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Wednesday, November 19, 2008

Start-up Compensation

For many of us young entrepreneurs, compensation is a barrier to starting a business. Unless you create a business that is highly profitable very early on, getting external financing may be your first possibility for compensation. At a recent Cohort A meeting, the subject of compensation came up. The topic was specific to how venture capitalists and angel investors view compensation expenses in a business plan.

Rather than attempt to answer this question myself, I refer you to Rick Segal's blog, The Post Money Value. Rick Segal is a partner at JLA Ventures (an investor in the $150M BlackBerry fund)

Rick Segal: The B Word
Warning: You are going to hate this post.

Why do start-ups have bonuses in their budgets? What's up with that? Let's roll back a bit and figure out what we collectively start with.

First, you come to me with a plan. You believe this plan is extraordinary and the idea, product, or service is amazing. It is the next Google. Fine. Let's assume I believe all this and not only drink the Kool-Aid but eat the packaging, cups, and pitcher you served it in. I'm in. You are funded, baby, let's rock.

You've told me in year 1, 500k of revenue but year 2, Katy bar that damn door, good golly Miss Molly, it is 10x in revenue over year 1. Amazing! So, why are you asking for a bonus if you met these objectives that you set out.

According to, 'bonus' means 'something given or paid over and above what is due or expected'. Said differently, it's compensation for extraordinary performance.

By definition, what is "expected" or "due" of venture-backed companies is "extraordinary" growth. The whole idea of taking venture capital and putting it to use is to grow an enterprise well beyond any natural rates of growth. Accordingly, the basic compensation that a management team earns should be to compensate them for that extraordinary growth. Ordinary growth, even good growth, is less than what is due. And growth, just so we are clear is not always measured in raw revenue so this isn't about a revenue to pay

Enter variable compensation. This I love doing. Give me a set of milestones and objectives you think can be done. Let's give you compensation and equity for doing that. Let's even let you share (equity) in the extraordinary growth of the company as you define it. When you go above and beyond those targets, you can share and share big in my view.

Practically speaking, if the Hockey stick you tell me can happen is $5,000,000 in year two, excellent, let's comp you so you can avoid worrying too much about the home bills (thank you, Austin Hill) and the rest of it in equity and variable compensation when you go way above and beyond. You get a good/big piece when all the shareholders win.

When I point this out to start-ups, pre-revenue companies, etc, lots of people phreak.

My advice when you are structuring your compensation packages is make them scream you believe. Think about it. If you take no salary and all stock, you damn sure believe. The other end of that spectrum is all comp, "market rate" pay and bonuses for doing the job. You will be somewhere on this spectrum one size doesn't fit all.
To me, it's about how much you believe. That was the B word: Believe. Do you believe?

Okay, flame away but before you do, please read this again, slowly. There is a larger point about you being committed and believing in the gig; not me making you go on food stamps. Every situation is different but the beliefs have still gotta be there.

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