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 Dictionary.com, '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.

A wrap up of the first meeting of the class of 2009: Sept 12, 2008

The 3^rd year of the Startup Leadership Program (SLP)kicked off on September 12, 2008 at the law offices our sponsor, Edwards Angel Palmer and Dodge (EAPD) at 111, Huntington Avenue, Boston.

There are 21 Fellows in the Class of 2009 from diverse backgrounds ranging from Biotech, Devices, Design and Microfinance to Marketing, Internet and Journalism. The group comprises very qualified individuals with entrepreneurial ambitions (some have already started off on that path.)

The first class was an introduction; to the program, the program managers, the participants and more.

About SLP and TiE 
The evening started off with an address by Anupendra Sharma, founder and chair of the Startup Leadership Program. Vanita Shastri, Executive Director of TiE Boston introduced TiE and its many programs and encouraged the class to participate and volunteer. This was followed by a brief introduction by EAPD, where we are holding classes for the 2^nd year.

Fellow Experiences

Three Fellows – Hooman, Rama and Pat talked about their experiences. The bottom-line. You get from this program what you put into it. It is our program, and its future success depends on what we make of it. The Fellows had great advice and answered questions. What worked, what didn’t. What they got out of it. What advice they had for the class.

Cohorts & Networking

We started off the interactive section by being assigned to four Cohorts (A, B, C & D) with 5-6 members each. This is our group for the first three months of the program. We spent 20 minutes learning about each other and picked a spokesperson who will represent the group for the first month. TLP has a CEO structure. The CEO is a Fellow chosen each month to lead the class based on performance and leadership potential. The group spokespersons report to the CEO. After the first 20 minutes, we joined new groups. This way we managed to meet at least half the class that evening. The second set of groups seemed to be more background-defined.  

Assignments

Time for work! This program belongs to the Fellows. We lead it, develop the content. Cohorts were assigned responsibilities – Hard Skills Workshop, Soft Skills Workshop, Venture Capital Competition and Field Trips.

Lots of assignments. We need to create “marketing pieces” about ourselves – our bios, for the prospectus and send them to Ryan Scott Bardsley. We also need to have each Fellows cellphone number, so that communications are seamless. So please send in your vCards with photographs (before Friday this week.) The notes section will also have our bios (what a good idea!)

Right after the first class there was a LOT of email activity. Everyone in the program is rearing to go and those who signed up for specific responsibilities have already started working on those.

I look forward to working with each and every one of you, and hope that you will all blog... prolifically. If you've never blogged before, and want to start, this is a great place to and you can always talk to either Parul or me (or even Anupendra) if you get stuck.