May 22 2007

Deferred Cash Compensation

Along the lines of our last compensation post, cash is at an extreme premium in pre-VC funded companies. In that vein, you might be presented with a situation where you “defer some of your salary” until after the first institutional financing. This means that you are theoretically earning this portion of your salary and once the financing happens, you will get it paid out in one lump sum.

Be careful about expectation setting here – while some VCs will respect this arrangement, if this deferred compensation number starts to grow, as a condition of the financing the VCs will often require some or all of the deferred comp to be converted into equity. This isn’t a horrible situation unless of course you’ve already spent your deferred comp on a new car. (Note to self – don’t by a new car until after the company is successful and you get a windfall from the sale of the business.)