May 30 2007 by Jason

Trends in Compensation Packages in Venture-Backed Companies

As we continue our series on Compensation, let’s look at some recent compensation trends. In general, while compensation is on the rise, the rate of increase slowed between 2005 and 2006. Founder compensation (in whatever role they play) is rising faster than non-founder compensation. There are some theories on this including (a) founders are becoming more savvy about their compensation packages and (b) there is increased competition between VCs for good deals and one way to win deals and keep founders happy is to pay them more (as Brad’s 18 year old niece likes to say – “well duh!”).

Non-founder CEO compensation has been fairly consistent for the past three years while founder CEO comp is up. As companies mature, these numbers tend to converge, although in general non-founder CEO’s make more cash comp – usually because they have significantly less equity – than founder CEO’s.

Comp for financial executives – both founder and non-founder – is on the rise. Double digit increases in cash and equity compensation for the past three years is not irregular.

Engineering and technical executives have seen a small rise in cash comp over the past couple of years, but equity has remained relatively stable.

Sales executive compensation has remained relatively flat. That being said, our experience is that they are making more incentive and commission compensation which follows the general macro economic uptick the U.S. has seen the past couple of years.

Marketing and business development executives have seen a steady increase in compensation over the past couple of years. Cash comp is up in the low double digits and equity about the same. With companies generally performing better than in past years, they are spending more on marketing and business development functions, as opposed to fulfilling these roles with a combination of the CEO and sales.

One other trend is the apperance of the “management carve out.” Given the recent past of tough times for start ups and dilutive / recap financings, many companies were left in a position whereby the management and employees did not own sufficient equity in the company to keep them motivated. In some cases, they owned plenty of equity, but due to large amounts of capital raised and the VC’s liquidation preferences, their equity was out of the money in any reasonable liquidation scenario. To solve this issue, investors and management developed the concept of “management carve outs” whereby the employees would receive a certain percentage of proceeds on a liquidation event (usually 5-10%) on top of anything they would receive for their equity. In essence, these employees were receiving a liquidation preference that sat along the liquidation preferences held by investors. As general economic conditions improve, these are becoming less common, but are still a valuable tool to keep management and employees incentivized.