Editor’s Note: Each week Maynard Webb, former CEO of LiveOps and the former COO of eBay, will offer candid, practical, and sometimes surprising advice to entrepreneurs and founders. To submit a question, write to Webb at firstname.lastname@example.org.
Q. I know how compensation is handled in public companies, but what about private companies? I run a fast-growing startup that just raised a series A round, and I’m doing a lot of hiring.
—CEO in the security sector
The good news here is that the information you seek is available. Just as there are services that public companies can use to gain knowledge about salary and compensation ranges, similar surveys are done for private companies. That’s super important because startups are a different animal. Cash is precious, so salaries will often be lower, but the equity offer should be higher given the risk people are taking to join an unknown entity. The risk/reward profile has to be in sync.
When it comes to stock comp, there is market data available for many of the roles and stages for startups. Check with the venture capitalists who funded you to see if they have access to this data. You can access information on how CEOs, key executives, and even board members are paid, which will make compensation less mysterious. These surveys will shed light on what the market dictates, and you can get a sense of what’s high-end and what’s low-end and see where you should position yourself. However, it’s important to note that great candidates can often command above-market premiums.
This is all very important information—you need to understand where you fit in the market so you can be competitive when hiring—but how you address refresh stock grants is the more ongoing issue to solve. Oftentimes, companies give new hire grants, which often cover three to four years with a cliff for the first year (at the end of 12 months, the first piece begins to vest and the rest vests monthly). As time goes on, this leaves you exposed because when someone has less future earning potential it may reduce incentive. Great people will always have great options for employment. You need to make sure you are adequately compensating employees on a forward-looking basis. Without the retention that comes from unvested stock, the most talented people might leave for new and potentially more lucrative pastures.
My advice is to take an annual look at the vested and unvested stock for all of your key employees. Determine what each key hire’s future compensation looks like and consider if you need to give more stock to secure retention. (Big companies usually have annual refreshes of stock, but startups can be remiss in setting this up.) While it costs you to offer this, the alternative is the potential greater cost of having to find new people to replace talent you can’t keep.
I know it seems early to be planning this way, but you’ll see how fast time flies. It will be another year before you know it, and soon it will be time to consider how to get your best people more stock, both to keep them fairly rewarded and appropriately motivated to stay and contribute their best work for you and your company.
Finally, I’d be negligent not to mention that the perceived value of your company and stock is a critical factor. If your company and valuation are growing, having stock compensation is even more powerful. Therefore, the most important thing to focus on, as always, is building a great, growing, and enduring company.