Many of us live and breathe early stage startups and have a deep understanding of all the principles and mechanics that make a new company foundationally strong, what’s needed to enable growth and scale, and ultimately the ingredients that will drive successful exit/monetization events for all involved.
Arming the troops
It’s a long and windy road to get a company from idea to reality to liquidity someday, but team alignment and incentives across the board – short, mid, and long-term – is a must that will arm your troops with intrinsic feeling of ownership (and actual or perceived eventual reward) of the business. One critical ingredient is the alignment of compensation (of all types) across founders, leadership, board, advisors and employees.
- First off, it’s obviously imperative to have stable base salaries. You won’t get paid above market here, but it needs to fit your expectations and lifestyle. You typically take less cash in a startup for the breadth of role, career opportunity and upside. Understanding the path to growth is important for your bank account but often times more so for your psyche, as startups are really, really hard and you need to remain motivated in the day to day grit and grind.
- Secondly, benefits (healthcare, paid time off, flexibility, office space, technology tools and support, 401K, miscellaneous perks) are important. All of these things matter with increasing importance given the current dynamics around the world. There has never been a time in my life or career where I’ve paid more attention to these things with a young family, aging parents, an unpredictable and scary world, and a company leadership position with my name on it.
- Third, as companies get out of the R&D, pre-revenue, and early stability phases, they should build a well understood performance incentive plan for annual raises and/or bonuses. This a real and important driver to enhance performance across the board on a quarter over quarter and year over year timeline. These plans are typically tied to revenue, margin or profit goals mixed with functional achievements for teams and individuals. They typically are ratio specific by level and role for base/variable compensation and are clearly communicated at the outset of a given fiscal year.
- Lastly, most common in technology startups, which is the York IE specialty, there are different ways to incentivize long game growth, enterprise value creation, and eventual monetization of the company. These come in the form of stock/equity/bonus in the company to reward the team for the ultimate high-reward outcome we all seek of a strategic or private equity exit or initial public offering (IPO). Stock options are typically the mechanism, but worth noting there can also be other vehicles like phantom equity, liquidity bonuses etc. Also, in the rare instance a company gets big and stays independent, these can convert to ownership shares and dividends for profit share, yet that is unlikely.
Stock options
On number four above, the main vehicle typically used in startup companies is stock options, granted via a stock option pool and plan a company defines and implements. The issue is that few understand this stock class mechanically because they are complex, confusing, and can be deeply misunderstood, especially for a first time recipient. They also don’t always reward in the way they were intended when they were awarded. It’s tricky and that’s why I tried to simplify what stock options are and some of the nuances that exist with them on a recent blog post titled, “What Are Stock Options And Other Questions You’ve Wanted To Ask.” This is a valuable overview for anyone involved in a private company (founder, employee, advisor, board member, investor, spouse, parent, kid, etc.) or anyone thinking about taking the leap. Go in with eyes wide open and always be the most prepared person in the room!
This article originally appeared on LinkedIn Pulse
