Startup Guide For Corporate Execs

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A bold attempt to address compensation related questions of those trying to make the leap from large corporations to young startups. Having mentored many such transitions, I thought I would put general guidelines out there, but this is not a ready-reckoner by any means.

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Startup Guide For Corporate Execs

  1. 1. Quitting a cushy corporate job to join a start-up venture. A guide for executives Shyam Kamadolli Entrepreneur, Venture Capitalist and Private Equity Investor
  2. 2. Guiding principles: generally speaking, balance risks/rewards Carefully consider the risks and rewards of quitting that cushy Fortune 500 (or similar) position for Chief Bottle Washer at a shiny new startup with an unpronounceable name and/or an indecipherable business model Rewards: Be clear why you want to make the transa Reward 1: making an impact, moving beyond a small cog in a massive wheel Reward 2: scratch that itch to be a real entrepreneur (let us face it, “intrapreneurship” is not all it is made out to be) Reward 3: get recognized Reward 4: make a play for compensation alpha (a.k.a stock options) Risks: Do not join a start-up if you are not comfortable with risks Risk 1: your cash compensation will most likely be lower Risk 2: your career trajectory may see a discontinuity Risk 3: your equity upside is possible but improbable © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 2 unless explicitly ascribed to them.
  3. 3. Compensation: what to expect Cash: base salary and bonus This cannot be addressed well here so I will make only a cursory attempt to guide you here Seek guidance from others who have made the leap before you in the same geographical / vertical market Recruiters are a good source of cash compensation standards In general, expect to make less than you are at the large corporate job, however it is a myth that it pays a LOT less than your job today (generally speaking – The closer the company is to an exit (IPO or sale) the lesser your haircut on cash compensation However, all in, you will be giving up on a few other things – Health benefits at start-ups are generally competitive but expect some losses here too – Statutory contributions to pension and retirement funds are common but matching schemes for voluntary contribution schemes are almost unheard of – Other frills like sweet group insurance deals are generally foregone – Vacation periods are usually not as long and even then cannot always readily be converted to cash Equity: that is what represents the monetary reward for your leap of faith so let us spend some time on this Three scenarios: mature startup, growth stage startup, seed stage startup © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 3 unless explicitly ascribed to them.
  4. 4. Mature start up Context: the company is on track to ~$100M of revenue Has been profitable in the recent past, expected to exit in 12 to 18 months Has been through several rounds of financing Between investors, founders/promoters and employees there are tens of millions of shares outstanding The stock option pool is in single digit % of total equity share capital of the company and is mostly spoken for Remember why you are making the transition Primarily for job satisfaction, to make an impact and to enjoy the upside Cash compensation: More or less in line with industry standards for a mid-cap/small-cap listed company © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 4 unless explicitly ascribed to them.
  5. 5. Mature start up: equity compensation Equity: The valuation of the company established at the most recent round of financing is probably in the range of $100M to $1B+ Depending on the role you play, you can expect a few hundred to few thousand shares If you are joining senior management, have your recruiter help you figure this out Expect to get the equivalent of your haircut in cash compensation for one or two years in equity at a minimum with an expectation of upside from the stock price going up at exit The questions to ask before you sign up but perhaps after you are well into discussions: – What is the current fair market valuation of the company and hence the per share price? Use the latest investor valuation if available. Else get a copy of the financials and determine the valuation yourself using DCFs (rarely works) or discounted comparables – What is your strike price? determine if your options are “in the money” – What are you working for? Establish the total value of options granted to you and the vesting schedule. 2 3 10 Typical capitalization table at a mature startup Investors Founders Allocated options Unallocated options 85 © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 5 unless explicitly ascribed to them.
  6. 6. Growth stage start up Context: the company is between $5 to $50M of revenue Has been profitable in the recent past, expected to turn profitable soon, expects to exit in 36 to 48 months May have been through one or two rounds of financing Between investors, founders/promoters and employees there are millions of shares outstanding The stock option pool is in single or double digit % of total equity share capital of the company and some of it is still available to new hires Cash compensation: Expect a haircut to your current compensation but the amounts vary. An expectation of 50% is not unreasonable. Remember why you are making the transition Primarily for job satisfaction, to make a big impact and to possibly make some money © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 6 unless explicitly ascribed to them.
  7. 7. Growth stage start up: equity compensation Equity: The valuation of the company established at the most recent round of financing is probably in the range of $20M to $80M+ Depending on the role you play, you can expect a few thousand shares to hundreds of thousands. Establish the amount of money you COULD make AT EXIT – The key number to note is the % of fully diluted share equivalents that your options represent – Perform an exit scenario analysis: what is the likely exit for this business? $300M? $1B? – Get a copy of the financials and determine the exit possibilities yourself using discounted comparables. Discount potential exit values for risk as a function of time to exit (roughly 15% for every year that you will have to work there before you see an exit). This expected value multiplied by your share of ownership is what you are working for – Do not forget to factor in dilution for any future rounds of financing the business may need before exit. – Strike price may make a difference for a suboptimal exit but is usually not much to fret over at this point 5 Typical capitalization table at a growth stage startup 10 Investors 20 Founders Allocated options 65 Unallocated options © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 7 unless explicitly ascribed to them.
  8. 8. Early stage start up Context: the company is pre revenue or in early revenues Expects to exit in 48 to 60 months. Anything longer and the team is likely to burn out May have been through one round of financing (joining before financing would make you a founder or close to it and this guide may not apply). Between investors, founders/promoters and employees there are hundreds or thousands of shares outstanding The stock option pool is up to 30% of total equity share capital of the company and most of it is still available to new hires Most corporate executives are NOT made for roles in this stage of the evolution of the business Cash compensation: forget about your current cash compensation! Compensation is set by regional standards and not by what you make. Investors typically have a view on how much they want to pay a CEO, a VP, a director and a senior manager. Variances from the standard are only for exceptional situations Remember why you are making the transition Primarily for job satisfaction, to make a big impact and to possibly make some money © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 8 unless explicitly ascribed to them.
  9. 9. Early stage start up: equity compensation Equity: The valuation of the company established at the most recent round of financing is usually established by the VC method (the investors set valuation to establish a certain ownership based on expected returns at exit). Terms like $5M on $5M mean a pre-money valuation of $5M for $5M round of financing yielding the investors 50% ownership. (Typically 40% to 60% is owned by investors for Silicon Valley style investing) Depending on the role you play, you can expect a few thousand shares Establish the amount of money you COULD make AT EXIT – The key number to note is the % of fully diluted share equivalents that your options represent – Do not forget to factor in dilution for any future rounds of financing the business may need before exit – Strike price may make a difference for a suboptimal exit but is usually not much to fret over at this point 17 3 Investors 50 Founders Allocated options 30 Unallocated options © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 9 unless explicitly ascribed to them.
  10. 10. If you did decide to take the plunge… Explore tax efficient structures like restricted stock for your equity compensation Do not forget to file appropriate paperwork with your income tax authorities if indeed such structures are available to you Realize that failure rates are high among those making such a transition Do not burn your bridges, have a plan B Your new job entails, in addition to what the job description says: Answering the phone at reception until someone is hired to do so Cleaning up the mess you (or someone else) made in the kitchen Flying coach on red-eye fares Taking cabs and not car services Etc. etc.. However, you are in for a very exciting ride… enjoy it © 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others 10 unless explicitly ascribed to them.

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