One challenge that our team had to overcome with a company was to determine the amount of equity to allocate to our first executive non-founder new hire. With the founding team, considering that we all started this particular company at the same time and each brought a unique perspective, skill set and experience to the table, an equal equity distribution made sense. However, by the time the first executive position came available the company had been de-risked in terms of product development and we were closing in on product/market fit.
In our minds the amount of equity should be less than our founder allocation, but how much less? Too much equity would de-value the contributions of the founding team, too little would not attract top talent. At the time we took a best guess and came up with a swag figure which felt reasonable.
Since having that experience I have since discovered a resource for determining compensation for early stage companies by means of “Valuing Early Stage and Venture-Backed Companies” by Neil J. Beaton. In his book, he references a site called CompStudy which provides studies and data on executive compensation. According to the author, CompStudy provides guidance on the amount of equity that newly hired, non-founder, C-level executives and directors typically receive upon joining a start-up company. A description of CompStudy is outlined in “Valuing Early Stage and Venture-Backed Companies”:
“CompStudy publishes an annual report of equity and cash compensation that provides compensation data on 25,000 top management positions and Boards of Directors at 5,000 private companies in technology and life sciences. Data are analyzed by founder/non-founder status, company revenue and headcount, geography, business segment, and number of financing rounds raised.”
An example of the averages for executive, directors, and the option pool are also provided:
- Chief Executive Officer 5.0%
- President/Chief Operating Officer (COO) 2.5%
- Chief Financial Officer (CFO) 1.0%
- Chief Technology Officer (CTO) 1.0%
- Vice President – Business Development 1.5%
- Outside Directors 0.25%
- Option Pool 20%
Considering the book was published in 2010 I believe these numbers are fairly recent, likely from 2009, so they should serve as useful ball park figures. The latest and greatest data may be found at the CompStudy website.
Allocating percentages may not seem like a big deal early in the life of a company, however over time a percentage point or two can be very costly to the company and founding team. Considering a nominal valuation of a start-up using a $5 million valuation, each point could be worth $50,000, which does not include the increase in value as the company is de-risked through various value creation milestones. This can make granting excess stock extremely pricey to the company and founding team. Accordingly, it is likely worth the time and effort to do some research and purchase a paid report through a company such as CompStudy or hire a consultant with access to such services.