If you have a fully-funded company, either through investment or through being a going concern, then it's straightforward to work out compensation: pay people market rate or better salaries and award equity based on role and impact. If the company is not fully funded, then how to allocate cash and equity is a more interesting question. Here are some thoughts:
- Distinguish founders as people who have shares instead of options. Being a shareholder should be considered a real privilege.
- Set expectations up front among all employees that roles and relative compensation will change based on impact and the direction of the firm. Compensation is about the present, not the past.
- Set expectations among investors that dilution (e.g., via assignment of options) will be an ongoing phenomenon as long as the company needs to use equity instead of money. Establishing a sufficiently large pool of equity and a timeframe for disbursement prior to taking investment will help set shareholder expectations.
- Establish a uniform conversion between cash and stock and compensate employees at at least their fair market value.
- Limit the number of employees who have a large proportion (>15%) of their compensation composed of equity to those who have the greatest control over and visibility into the company's fortunes.
This is especially important in a founder-funded or angel-funded venture, as the proportion of operating expenses derived from cash is likely to be small while expectations and entitlements are likely to be large.
Add a comment.
