Folks, I am not sure if this has been discussed before. If so, can you pls direct me to the relevant posting?
I would like to know about the standard practices to decide compensation for early stage employees. Consider this example: I am planning to hire a person at the CxO level. My company is about 15-20 people. Of these say 4-5 ppl are the Sr Mgmt. The Sr Mgmt have equity stake and the remaining employees as low level guys hired at market salary. Now if I have to add another person at the CXO level, are there any thumb rules for compensation? Say mkt salary for this guy is over 20L. How can I estimate a fair salary/stock package? Pls let me know in both cases – 1. the company has a valuation 2. The company has never been valued.
regards,
Vamsi.
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Another way to set the equation:
Let’s assume that he has a market salary of Rs 20 Lacs. Assuming you are NOT paying him market salary and giving stocks in lieu, and say you pay him Rs 10 Lacs. Secondly assuming that it will take you about an year to start paying him market value (typically takes 1 year to get to product-market fit, another to exploit that). The stocks that you give him are a function of these two parameters , the salary discount that he took (Rs10 Lacs) and the time investment (1 yr). You might want to divide stocks to everyone based upon this equation – so a person who takes a discount of Rs 5 Lacs for the same time gets half as much, and a person who takes a similar discount (as measured from his then market pay cheque) for twice the period gets twice as much.
Also, I think the 1 yr thing is just a guideline to help and the stock allocations should not change even if it takes substantially more than that (which in most cases definitely will).
Also, incase you are not discounting salary from market rates then I think any amount of stocks options should be good – even for the person joining then it makes sense to measure the quality of the stocks (read company) rather than the quantity.
Another way to set the equation:
Let’s assume that he has a market salary of Rs 20 Lacs. Assuming you are NOT paying him market salary and giving stocks in lieu, and say you pay him Rs 10 Lacs. Secondly assuming that it will take you about an year to start paying him market value (typically takes 1 year to get to product-market fit, another to exploit that). The stocks that you give him are a function of these two parameters , the salary discount that he took (Rs10 Lacs) and the time investment (1 yr). You might want to divide stocks to everyone based upon this equation – so a person who takes a discount of Rs 5 Lacs for the same time gets half as much, and a person who takes a similar discount (as measured from his then market pay cheque) for twice the period gets twice as much.
Also, I think the 1 yr thing is just a guideline to help and the stock allocations should not change even if it takes substantially more than that (which in most cases definitely will).
Also, incase you are not discounting salary from market rates then I think any amount of stocks options should be good – even for the person joining then it makes sense to measure the quality of the stocks (read company) rather than the quantity.
Its really tough situation. It depends on the person whom you choose. If I’m in your place, I’d reward him with stock options than giving him salary. May be you could fix him a minimum salary plus the options which could yield him if he vests in future course of business
Let us assume that the market salary for this person is 20 lakhs as per your assessment. Now you can split this into 2 parts
1. Fixed component
2. Variable component
If the person whom you are hiring is ready to put his skin in the game (If (s)he is ready to restrict his/her fixed component to only the amount (s)he needs to maintain his/her current lifestyle & put his/her savings into the variable component), then it is easy to arrive at the fixed component.
Now the variable component can be worked out in two ways.
1. if your company has a valuation, then you could give him/her enough stock options which will add up to his variable component.
2. If your company is not valued, then it becomes a little tricky. I have seen some people handle this by committing to a percentage stake in the company. One of my colleagues joined a gaming company as CTO (not yet valued) for a small fixed component plus 6% stake. When the firm got valued, his stake was worth $1 million.
I think valuation at this early stage would not yield a fair market value (since you can’t find another comparable transaction) and book value will be a minus figure for startups sans revenues. You need some more info on the following lines –
a) How much will he contribute to take the company to the next level of product development / Revenue growth ?
b) By how much will that contribution shrink your go-to-market (GTM) gap ?
Compute the resultant cost savings from the product development cycle so shrunk and the faster GTM so enabled by the recruit and arrive at a consensus.