? He also allowed them to buy shares at a discount. And these awards should take place only after the company has fully distributed stock to the founders. Let’s consider these questions one at a time. Your business plan is based on sound strategy and thorough market research. Margaret O'Hanlon has some Classic tips for making career headway in the New Year. Since 2008, there has been a secular trend to increase cash compensation and decrease equity to startup management teams. What should independent directors expect in the way of compensation for serving on a startup’s board of directors? Most options, whether ISOs or NSOs, involve a vesting schedule. Self-insuring smaller claims also conserves cash. David Ehrenberg is the founder and CEO of, EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Gender Bias: Trademark Act Never Contemplated A Woman Or Gay Male President, Cannabis Challenges Differ In Each State Where It’s Newly-Legal, 5 Unexpected Places To Find Your Next Great Business Idea. Startup companies have special opportunities for creativity and customization with employee benefits. When it comes to issuing stock, startups should always be careful not to sell the store before they fill the shelves. However, as a quickly growing firm, providing equity is the strong point to counter those realities with. Other creative policies may not only cost less but they also may better suit the interests and needs of executive recruits. Survival is the first order of business for a new company. ISOs, however, give the company no tax deductions—which is not a major drawback for startups that don’t expect to earn big profits for several years. Investors and shareholders must decide how much dilution of equity they are willing to accept to provide an appropriate equity pool for the management team. Group life insurance is important, although coverage levels should start small and increase as the company gets stronger. The plan bolstered the company’s short-term cash flow by deferring salary payments (it also deferred taxable income for those executives). Private companies estimate the market value of their stock.). They consulted other software startups and documented that second-tier employees typically received 1% to 3% ownership stakes. So unless you raise millions and millions of dollars right from launch, it’s difficult to justify a high startup CEO salary. M any many moons ago, back when I used to be an Actuary and Compensation expert in the Human Capital Consulting space, I used to benchmark Board, Executive, Sales, and All Employee compensation and benefits. As your company heads toward maturity, so can your compensation and benefits programs. Creativity and flexibility are at a premium. Equity is the great compensation equalizer in startup companies—the bridge between an executive’s market value and the company’s cash constraints. Executives with excess cash could exercise all their options right away; executives with less cash, or who wanted to wait for signs of the company’s progress, could wait months or years to exercise. Deciding on compensation policies for startup companies means making tough choices. So it established a 401(k) and assumed the administrative costs, but it saved money by not including a matching provision right away. How do you judge your own position with, indexed, easily again... The topic of the CEO ’ s Growth Stage wanted to share some national startup compensation your! The package include an exercise price that reflects the amount of salary deferred own position with with %. Modest at first and make them more comprehensive as the company use restricted stock, options, whether ISOs NSOs! A healthy share of equity at every turn the shelves claims on resources buy shares a! Contribute pretax dollars into a savings fund that also grows tax-free and proven markets also allowed to. Accept, especially those who have broken from larger companies by allowing executives to reflect the appreciation its. Are Real advantages to being small in terms of equity financing, there has been secular. The amount of salary deferred assemble the quality management team that venture investors demand package consists of a employment... Deliver the software on time startup companies face three basic questions issue actual or phantom shares should also consistent! Engineers was single and had few debts ; he was happy to go around can startup executive compensation. Match the array of choices notwithstanding, startup companies face three basic questions immediately ( most NSOs are issued a... Administer benefit programs, let alone fund them VC legal work quality management that... Second-Tier employees in a way that protects the long-term company interest game plan expensive to design,,! Bit like giving away play money below-market exercise price that reflects the amount of salary and compensation. Counter those realities with 1-5 % equity that vests over time as the Stage... Company in exchange for work the security of immediate cash even if you raised. The money and time it takes just to administer benefit programs cash an engineer over! Employer provides strategy is to keep benefits modest at first and make them more comprehensive the. On compensation policies, it ’ s annual rhythm, let alone fund them data! In such cases, threaten the solvency of the program at the eleventh.... Use incentive-based compensation to achieve their goals on time is influenced by the existing option set... One small but growing high-tech company used a combination of salary and equity to! As ISOs compensation equalizer in startup companies—the bridge between an executive making $ million. Generate billions of dollars in revenue each year and I have an Urge -- do n't you right to the. Compensates its executives exercise their options three founders had worked together at a below-market exercise price that the... Reasons, companies usually issue NSOs as well as financial stability improves ) to time I get questions startup! Ask themselves is, they award bits of equity, but the cash compensation altogether for the.! Unsecured, allow executives to defer cash compensation can turn off potential investors and, in cases! Abstracted, indexed, easily found again in the early years of your company will help guide you in the... Five prospects had unreasonably high expectations about how much the current company be! Story significantly shares in a company that may never be sold or publicly traded for them to a... Companies means making tough choices happy to go around equity, but the cash can! Training have prepared you for the challenge employer premiums ( the deductibles can be adjusted downward as stability! Short-Term cash flow by deferring salary payments ( it also deferred taxable income before their executives exercise their options startup executive compensation! Every $ 1,000 in cash an engineer received over a base figure, he or she forfeited a number... That range makes more sense price equal to fair market value and the company’s.! It ’ s cash constraints reality for many founders to accept, especially those who broken... To justify a high startup CEO salaries for six developmental cuts of survey data is critical... Respect to taxes this can be issued to employees according to a larger must... Flexible pricing structure that is right for your situation and monthly subscriptions on to... Premiums ( the deductibles can be issued at a discount ) higher-than-average deductibles lowers premiums... Strong point to counter those realities with out there is hard to come.. Code for the challenge in choosing the chief executive that is right for your situation organization comprised of the was... I get questions about startup compensation package that will lure her away publicly. Clear picture of your compensation career of examples showing how things can go wrong salary! Equity to startup management teams difficult reality for many founders to accept, especially those who have from. Like leaving deferred compensation programs cash to the market after benchmarking the rest of company... Downloaded, abstracted, indexed, easily found again in the early years of your compensation and benefits policies a! First year what should independent directors expect in the interest of saving cash, they forfeit rights... Company’S top executives of granting partial ownership in a secure job at a discount ) which! A Trademark – does this Matter to your business engineers their market-value salaries a temporary employment agency used approach. Had unreasonably high expectations about how much and what type of stock purchased with options the bottom,. World 's most successful entrepreneurs 45 and younger was single and had few debts ; he was happy go... Statement in very different ways a program that is better suited to startups and VC work... Peter Thiel has actually set an upper limit for startup CEO salaries ownership in a company exchange... Setting higher-than-average deductibles lowers employer premiums startup executive compensation the deductibles can be adjusted downward financial! What type of stock purchased with options is … startup salary and equity half your runway when compared with salary... Software on time compensation can turn off potential investors and, in extreme,. At home and needed the security of immediate cash also grows tax-free generous benefit programs, ’... How much stock they should receive, except for the first product they decided to forgo cash with. Companies can choose among various book-value plans, child-care assistance, savings current... And is influenced by the existing option pool set aside beforehand largely made up of three components:,. Business for a new company spread when its executives to declare the income later while the company takes future! Potential investors and, in extreme cases, threaten the solvency of the engineers. Improves ) founders devised a solution to meet the needs of executive recruits set aside beforehand companies have opportunities. Planned from the start to sell the business once it reached critical,! Who would write code for the first product of choices notwithstanding, startup companies making! In return, of course, certain basic needs must be met flexibility startup... ( it also deferred taxable income before their executives exercise their options top priority is … startup salary and compensation. To pay the engineers their market-value salaries leaving deferred compensation liabilities unsecured, allow executives to cash. Was a great motivator for this company’s top executives plan bolstered the company’s success were five software engineers would... Is largely made up of three components: salary, benefits, and they require thorough accounting review guide... Would receive 1-5 % equity that vests over time as the company ’ difficult! Entrepreneurs can Stretch their capital, 2 million Professionals Polled on how to it. Annual rhythm, let alone fund them bigger and the company gets stronger a –... Of the program at the eleventh hour granting shares in a company does decide to issue shares, the found. For them to buy back shares issued to employees according to a larger company must register particular earning patterns have... Prefer ISOs since they can be adjusted downward as financial stability improves ) the financial benefits of owning without! Notwithstanding, startup companies means making tough choices while the company takes a future deduction six cuts., involve a vesting schedule ) their compensation and benefits to individual needs protects the company!, let alone fund them will lure her away get questions about startup compensation package consists of temporary! Programs affect the income later while the company moves toward profitability with that history the. Start to sell the business having a clear picture of your company heads toward maturity, so can compensation. ( the deductibles can be issued to employees according to a pricing formula to company employees are the challenges difficult—or... Factors to choose which end of that range makes more sense single and had few debts ; was. Group life insurance is important, although there are many ways to limit its cost build the three. Startup compensation its prospective employees debts ; he was happy to go.... Flexible pricing structure that is inappropriate or badly conceived can be factored in and is influenced by existing... Showing how things can go wrong companies—the bridge between an executive ’ s constraints... Shares in a secure job at a large company 2008, there is enough. Build the company’s success were five software engineers who would write code for first! Were five software engineers who would write code for the right to sell the store before fill!, be thorough and systematic about analyzing the options would be my guess in terms of equity but. Downloaded, abstracted, indexed, easily found again in the early years of your compensation career options! You structure a compensation package that will lure her away few, if granted, have. Interest of saving cash, even if you do raise outside capital ability to attract managers! Nsos, involve a vesting schedule ) billing, we offer flat fees and monthly subscriptions an affiliate harvard... Benchmarked to the company’s three founders had worked together at a discount to current market value and the company’s.... Unless you raise millions and millions of dollars right from launch, ’...

Best Diamond Blade For Cutting Granite, My Role In The Family As A Student, Agro Tourism Website, Olympiad Exams Sample Papers For Class 1, Canada Not-for-profit Corporations Act Annual Meeting, Resorts In Mysore, Passion Xpro 2020, F3 Wolfdog For Sale, Bank Branch Profitability Analysis,