Q: Where can I get some good starting salary information for a SaaS startup? I need the information for CEO, CFO, CIO, CINO, Director of Sales. How much should the starting salaries vary for a startup with $5 million vs $10 million gross revenue?
A (Brad): First of all, you can find a great deal of info on structuring employee compensation right here on Ask the VC. We have posted about this topic many times in the past and have often covered specific aspects in great detail – take a look at the Compensation archive. Although many of the posts found within the archives relate to the question, the few listed below are a targeted to your question.
The CompStudy report, written by Harvard University Professor Noam Wasserman, is also extremely good. It’s a yearly report on the current equity and cash compensation within private companies. Noam also has an excellent book related to startups (but not to compensation) titled The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.
The numbers we list here on Ask the VC or those found within published market reports are based on average market data and should therefore be used as a general guideline. Many variables like the company’s age, current revenues, profitability, geography and others all come into play when structuring compensation packages.
Finally, I have a belief that most of these compensation studies have a frustrating survivor and reporting bias that tends to cause the numbers to be inflated. So, use them to calibrate, but not justify, your numbers.
Q: In our startup we have 4 founders, two of whom are not full time. We’ve all put in a good sum of cash thus far. The two founders with the least equity happen to be the two tech founders. Some of us feel that we made a mistake when allocating shares in the beginning – there is one founder in particular who does not do any work, and he has the second-most equity (the split goes like this: 32%, 26%, 10%, 7.5% with the rest for employees + advisors). To me, it seems like any outsider would see this as a big disparity and wonder what happened, but one of our guys (Mr. 32%) seems to think that if we can get funding, the VC will correct this wrong. I’m rather doubtful of that – what VC will want to fund a team that didn’t have the foresight to motivate the biggest contributors and keep them interested? I’m looking to convince him that we need to fix our own mistakes before pursuing funding. Am I off base?
A (Brad): You aren’t off base. Furthermore, this is a common problem and one of the reasons I strongly encourage every founding team to have four year vesting on their stock.
While some founders thinks this simply gives future investors a way to claw back equity in the future, it’s much more often the case that this protects the founders from each other, in cases like this or situations where one of the founders simply leaves.
In your case, you feel like the 32% founder doesn’t do any work. If your other two founders believe this also, the three of you should directly confront Mr. 32% right now. Don’t wait, don’t defer, don’t let more time pass. Deal with the issue – up front and directly. It’s an easy thing to solve – if you all agree (including him) that he should only have 15% of the company, then he can simply forgive (or give back – the mechanism will depend on how the company is structured) 17% of his equity. Then, each of you will end up with an increase of your pro-rata percentage of his equity.
If you have equity alignments early in your company, deal with them. Don’t let them fester.
Q: As a rookie VC trial by fire is a great way to learn. Aside from crunching through some early deals, where are the best executive programs and crash courses for newbies to the VC world?
A: While self serving, we recommend you start with our book – Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist. In addition, there are a bunch of courses now using the book that are referenced on the web that include additional materials that are helpful.
Jason also did an excellent Crash Course on Venture Capital – the 90 minute video is below.
Venture Capital Crash Course with Jason Mendelson from Andrew on Vimeo.
Berkeley has an excellent Venture Capital Executive Program as do Harvard and Stanford. In fact, a quick Google search on Venture Capital Executive Program turns up a bunch of great resources.
There is also extensive information on the National Venture Capital Association website, the four day Venture Capital Institute is entering its 38th year, and the Kauffman Fellows Program is entering their 18th year.
If you know of other web based resources, please add them in the comments.
Q: We are a Delaware C Corp registered as a Foreign Entity in Colorado our home state and we need to figure out the answers to the following questions with regards to stock certificates.
1. Who gets stock certificates issued and when?
My assumptions are that cash investments DO get certificates, warrants DO NOT.
Founders and Employees with vesting schedules DO NOT get certificates, until a portion of stock is vested.
2. Do the buy and print your own certificates follow the normal process?
3. Do private C Corps file capitalization stables with the SOS?
It’s a pretty simple answer, really. If you buy the stock, you get the certificates. So cash investors do get certificates. Warrants and options are securities that provide the holder to exercise them later by paying for the stock at a pre determined strike price. At the time of exercise, money is paid by the holder to the company for the stock subject to that warrant or option and then a certificate is issued. The options can not be exercised until vested, as you suggest.
i’m not sure what “buy and print” your own certificates mean, but there is no form that you have to follow. It just needs to be signed by the President and Secretary of the company. Furthermore, cap table are not filed anywhere. You may keep this information private.
Troy Henikoff and I had lunch a month or so ago in Chicago and the conversation turned to convertible debt. I’d recently made an offer to invest in a company Troy was an investor in and the entrepreneur and I got tangled up in the definition of pre and post money in the context of existing convertible debt. In this case there were multiple traunches of convertible debt at different valuation caps. My offer was above the highest cap, but I interpreted the way the convertible debt, and pro-rata rights associated with it, worked differently than the entrepreneur did. Given the magnitude of the convertible debt, the way the debt was handled had a significant impact on the post money valuation dynamics. Ultimately, the entrepreneur and I couldn’t narrow the gap and we didn’t end up working together.
There were no hard feelings on my side (I like the entrepreneurs a lot) but it made for an interesting and awkward discussion. Troy did a great job of processing it and wrote an important, and thoughtful blog post, titled Convertible Debt: really Bridge Loans and Equity Replacement Debt. If you are an entrepreneur who is raising, or has raised, convertible debt, I encourage you to read it carefully.
In our conversation, we talked about a nuance which Troy left out – namely that the magnitude of “equity replacement debt” matters a lot. If it’s a small amount (say – $300k or less) this issue isn’t that severe. But once it gets up to $1m or more, the problem often appears in a big way. My partner Seth covered this nicely in his post That convert you raised last year is a part of your cap table.
All of those convertible debt rounds that happened in 2010, 2011, and 2012 – including a bunch of uncapped ones – are now turning into either equity rounds or unhappy situations. The more everyone on both sides understands the dynamics, the more effective the future financings, including the future convertible debt rounds, will be.
My long time friend and favorite Seattle VC Greg Gottesman has started blogging. Greg’s a great writer and super thoughtful investor so I expect his blog will be one to read and comment on. It’s certainly going to be in my daily blogroll.
Greg and I are currently on the boards of Cheezburger and Startup Weekend together. We had several shared investments over the years including both good and bad ones. I’ve always had deep respect for how Greg thinks, works, and acts. Plus, I just love hanging out with him.
Greg was half of the motive force behind bringing TechStars to Seattle. He and Andy Sack, the TechStars Managing Director, literally made it happen. Greg’s been an awesome partner in the TechStars journey and completely embraces the mentorship model and the notion of “give before you get.”
Greg – welcome to the blogosphere. It’s never too late to join.
Q: What costs are considered reimbursable to the founder of a start-up company? More specifically, if the founder has been boot-strapping his company since inception, and he agrees to a series a term sheet with a VC firm, are the operational costs incurred by the founder between this time and the closing of the round reimbursable to the founder? For example: The founder of a consumer product company and a VC firm agree to a term sheet in July. The round doesn’t close until October or November due to raising additional capital for the round, attorney delays, etc. In the interim, the founder continues to self-fund the day-to-day operations of the business – packaging design, inventory, PR firm, etc. What expenses can the founder expect – if any – to get paid back out of the series a funding?
This varies widely and is fundamentally a negotiation between the new investors and the founders who have incurred the expenses. The four variables are:
- Amount of expenses
- Amount of funding being raised
- How the expenses have been accounted for
- Attitude / style of the investor
As the amount of expenses increases, the willingness of the investor to reimburse for any of them decreases. This is directly linked to the amount of funding being raised. For example, if $1m is being raised and the expenses are $50k, an investor will likely be ok with 5% of the funding getting paid back to reimburse the founders. However, if $1m is being raised and the expenses are $500k, it’s unlikely that an investor will be ok with 50% of the proceeds going to paying founders back for expenses that have already been incurred.
How the expenses have been accounted for also matters a little, if only for optics. If it has been treated as debt advanced to the company by the founders and is documented in an arms length transaction, it sometimes has more impact on the investors. The issues of amounts far outweighs the structural issues, but the structural issues sometimes signal that there was an intent to see the money get paid back at the close of the financing.
Finally, the attitude and style of the investor matters the most. Some investors are adamantly opposed to the idea of paying the founders back any expenses and view this simply as contributed capital to the business. Other investors will view this as part of the investment required by the founders to justify the pre-money valuation. Other investors will simply not want any of their new investment to pay for past expenses. In contrast, you’ll run across other investors who are more flexible, or who are happy to get a little more money into the company at what they believe is a relatively low valuation.
Ultimately, there is no rule – it’s just part of the negotiation.
Dave McClure has a great post up today titled VC Evolution: Physician, Scale Thyself. It’s a long ramble, as is Dave’s style, on a bunch of issues around the evolution of how VC works and scales. I’m an investor in Dave’s fund and have believed in him from the beginning so it’s cool to see him continue to push the edge of things.
While Foundry Group has a very different strategy than 500 Startups, an awesome thing about Dave and 500 Startups is that they HAVE a strategy, which many VC firms don’t.
It used to be the case that whenever a private company did a financing, it filed a Form D with the SEC in order to comply with Regulation D. Suddenly, I’m hearing of lots of situations, especially in seed and Series A financings, where companies are no longer filing Form D. Apparently a number of law firms have decided that a Form D filing is no longer mandatory. After checking with some entrepreneurs who haven’t filed a Form D, their motivation is that they want to keep their financing “secret” so they can stay in a stealth mode for longer.
Jason Mendelson just wrote a post on his blog titled Why is Everyone Hatin’ on Form D? In it he explains the groundrules.
Regulation D requires a filing, but per Rule 507, if you don’t file it, doesn’t eliminate your ability to rely on RegD for the financing. Therefore a company that wants to be stealth and elects against the advice not to file the Form D is violating an SEC rule, but it doesn’t jeopardize the offering exemption. 4(2) always exists, but that is factual, and in these very early rounds you may have small angels or others who are tricky.
Jason goes on to explain the implications and downsides of not filing. In the comments, Bart Dillashaw weighs in on the best reason to file Form D (it preempts all of the individual state securities laws and regulations.)
Both Jason and I feel strongly you should just suck it up and file Form D. I am completely confused by the advice some lawyers are giving about the reasons not to file. And I am concerned that some VCs are supporting what we think is bad legal advice and this will ultimately come back to haunt some entrepreneurs.
I love it when Joe Kraus blogs. I don’t know Joe very well – mostly through my partner Ryan McIntyre (who was Joe’s partner at Excite) but I’ve greatly enjoyed our deep dinner time conversation (the last one I remember was a Vegas one that was the Dick Costolo / Eric Lunt leaving Google party which was – eek – a long time ago).
Joe’s blog today is called The Caller ID Test. TechStars Boulder Demo Day starts in 25 minutes and this post is super relevant for everyone in the room – both entrepreneurs and investors. It’s a simple one – when you see the caller ID from the person on the phone, do you want to answer? If not, think hard about what that means.