Thread by @ryan_caldbeck

1/ Founder compensation. I’ve had conversations with 5-10 tech founders over past 2 months about their comp and the awkward conversations they have with their board about the topic.

Here I’ll hit on cash comp, equity refresh and secondary. Dangerous and uncomfy topics. Giddy-up

2/ I deal with these conversations as an investor. I’ve lived through those conversations in the past as a founder but not recently. They are horrible on both sides- but 10x worse as a founder.

First why founder comp discussions are tough and then what I’ve seen (kind of) work.

3/ Why they are tough: Asking for a raise is uncomfortable for everyone always. It is uniquely awkward for founders. Are they taking money away from the company that could be used to grow? Being greedy given their already privileged position?

4/ What happens if they don’t get the raise? Are they really going to leave? What ethical or legal obligation does the board really have to grant a raise or permit secondary? Why should a founder get a raise or secondary if all other team members aren't?

5/ Often the founders try to not be the highest paid employees- as a way to help shape the culture. That gets harder as years go on.

So how do founders talk about comp with their board?

6/ What I’ve seen work: First, I’ve seen the most effective conversations are consistent with the company’s compensation strategy. So for example if the company aims to pay in the 60th percentile and the founder is asking for 90th percentile comp? That’s a problem.

7/ Next: Data is king. I’ve found that a robust comp survey can help both board and founder feel more comfortable. Ask 5 other CEOs, or VCs that aren’t in your deal, or heck even your VCs themselves, for a comp survey. I’ll bet you $1 that you know folks that have comp surveys.

8/ OptionImpact is one of the better comp surveys I’ve seen in tech. Can cut by size/stage of co. and provides info on cash and equity. [Though I still wish I could find better comp data]

https://twitter.com/ryan_caldbeck/status/991886862179385346

9/ Let’s be clear, comp surveys aren't perfect. The N often isn’t big enough, #s change based on which survey you use and what bucket you put your co. in. But I think better than nothing. Oh and in CPG they are 10x worse than tech- because less efficient market in terms of info.

10/ Comp surveys help with cash comp for a CEO. They don’t do a ton for equity refresh grants for founders. At least I’ve never seen one that addresses it. Those that list equity typically list total avg equity owned by that role - as if that role was hired in.

11/ Equity refresh grants- At some pt the founders vest through their original grants. Along the way they often raise money and get diluted. In my opinion- as an investor and a founder- I think it is appropriate to do refresh grants for the founders.

12/ For the same reason equity refresh grants are a way to retain and reward team members, I think they are appropriate for founders. Some would say it's “fair” given founders are still employees.

To be clear: this entire TS is very uncomfortable for me. But I think it's imp.

13/ An easy way to calculate would be to use the @Wealthfront equity plan. The equity associated with the [CEO] in the comp surveys is often associated with [CEO] for hire- i.e. not founders.

14/ I’ve seen founders then apply the Wealthfront refresh grant philosophy against that CEO/COO/CTOs for hire equity amount.
blog.wealthfront.com/the-right-way-…

15/ Finally......secondary.

Oh boy.

Secondary is a really taboo thing to talk about publicly. But it happens. And sometimes it blows up in spectacular fashion.
techcrunch.com/2015/04/30/the…

16/ Secondary is hard to talk about because it is extremely personal- like most comp. But also hard because most founders don’t want others to know they sold a piece of their company. Do they no longer believe in the business?

17/ Also hard to talk about because- unless it is a tender offer- your lawyer will tell you only <10 shareholders can sell. Meaning you have to pick and play favorites with early employees & maybe even investors.

18/ Secondary amounts are a complex algebra equation. How successful is the co, how long have the founders been in, how big is round relative to secondary, how long will primary last, how much of their stake are they selling (%), and what is $ amount being taken off the table.

19/ On average I’ve seen it rare when a founder can/should sell more than 10% of their stake (meaning if they own 20%, selling max of 2%). Exception is when >10% is still worth <$1m.

[I’m not trying to make a judgement on the $ or % amount. I’m just observing what I’ve seen]

20/ The secondary typically occurs >4 yrs after founding the company. Before that I typically see increased questions from the VC.

21/ Why do it? Concentration and liquidity. Even if a founder is fully locked in for the vision and future w/ co., any financial adviser would say she should diversify. If you aren’t independently wealthy, with a growing startup 95%+ of wealth is tied to one (very risky) asset.

22/ In terms of $ amount taken off the table, I see a wide range ($500k - $20m), but with a concentration at $2-7m. The amount depends on many factors again including those mentioned above.

23/ The founder is trying to decrease concentration and get financial release. The VC is trying to ensure continued ongoing alignment and motivation.

24/ Also important is the total % amount owned by the founder after the deal.
Occasionally I see a board willing to allow secondary in transaction (to provide financial relief) and do refresh grant at the same time (to ensure founder has proper skin in the game going forward).

25/ Some VCs HATE secondary. That’s hard to sniff out- perhaps impossible- until the situation is at hand. Might be worth talking to some of their other companies to get a sense of others that might have done it. Focus on companies that have raised several rounds over a few years

26/ It makes the conversation much more difficult but doesn’t change the founders desire for some financial relief from the pressure they have felt for years.

27/ Roughly 97% of conversations about secondary are really tough. About 80% of those about cash comp changes and equity refresh are as well. Don’t be surprised. It also doesn’t mean you shouldn’t bring it up with the data to support your position.

28/ Final point- before you take secondary make sure your accountant deeply understands QSBS.
andersentax.com/services/for-p…

29/ Being a founder in 2019 is a extremely privileged position. I feel lucky every day. There is a lot to gain both intrinsically and extrinsically. It is also a hard role with a lot to lose. I’m trying not to make judgments above, more just to relay what I have seen.