Equity Compensa0on Rules of thumb, guidelines, conven4onal wisdom & other considera4ons. Frank Demmler
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1 Equity Compensa0on Rules of thumb, guidelines, conven4onal wisdom & other considera4ons Frank Demmler
2 Founders Pie Ge:ng started correctly is cri0cal!
3 Founders Pie Conven4onal Wisdom Count the number of founders Divide the number of founders into 100 That s the fair percentage for each founder Founders Percent % % % Frank Demmler 2015 All Rights Reserved 3
4 Founders Pie Conven0onal wisdom is wrong, and could be fatal Frank Demmler 2015 All Rights Reserved 4
5 Think about 2 founders, what if? One jumps into the company & the other keeps his job, helping at night & on weekends Company is doing well. One founder happy with current income, the other wants to change the world. Company needs money. One founder puts it in, the other doesn t. Frank Demmler 2015 All Rights Reserved 5
6 Think about 2 founders, what if? One jumps into the company & the other keeps his job, helping at night & on weekends Company is doing well. One founder happy with current income, the other wants to change the world. Company needs money. One founder puts it in, the other doesn t. Frank Demmler 2015 All Rights Reserved 6
7 Slicing the Founders Pie Frank Demmler
8 Slicing the Founders Pie How much stock ownership should go to whom? Share the wealth with those who help to create the value and thus the wealth Realize a harvest of at least 5 to 10 0mes the original investment Make sure the company prospers and grows thus crea0ng a huge, shared pie Frank Demmler 2015 All Rights Reserved 8
9 Distribu0on Issues Differen0a0on Reward system recognizes differences in contribu0ons among team members Performance Reward is a func0on of performance (as opposed to effort) Flexibility Reward system acknowledges and accounts for changes in contribu0ons of team members Frank Demmler 2015 All Rights Reserved 9
10 Considera0ons of Value Contributions in certain areas are of particular value to a venture. Idea Business plan preparation Skills, experience, track record, or contacts Commitment and Risk Responsibility Frank Demmler 2015 All Rights Reserved 10
11 Stock- Ves0ng Agreement Stock- ves0ng agreement agreement between venture and team member used to guard against the event that some por0on of the stock has been earned and some por0on will remain unearned, as when a team member quits or dies; the venture places the stock purchased by team members in escrow to be released over a two- or three- year period Frank Demmler 2015 All Rights Reserved 11
12 Stock- Ves0ng Agreement Fosters longer- term commitment to the success of the venture Provides a method for a civilized, no- fault corporate divorce if things do not work out Establishes a period of years, oden four or more, where founding stockholders can earn out their shares Frank Demmler 2015 All Rights Reserved 12
13 Founder Rela0ve Contribu0on Absolute Scores (1-10) Weight Founder 1 Founder 2 Founder 3 Founder 4 Idea Business Plan Domain Expertise Commitment & Risk Responsibilities Frank Demmler 2015 All Rights Reserved 13
14 Founder Rela0ve Contribu0on Weighted Scores (1-10) Founder 1 Founder 2 Founder 3 Founder 4 Idea Business Plan Domain Expertise Commitment & Risk Responsibilities Total Points % of Total 100.0% Frank Demmler 2015 All Rights Reserved 14
15 Suppose: University Spinout 4 founders Inventor senior faculty, won t leave the university Business guy (MBA?) jumps in and responsible for ge:ng things done Post- doc knows how to make the technology work, jumps into the company Lab tech happened to be in the right place at the right 0me Frank Demmler 2015 All Rights Reserved 15
16 Founder Rela0ve Contribu0on Absolute Scores (1-10) Weight Founder 1 Founder 2 Founder 3 Founder 4 Idea Business Plan Domain Expertise Commitment & Risk Responsibilities Frank Demmler 2015 All Rights Reserved 16
17 Founder Rela0ve Contribu0on Absolute Scores (1-10) Weight Founder 1 Founder 2 Founder 3 Founder 4 Idea Business Plan Domain Expertise Commitment & Risk Responsibilities Frank Demmler 2015 All Rights Reserved 17
18 Founder Rela0ve Contribu0on Absolute Scores (1-10) Weight Founder 1 Founder 2 Founder 3 Founder 4 Idea Business Plan Domain Expertise Commitment & Risk Responsibilities Frank Demmler 2015 All Rights Reserved 18
19 Founder Rela0ve Contribu0on Weighted Scores (1-10) Founder 1 Founder 2 Founder 3 Founder 4 Idea Business Plan Domain Expertise Commitment & Risk Responsibilities Total Points % of Total 33.0% 44.2% 16.5% 6.2% 100.0% Frank Demmler 2015 All Rights Reserved 19
20 Founder Rela0ve Contribu0on Weighted Scores (1-10) Founder 1 Founder 2 Founder 3 Founder 4 Idea Business Plan Domain Expertise Commitment & Risk Responsibilities Total Points % of Total 33.0% 44.2% 16.5% 6.2% 100.0% Frank Demmler 2015 All Rights Reserved 20
21 Rules of Thumb Frameworks for thinking about equity compensa0on
22 Perspec0ves Timing issues Today At exit Somewhere in between Incen0ve value Percentages Value Parity/fairness Frank Demmler 2015 All Rights Reserved 22
23 From 30,000 feet At the end of the day, founders and management will own 20% - 33% of the company (at the 0me of an exit) During the early stages of the company, stock op0on pools are likely to be in the 10% - 25% range. Pools are replenished with each round. Making people whole is not automa0c. Frank Demmler 2015 All Rights Reserved 23
24 Small Piece of a Large Pie What does that mean?
25 The Way It s Supposed to Work Founders Option Pool 1 Option Pool 2 Option Pool 3 Investor 1 Investor 2 Investor 3 IPO Total Pre-financing value Post-financing value Investment Price per share Start Seed Round Round 2 Round 3 IPO Shares % Shares % Shares % Shares % Shares % 100, % 100, % 100, % 100, % 100, % 66, % 66, % 66, % 66, % 111, % 111, % 111, % 28, % 28, % 166, % 166, % 166, % 166, % 444, % 444, % 444, % 458, % 458, % 344, % 100, % 333, % 888, % 1,376, % 1,720, % $ 1,000,000 $ 5,000,000 $ 20,000,000 $ 150,000,002 $ 2,000,000 $ 10,000,000 $ 30,000,000 $ 187,500,002 $ 1,000,000 $ 5,000,000 $ 10,000,000 $ 37,500,000 $ $ $ $ Value of Founders' Share $ 600,000 $ 1,125,000 $ 2,179,688 $ 10,898,438 x Frank Demmler 2015 All Rights Reserved 25
26 Frank s Rules of Thumb when considering a single employment offer CEO rainmaker 8.0%- 12.0% COO the business guy 4.0%- 8.0% VPs 1-2 key players 2.0%- 3.5% VPs Other 1.0%- 2.5% CFO supply & demand 0.5%- 1.0% Frank Demmler 2015 All Rights Reserved 26
27 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CEO - Founder 100k-250k 200k 0-100k 5-20% 9.0% President / COO - Founder 100k-200k 175k 0-50k 3-8% 5.0% CFO - Founder 100k-170k 150k 0-20k 1-5% 2.5% CTO - Founder 120k-200k 160k 0-30k 2-10% 4.0% VP Engineering - Founder 150k-185k 160k 0-30k 1.5-5% 2.5% VP Sales - Founder 175k-200k 175k 0-60k 1.2-5% 3.5% VP Business Dev - Founder 150k-180k 170k 0-35k 1.5-5% 3.0% VP Marketing - Founder 140k-180k 160k 0-30k 1.3-7% 3.0% Founders Frank Demmler 2015 All Rights Reserved 27
28 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CEO - Founder 100k-250k 200k 0-100k 5-20% 9.0% President / COO - Founder 100k-200k 175k 0-50k 3-8% 5.0% CFO - Founder 100k-170k 150k 0-20k 1-5% 2.5% CTO - Founder 120k-200k 160k 0-30k 2-10% 4.0% VP Engineering - Founder 150k-185k 160k 0-30k 1.5-5% 2.5% VP Sales - Founder 175k-200k 175k 0-60k 1.2-5% 3.5% VP Business Dev - Founder 150k-180k 170k 0-35k 1.5-5% 3.0% VP Marketing - Founder 140k-180k 160k 0-30k 1.3-7% 3.0% Founders Frank Demmler 2015 All Rights Reserved 28
29 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CEO - Non-Founder 180k-260k 225k 0-150k 3-7% 5.0% President / COO - Non-Founder 150k-230k 200k 0-75k 1-3% 1.5% CFO - Non-Founder 100k-200k 160k 0-50k % 1.0% CTO - Non-Founder 125k-200k 160k 0-50k 0.5-2% 1.0% VP Engineering - Non-Founder 150k-200k 175k 0-50k % 1.0% VP Sales - Non-Founder 160k-200k 175k k % 1.0% VP Business Development - Non- Founder 150k-190k 175k 0-70k % 0.75% VP Marketing - Non-Founder 160k-190k 175k 0-50k % 0.8% Non-Founders Frank Demmler 2015 All Rights Reserved 29
30 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CEO - Non-Founder 180k-260k 225k 0-150k 3-7% 5.0% President / COO - Non-Founder 150k-230k 200k 0-75k 1-3% 1.5% CFO - Non-Founder 100k-200k 160k 0-50k % 1.0% CTO - Non-Founder 125k-200k 160k 0-50k 0.5-2% 1.0% VP Engineering - Non-Founder 150k-200k 175k 0-50k % 1.0% VP Sales - Non-Founder 160k-200k 175k k % 1.0% VP Business Development - Non- Founder 150k-190k 175k 0-70k % 0.75% VP Marketing - Non-Founder 160k-190k 175k 0-50k % 0.8% Non-Founders Frank Demmler 2015 All Rights Reserved 30
31 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CEO - Founder 100k-250k 200k 0-100k 5-20% 9.0% CEO - Non-Founder 180k-260k 225k 0-150k 3-7% 5.0% President / COO - Founder 100k-200k 175k 0-50k 3-8% 5.0% President / COO - Non-Founder 150k-230k 200k 0-75k 1-3% 1.5% Founders vs. Non-Founders Frank Demmler 2015 All Rights Reserved 31
32 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CEO - Founder 100k-250k 200k 0-100k 5-20% 9.0% CEO - Non-Founder 180k-260k 225k 0-150k 3-7% 5.0% President / COO - Founder 100k-200k 175k 0-50k 3-8% 5.0% President / COO - Non-Founder 150k-230k 200k 0-75k 1-3% 1.5% Founders vs. Non-Founders Frank Demmler 2015 All Rights Reserved 32
33 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CTO - Founder 120k-200k 160k 0-30k 2-10% 4.0% CTO - Non-Founder 125k-200k 160k 0-50k 0.5-2% 1.0% VP Engineering - Founder 150k-185k 160k 0-30k 1.5-5% 2.5% VP Engineering - Non-Founder 150k-200k 175k 0-50k % 1.0% VP Sales - Founder 175k-200k 175k 0-60k 1.2-5% 3.5% VP Sales - Non-Founder 160k-200k 175k k % 1.0% VP Business Dev - Founder 150k-180k 170k 0-35k 1.5-5% 3.0% VP Business Development - Non- Founder 150k-190k 175k 0-70k % 0.75% VP Marketing - Founder 140k-180k 160k 0-30k 1.3-7% 3.0% VP Marketing - Non-Founder 160k-190k 175k 0-50k % 0.8% Founders vs. Non-Founders Frank Demmler 2015 All Rights Reserved 33
34 Per Brad Feld, askthevc blog, Title Cash Comp Cash Median Bonus % Co Equity % Co. Median CEO - Founder 100k-250k 200k 0-100k 5-20% 9.0% CEO - Non-Founder 180k-260k 225k 0-150k 3-7% 5.0% President / COO - Founder 100k-200k 175k 0-50k 3-8% 5.0% President / COO - Non-Founder 150k-230k 200k 0-75k 1-3% 1.5% CFO - Founder 100k-170k 150k 0-20k 1-5% 2.5% CFO - Non-Founder 100k-200k 160k 0-50k % 1.0% CTO - Founder 120k-200k 160k 0-30k 2-10% 4.0% CTO - Non-Founder 125k-200k 160k 0-50k 0.5-2% 1.0% VP Engineering - Founder 150k-185k 160k 0-30k 1.5-5% 2.5% VP Engineering - Non-Founder 150k-200k 175k 0-50k % 1.0% VP Sales - Founder 175k-200k 175k 0-60k 1.2-5% 3.5% VP Sales - Non-Founder 160k-200k 175k k % 1.0% VP Business Dev - Founder 150k-180k 170k 0-35k 1.5-5% 3.0% VP Business Development - Non- Founder 150k-190k 175k 0-70k % 0.75% VP Marketing - Founder 140k-180k 160k 0-30k 1.3-7% 3.0% VP Marketing - Non-Founder 160k-190k 175k 0-50k % 0.8% Frank Demmler 2015 All Rights Reserved 34
35 End- Game Arithme0c Who owns what at liquidity event? Per Don Dodge, The Next Big Thing Blog Title % Equity Number Total Equity CEO 4.00% % Vice President 1.00% % Director 0.50% % Manager 0.25% % Others 0.05% % 20.00% Frank Demmler 2015 All Rights Reserved 35
36 Other Rules of Thumb Directors 0.50% 1.00% Advisors 0.25% 0.50% Founder ves0ng 25% at closing + 1 / 36 per month for 3 years Ves0ng accelera0on at change of control Management- friendly: double trigger Investor- friendly: no accelera0on Frank Demmler 2015 All Rights Reserved 36
37 Considera0ons Founders vs. Non- Founders Stock op0ons Non- qualified op0ons Incen0ve stock op0ons NQO can be dangerous Tax on difference between exercise price & FMV Price can go down ader purchase oops!!! Stock op0ons vs. restricted stock Pre- financing vs. post- financing Within the company vs. compared to other companies Frank Demmler 2015 All Rights Reserved 37
38 Exercise Price serious tax & securi4es issues related to what follows Exercise price is 0ed to the company valua0on Preferred stock is superior to common stock Preferred stock share price should be higher than common stock The difference between common stock and preferred stock diminishes over 0me & as commercial trac0on takes hold Common may be as low as 10% of preferred Frank Demmler 2015 All Rights Reserved 38
39 Other Clichés with some elements of truth Focus on the share price. As long as it s going up, you re OK. Cosme0cs mauer. Op0on grants of tens- of- thousands of shares can be persuasive, even if the actual value is miniscule. It is the CEO s job to sell the vision. Candidates must be excited about opportunity and their role in realizing it. Compensa0on is secondary. Frank Demmler 2015 All Rights Reserved 39
40 Final thoughts Budget your equity distribu0on over a reasonable 0me frame Don t do anything without strong professional assistance Develop a network of mentors and advisors who can help you design something appropriate for you and your company Don t do anything without strong professional assistance Frank Demmler 2015 All Rights Reserved 40
41 References hup://dondodge.typepad.com/the_next_big_thing/2007/08/how- much- equity.html hup:// stock- op0ons- isos- vs- nsos/ hup:// hup:// hup:// hup://en.wikipedia.org/wiki/employee_stock_op0ons hup://en.wikipedia.org/wiki/non- qualified_stock_op0ons hup://en.wikipedia.org/wiki/incen0ve_stock_op0on hup:// hup://blog.pmarca.com/2007/07/why- a- startups-.html Frank Demmler 2015 All Rights Reserved 41
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