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| 11/23 |
| 2009/5/8-14 [Industry/Startup] UID:52970 Activity:kinda low |
5/7 (I am revising my numbers, in my fit of rage at 4am in the morn,
I made some math errors I didn't feel like correcting. anyway...)
I work at a year old startup, 50 employees, pre-IPO (duh!), exit
strategy is to either become profitable company or get bought,
almost profitable but not quite, fast paced, lots of work,
everyone pulls weight, I just found out my non founder CEO makes
475k a year because junior office admin girl had to tell immigration
the stock holding values held by one of our employees. I have
calculated the CEO's options are 1010X mine. I've been here almost
2.5 years, he started in Sept 2008.
Also another question, is salary of your CEO usually common
public knowledge at a startup? or any company?
\_ Please start another thread, rather than edit the original post.
Now a bunch of the comments don't make sense.
\_ 1000x? Sounds like he's getting too much (10%?) and you're getting
too little (.01%?). The Phoenix thing and the high salary are the
real red flags. I'd write this company off and continue to work
there because the economy sucks, but be ready to look for a job in
the next 12 months. How many years out of school are you?
\_ ob boss-napping!
\_ Not in my opinion and I have worked at lots of startups.
Unfortunately, it is all too common. How senior are you?
You should be getting between .1-.4% of the total outstanding
company stock every four years in vested options, imo.
Here is a guy I found who says pretty much the same thing:
http://piaw.blogspot.com/2009/01/stock-compensation-at-startups.html
\_ thanks for posting this. i still feel screwed. and not in a
good way.
\_ You know piaw@blogspot = piaw@soda.
\_ I heard Piaw got an $80k/yr job offer as a fresh grad, and
that was year 1993. I got an $40k/yr offer as a fresh grad
that year.
\_ Is Piaw a stud? I graduated that year and got offered
$34k/yr by the UC, but quickly moved to Taos, making
$50k/yr.
\_ Piaw would take classes like Math 104 for fun.
(At least it was Math 104 when I was there.)
At the time, Math 104 was the math department
weeder class. I owe Piaw my A in
Math 55 (at the time). I sucked in that class
until the final. Piaw had told me to take that
class under Lenstra, he said Lenstra was good,
these were Piaw's words: "Lenstra is very good.
His exams are very straightforward. If something
doesn't work, then try something else." Into the
final I went, with a C+ going in. Math 55 was not
a class which my brain worked well on. I have never
worked so hard on a class with so little result,
before or since, exept for the final. In the final,
for each problem, it was as if Piaw was there, in my
head, repeating, "His exams are very straightforward..."
And I took this ghostly advice, again and again
during the exam, and got all but one problem.
Fortunately, Lenstra had said, "if you don't like one
problem, throw that one out. Oh, and BTW, if you
do well on the final, we'll replace your mid-term
grade, too." And that is how Piaw's awesomeness
got me an A in Math 55, when I started with a C+.
I doubt Piaw remembers me, but I sure won't ever
forget him. And if some friend of Piaw's wants
to send this on to him, feel free. I have never
experienced a more powerful moment of happiness than
when I exited that final exam--1 hour early, looking
back at everyone else struggling with it, knowing
I'd aced it. I was literally dancing with joy.
--PeterM
\_ Holy shit. This piaw guy sounds like a God. We
should get him involved in CSUA again.
\_ I also heard that he once TA'ed a class he was
taking.
\_ Salary sounds way high. Stockwise it sounds like you just accepted
the offer you were given. You can go to your CEO and tell him you
want more stock.
\_ $500K/year seems reasonable. He's the CEO. You don't think he
should make 4X what a developer makes? His options might be out
of line, but that's not coming out of your bottom line anyway.
Is he doing a good job? I'm not really sure what your point is.
Would you feel better if he made $280K/year? What would it matter?
\_ Difficult to say. He lives in Phoenix. We're in bay area.
He also has a house in London. He makes an appearance here
once every few weeks. I hear him on company conf call if I want
to but I've missed the last 4, I've been way too busy to care.
we prob pay his plane fair and SF hotel too. I'd feel better
about slaving away all week if he were around to watch.
We recently layed off a bunch of developers and a couple of
sales account execs, I think to impress the board of directors
with our cost cutting skills. we shouldn't be paying our
fatass CEO (he's HUGE) 1/2 mil a year and more equity than every
other non founder employee COMBINED.
\- you are saying for every $20k your stock options are worth,
he will get $1bn? these numbers dont seem to add up ...
either you have some seriously optimistic estimates of
the valuation growth of your company, or your options arent
worth jack [i.e. if he is taking away $1m for every $20
you get]. Let's take Adobe with mkt cap of ~$15bn ... if
this guy owns 10% of the company, then you are looking at
your options being worth $30k, not a sum which would greatly
affect your life. If he owns 5% of the company, then you
seem to need some pretty optimistic growth expectations
to have your options to be worth more than a car ...
unless the expectation down the road is you'll be getting
lots more options and the current grant is more like a
bonus up front rather than the sum of your vesting
expectations. Run the numbers on a billion dollar valuation,
and your options are going to be worth a nice vacation.
\_ good points, my math was wrong in my original rant.
\_ you are making me sad again.
\_ I don't believe the numbers you gave. Where did you find them? $500K
for a startup CEO is really high, VC's generally hate that. I'd
expect a startup CEO to get paid in the $150-250K (maybe 300K) range.\
VC's want to give the founders/CEO enough money to feel like they
expect a startup CEO to get paid in the $150-250K (maybe 300K) range.
VC's want to give the founders/CEO enough money to feel like they
have to work their asses off to make a living. The salary is just
enough to get by (ya, $250K sounds like a lot, but it's not that
ridiculous). As for the stock, piaw's blog seems very reasonable.
Don't think that "10,000 options" is a lot, you really have to look
at it as a percentage of total outstanding stock. A friend of mine
was negotiating and asked that question and they told him that the
board wouldn't allow them to share that number. I call bullshit, but
does anyone know if there's any truth to this?
As for the stock options, lets assume there are 1M outstanding.
Non-founder CEOs generally get 2-5% of outstanding stock. So that
would leave him with about 50K options on the high end and you with
1K (or 0.1%). That seems about right. How long have you been out of
school and how many employees were there when you started? I hope
you didn't get screwed on a super-low salary because they told you
the stock would make you millions.
Lastly, this CEO in Pheonix thing sounds like the biggest red flag
of all. Why is the CEO not where the company is based? Sounds like
he is a sales-CEO type and travels a lot with a big budget. What
kind of VC backing does your company have? Can you name one of the
VC's? --abe
\_ He said his CEO was getting 50000X his stock, not 50X. Your
numbers seem right. His are hard to believe. In your example,
the CEO would be getting 50K options and the worker bee 1 option.
Yes, one share of stock. Hard to believe.
\_ 50000X number was wrong, sorry. --q
\_ So was it 50X? If so, quit your bellyachin'.
\_ No, the salary of employees at private companies is usually not
public knowledge. At a public company, the top five compensated
employees salaries are in the 10-K filed every year, so the CEOs
salary is almost always one of those, and therefore public
knowledge. $475k seems a bit high for a startup with 50 employees
unless he is an MD or something like that, but it is not completely
absurd. |
| 11/23 |
|
| piaw.blogspot.com/2009/01/stock-compensation-at-startups.html Piaw's Blog Thursday, January 01, 2009 Stock Compensation At Startups Typically, startups offer stock options to employees (especially engineers--who can't obviously be paid through a commission). The obvious numbers involved are the number of options, the strike price, and the vesting period. The number of options and the vesting period is typically known before you take the job, but the strike price can change between when you take the job and when you start and when the options are priced. Typically, the offer letter will contain language such as, "I will recommend to the board that you receive 10,000 options to purchase company stock at the prevailing market price." There's nothing suspicious about this--I've never heard of a company that did not live up to such promises in the offer letter. Here are the variables in stock compensation that you should think about. Number of Options This is the top-line of options compensation--it represents the amount of equity you own in the company. Many people focus on the number of options they get as though the absolute number means something--it doesn't. What matters is the percentage of the company you actually own. As such, this number only means something when you also know the number of outstanding shares in the company. To emphasize this, one of my friends joined Commerce One back before it did an IPO. She was offered 20,000 options but the company had so little revenue that at the IPO, the investment bankers reversed-split the stock, so she only had 10,000 options. What's the difference between 10,000 options at $600/share and 40,000 options at $150 a share? Typically, the percentage compensation goes something like this: Table 3-1. Typical Stock Compensation Title Percentage of company VP of Engineering 05% and up Senior Engineer and above 01% and up Entry-level Engineer 005% Note that these numbers are typically adjusted by the stage of the startup (and thus the amount of risk you're taking by joining the company at this stage) as well as the generosity of the founders and the board/venture capitalists involved in the company. My advice to founders is to spread the stock around--having motivated employees participate in your success will be something you'll be extremely proud of. Now, that percentage of the company you own is not fixed. A study I read once indicated that dilution in Silicon Valley is about 1% of the company per year, but for startups, that tends to change dramatically as new money comes in. If the company is successful, the valuation of the company will increase at each funding round, so the dilution is usually not a big deal. Hardware startups, however, require huge infusions of capital after the design phase is over and the company has to fund production, so in those cases a big dilution event could pre-date launching the product. This is one of many reasons why so many companies have gone to outsourcing their production, so their upfront costs are reduced. Obviously, if a company's schedule slips or customers don't show up as expected, then further rounds could be "down-rounds", so the dilution could be substantial in those cases as well. Vesting Period The vesting period is the time it takes for you to own all the rights to your stock-options. The Silicon Valley period is 4 years with a one year "cliff." That means if you leave the company within a year of joining, you forfeit all rights to any options at all. After the first year, the standard is that each month another 1/36^th of your options continue to vest. That means if you got 10,000 options and left the job after 3 years, you get 7500 options when you leave. Note that most option agreements tell you that you have a limited period of time after you leave to exercise those options, so if you think the company has a good chance of success, don't quit your job and forget to exercise those options. It also means that if you really hate your job after 11 months, grit your teeth and stick around for another month just in case the company turns out to be valuable. I have occasionally heard of 5 year vesting periods (usually also with 1 year cliffs). These are usually far more common outside Silicon Valley, where the average employee isn't as savvy about stock-options. I generally advise against accepting such offers in Silicon Valley (unless, you're absolutely convinced that this company will be extremely successful--such as being profitable). Since most startups are not traded publicly, this price is set by the board of directors. The board of directors takes into account several factors, including the revenue (usually meager, but can be substantial at a late stage startup), the product development cycle, partnerships that might be occurring, as well as the most important factor, employee morale. One would think that a big factor in the price would be that of investors who put in money (usually venture capitalists, but sometimes big companies, as in the example of Microsoft investing in Facebook at a $15 billion valuation in 2007). After all, typically the lead investor at every round usually sets the valuation of the company. The reality, however, is that the internal valuation (as expressed by the stock option prices that new employees get) is usually set at 1/10^th of the price that the previous lead investors got. This difference reflects the sweat equity that employees put in. There's no startup in Silicon Valley that will risk having valuable employees walk out just because they got taken to the cleaners on price--in fact, even in cases where the company did a complete reset (ie, zeroed out early investors' equity and revalued the company at a lower price because the business model has completely changed), employees would usually get new options and are somewhat protected from such events in order to retain them. Think again--Veritas was one such example) Ultimately, however, price does not matter as much as the amount of equity you got, and I wouldn't sweat it too much. Pre-Exercise Option This is now a standard feature of Silicon Valley contracts, and if it's not in your options package you need to negotiate for it. Basically, this lets you exercise your options (even the unvested ones) at the provided strike price. This matters because of the huge difference between long term capital gains taxes and short term capital gains taxes. Short term capital gains taxes are taxed like income, leading to tax rates of up to 40% on a federal basis, and as much as 50% for Californians (where most startups are based). By contrast, long term capital gains usually gets favorable treatment--as low as 15% during the Bush tenure. The catch is that when you buy the stock, the difference between the current market price and the price you paid is immediately taxed as income. Note that if you join a company and immediately exercise the options before the price goes up, no tax is due, so that's the best time to do it. Again, the solution here is to exercise early, before these things become headaches, or, if you're at a risky company whose stock just did amazing levels, forget about making that extra 25% and just sell--you don't need to compound your risks. The way the pre-exercise clause works is this--you'll buy the stock and own it like any other stock-holder. That means that if the company goes under you're out the money, just like any other investor. However, if you leave the company before the options vest, the company has a period of time (usually between 60-90 days) during which it can buy back the stock from you. Qualified versus non-Qualified stock options Tax-law distinguishes between ISO (Incentive Stock Options) and NQO (Non-qualified stock options). There are minor tax differences between them, so I'll summarize them in the table below: Table 3-2. ISO versus NQO ISO NQO Holding Period for long term capital gains 2 years from grant + 1 year after exercise. One kind of option is not better than the other, since their tax-treatment is only slightly different. However, if a company used to give out ISO and recently switch to giving out NQO, then what you want to do is immediately exercise your options as quickly as ... |