Tag Archives: Equity

Do You Give Equity to Board Members? Four Considerations

Situation: An early-stage company has a key advisor who is helping them to build a 3-5 year vision and plan. The company can’t afford to pay the advisor full-time but he’s interested in working one day a week or becoming a Board member. Should they give him equity as a Board member and under what conditions?

Advice from the CEOs:

  • Adding Board members increases complexity, especially when it comes to big decisions. Once an early stage company transitions from their start-up Board to a more formal Board with non-founder members, particularly when a significant number of the new members have strong corporate experience, the Board will take on a certain level of independence in corporate and compensation decisions. Be aware of this, as a larger more independent Board may make decisions that the founders would not make.
  • It is not irregular for Board Members to receive equity or options. If you want to grant options, you must undertake an initial company valuation exercise, followed by annual valuations. It is common to grant options with 4 year vesting on a monthly basis. Vested shares can be purchased at Day 0 price, with some period to exercise options following departure from company.
  • Seek an expert in Board operation and compensation. There are a number of advisors with deep experience in this area who can advise the company on standard practices for Board operation and compensation.
  • If the company decides that they are not yet ready for an expanded Board of Directors, another alternative is a Board of Advisors.

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How Do You Attract a High Powered Individual? Three Thoughts

Situation: An early-stage company is in discussions with a high-powered individual who could invest, join their Board, or help them more directly as an executive. They want to involve him enough so that he is interested in working with them. How do you attract a high powered individual?

Advice from the CEOs:

  • You are still in fact finding mode. Get an NDA ASAP! Backdate the NDA to your first conversations.

o    This individual needs to meet face to face with your current team. See how the dynamics work; be very sensitive to conflicts and jealousies. These can wreck an early stage company.

o    You need to see how the new individual interacts with your current team to check chemistry before you go too far.

o    Be gingerly with your co-founders about adding another “founder.”

  • Create a high level straw man for this person’s roles and responsibilities.

o    Ask the individual what he sees as the potential for the company and how he foresees being able to contribute.

o    Develop a business plan for this individual – with the appropriate title. Spell out roles and expectations.

  • If you offer an equity position, be sure that shares are on a vesting schedule and that you have a shareholder’s agreement.

o    Be creative in your vesting. Rather than vesting on time, consider vesting on individual and company performance against milestones. If the company doesn’t hit the milestones what is the value of the shares? Make the milestones consistent with the individual’s objectives – bringing dollars into the company based on investment or revenue hurdles.

o    If this individual wants to come in as a “founder” insist on some investment to demonstrate commitment – you and your co-founders have funded the company to date.

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How Do You Ask for Consideration? Four Suggestions

Situation: A company played matchmaker between another company in the concept stage and a funding source. Having performed this service, the company would like to get something in return. There is no agreement in place regarding consideration for this service. How do you ask for consideration?

Advice from the CEOs:

  • A way to introduce the conversation is to say – We’ve been happy to help you identify funding for your company. What kind of role and contribution do you see for us as you move forward? This prompts the other company to confirm the inequity, instead of you, and makes it more likely that they will offer you something.
  • This is really a relationship challenge. You’ve done a great favor for the other company – obtaining funding for an early stage company is a major accomplishment. If there is a good relationship between the two of you it is reasonable to hope that they will recognize this. A minimal way to ask for this is to say – If you get funded we want to be your service provider.
  • In business, many leads are referrals. When we get a good lead, we try to assure that the referral source gets some business from the resulting project. This encourages them to continue to provide us with leads. It also reflects common courtesy. Providing this example may help your case.
  • On option may be to ask for an equity interest. For an early stage company, this is inexpensive as they have not yet established significant value.

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How Do You Set End of Year Owners’ Comp? Three Thoughts

Situation: A company is a C Corp with several owners. As it is the end of the year, there is an active debate on owners’ compensation. The CEO has looked at a number of options, but would like the advice of others in a similar situation before making a decision. What do you see as the pros and cons of various options for end of year owners’ compensation?

Advice from the CEOs:

  • In one company, profits are split among owners according to stock ownership. This is similar to a public corporation where dividends accrue according to stock ownership. The pro is that it is equitable; the con is that smaller owners who may have made significant contributions during the year don’t necessarily receive the recognition that they may believe they deserve.
  • Another CEO varies owners’ compensation according to company performance. In good years, there is the option to be generous through enhanced bonuses, etc. In slim years it is more important to conserve cash, and quite frankly company performance didn’t justify significant bonuses. The pro is that this offers the CEO more flexibility than the first option to recognize significant contributions; the con is that the recognition of some may seem arbitrary to others.
    • In response to the latter observation, a third CEO sees this as acting like a good father – sometimes you just have to declare your prerogative if employees squabble about your decisions or push too hard for unreasonable requests.
  • The CEO who originally asked the question followed with an additional question – how do you present your compensation decisions to owners or staff who may think that they deserve more than their stock position or company performance over the year allows?
    • This is a facts of life situation – once the final determination is made it is not negotiable.

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How Do You Handle Allegations of Employee Theft? Four Guidelines

Situation:  A company’s leadership is wrestling with how to handle an accusation of employee theft. In the case presented, the accuser lacks credibility, but the charge is serious. The leadership team wants to deal fairly and equitably with the case, but doesn’t want to send the message that pilferage is acceptable. How do you handle allegations of employee theft?

Advice from the CEOs:

  • To assure fairness and equity, determine a way to substantiate, with objective or third party information, whether charges of pilferage are valid.
    • Express your seriousness about the situation, and ask the accuser what evidence they can provide to substantiate the allegations.
    • In a warehouse or stock room situation, install inexpensive video equipment to record and verify pilferage.
    • To assure that messages to employees are clear, revise employee manuals to specify serious repercussions for pilferage as well as measures being taken to prevent it. This will demonstrate awareness of the issue as well as the company’s determination to discourage pilferage.
  • If you can verify the allegation, either through objective or third party evidence, face the employees involved. The choices are simple:
    • Either the behavior stops and the estimated damages repaid to the company by the employee, or
    • The employee is fired.
  • Do not think that this is something that will go away on its own. If there has been pilferage and the situation proceeds unchecked, it will damage you both financially and in terms of employee respect and morale. Employees will be watching your response closely.
  • To protect yourself, once you determine a course of action be sure to document everything.

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How Do You Negotiate a Tricky Merger? Five Thoughts

Situation: A company is considering a merger. The other firm competes with customers who account for 25% of the company’s current revenue. How do you maximize the value of this merger to the company while mitigating the negative impact on current business?

Advice from the CEOs:

  • The maximum risk from the combination is loss of 25% of current revenue. The merger makes sense if you believe you will gain upside which more than counters this risk.
  • Both companies have brand equity. Maintain both brands and to continue to promote them. Maintaining both brands will buy you time to replace business which is potentially at risk.
  • Talk to customers and get their perceptions of the pros and cons of the potential combination. Ask about any concerns that they may have. Understanding the pros, cons and concerns will help you to mitigate negative fall-out.
  • Legally, in a 50/50 split, the Chairman will call the shots. You will have little recourse to counter the Chairman if he decides to fire you. This individual has built his company through previous mergers. Visit and break bread with those who were principals of these companies at the time they were merged or acquired. This will tell you a great deal about the individual with whom you entrusting your future. You will also learn what the others did during their mergers to help plan your own moves.
  • Give yourself a back door or Golden Parachute after six months if the merger does not go as you anticipate.

Key Words: Merger, Competition, Value, Mitigate, Upside, Risk, Market, Access, Brand, Equity, Customers, Pros, Cons, Concerns, Control, History, Golden Parachute

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