Archive for the ‘equity issues’ Category

Is Dead Equity Crippling Your Company?

By: Noam Wasserman for Inc.com Dead equity — equity held by employees and founders no longer working at the company — is a large and growing problem. Facebook’s IPO minted many millionaires and even billionaires.  One who attracted much attention is David Choe, the graffiti artist hired to paint the company’s first headquarters.  Choe opted to forgo a cash payment “in the thousands” for the equity equivalent at the time. Thanks to that one decision, he owns nearly four million shares of stock, worth in excess of $100 million. Choe’s equity is a headline-grabbing example of “dead equity”: equity owned by people who are no longer actively working for the startup. Every share of dead equity could have been redeployed as incentive for a current or future contributor to grow the value of the startup.  Instead, the dead equity languishes on the cap table, weighing down the startup and making it harder to attract and motivate the people who could impact its growth. Facebook’s situation is far from unique, even among recent tech IPOs. Mark Pincus of social gaming company Zynga recently confronted a similar problem when he tried to reclaim equity that he felt he had over-allocated to some early hires. Imagine how much tougher a dead-equity dilemma becomes when co-founders, who tend to hold large equity stakes, are involved. Facebook co-founder Eduardo Saverin was able to hold onto a significant chunk of equity after his forced exit from the company; that equity is now worth billions. Other prominent examples of drop-out co-founders who held significant amounts of dead equity include those at car-sharing company Zipcar and at tech startup govWorks.com (made famous in the movie “Startup.com”). A Significant – and Growing – Problem Dead equity has always been a significant issue for startups. Founders and hires have always […]

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Fear vs. Greed at Facebook

By: Noam Wasserman for Inc.com Mark Zuckerberg and his executive team have been extremely successful at retaining equity in their company. But how well do most other founders do? Even as Facebook prepares to go public, Mark Zuckerberg, the founder and CEO, still owns 28% of his company. As a whole, Zuckerberg, his co-founders, and his former and present employees, own about 55% of Facebook. How did they do this? Fear vs. Greed Each time founders seek capital they face what my colleague Bill Sahlman refers to as the fear versus greed tradeoff. On the one hand, founders fear that they will be forced to shut down their startup if they run out of money, which leads them to rush to raise new capital. On the other hand, they are also understandably greedy about maintaining a high equity stake, by minimizing their dilution. (Dilution is the progressive shrinking of each executive’s equity percentage as the startup raises each round of financing.) When founders delay raising each round, they are typically hoping to achieve certain milestones that will raise the startup’s valuation. That will reduce the percentage of stock they will have to cede to their financiers, and thus reduce their dilution. In every round of financing, Zuckerberg and his Facebook team have impressively minimized their dilution. Our CompStudy data, which allows us to compare Facebook’s equity dilution against that of some 2,500 technology startups, shows how successful the team has been. To estimate how much the founders and other insiders owned after each of the startup’s first three rounds of financing, we used the two major factors that affect dilution: the capital raised by the startup and the pre-money valuation it received. As shown in Figure 9.5 of my book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can […]

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The Gender Gap in Startups, Part 2: Compensation

Is there a Gender Salary Gap in private ventures? My previous post showed the percentages of men versus women in IT versus Life Sciences executive teams, across various VP-level and C-level positions. In this post, I focus on salary differences by gender, first describing the overall results using our full 2008 survey results, then delving into various subsets of the data. The regressions included data on 2,200 executives from almost 480 private IT and Life Sciences ventures. The regressions controlled for differences in the following factors: Positions — separate variables for each of 15 VP-level and C-level positions Company maturity — rounds of financing raised, number of employees Industry — IT vs. Life Sciences Geography — whether the venture is located in each of the two “hubs” of start-ups (California and Massachusetts) or not Executive backgrounds — founder versus non-founder status, years of prior work experience, years working in the venture, educational background (i.e., advanced degrees) Executive’s equity holdings — percentage of the venture’s equity held by the executive (Note: Where appropriate, some variables were log-transformed or square-root transformed.) The table below summarizes the gender-salary gaps that were statistically significant (p<.05) after controlling for the above factors. The sections that follow describe the results, followed by auxiliary results analyzing whether the gap is different if the CEO is a woman, and analyzing gender differences in equity holdings. In short, there is indeed a gender salary gap within private ventures, but that gap is greater in IT ventures than in Life Sciences ones, outside the “hubs” of California and Massachusetts, and in later-stage ventures. It is important to note that, compared to the 20-25% gender wage gap consistently found in studies of large companies, these gender gaps in private ventures are much smaller (less than 10%). Small, private ventures may indeed […]

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Unlocking Your Golden Handcuffs: How Common is Accelerated Vesting on Change of Control?

“I’m negotiating my equity-compensation package. How frequently do people get accelerated vesting on change of control?” In private ventures, vesting of equity stakes is the major form of golden handcuffs (see posts here, here, and here) used to keep executives at their ventures. However, other terms, such as accelerated vesting on change of control (AVCoC), can shorten those vesting periods. (See Brad Feld’s description of AVCoC in the middle of this post, or the VentureHacks overview here.) I recently got an email from a serial entrepreneur who has been brought on as the head of finance and operations in a mobile-services start-up. One of his questions was: How often do new-venture executives get AVCoC? If it’s not common for them to get it, he wouldn’t push for it and would focus his negotiating leverage on another term, but if it’s common, he wanted to push hard for it. (He felt that the start-up might be the subject of M&A activity in the future, and had already experienced working for a large company after a prior venture of his had been acquired.) I decided to dive into our fresh CompStudy data on equity terms to examine how common AVCoC is within new-venture management teams. I took a look at three levels of data: What is the overall percentage of executives receiving AVCoC? Does the percentage differ by level in the organization (e.g., CEO vs. other C-level executives vs. VP-level executives)? And has the percentage been changing over the last few years? For these analyses, I combined our 2005, 2006, 2007, and 2008 IT datasets, which gave me a total of 6,053 executives from 1,202 private ventures. Overall, the percentage of executives receiving AVCoC was 65.5%. However, as shown in the chart below, the percentage varied from a high of 76.4% for […]

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Equity-Split Results, Part 2: Implications for Team Stability

Does the founding team’s equity split affect the team’s stability as the venture grows? As I described in my original “Splitting the Pie” post almost a year ago, my initial interest in equity splits was sparked by the contrast between how the founders split the equity in our “Zipcar” case versus my “Ockham” case. Specifically, those two cases suggested that the equality of the split could have important implications for the stability of the founding team. Last month’s post about the initial quantitative analyses of my equity-split data summarized the factors that increased or decreased the likelihood that a founding team would split equity equally versus unequally. This post will detail the quantitative results regarding the implications of the split for the stability of the founding team over the first two years of the venture’s life. In particular, I analyzed how well the equality of the split predicted whether all founders would still be working for the venture 6 months, 12 months, 18 months, and 24 months after the founding of the venture. My data was collected in the Spring of 2006 (see here for details on the surveys I use to collect my data) and included 998 founders from 326 multi-founder technology ventures. The table below shows the major factors that had statistically significant effects (at the p<.05 level or better) on team stability (defined as whether all founders were still working or not) at each 6-month milestone, with a “+” showing a significant positive effect on team stability and a “-” showing a significant negative effect on team stability. In non-table form, the results are as follows: When the team invested the same amount of financial capital at founding, the team tended to be more stable throughout the 2 years. When the team had a heterogeneous (i.e., widely […]

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Equity-Split Results, Part 1: When Do Teams Split Equally?

What makes a founding team more likely to split equity equally? In this year’s Entrepreneurship and Compensation Survey, I added questions about equity splits within the founding team. These questions were sparked by my cases and field research about equity splits, which indicated that: there might be systematic patterns to which teams split the equity equally vs. unequally, and how the equity is split might affect the stability of the founding team over the first couple of years of venture existence. This is the first in a series of posts presenting the results of quantitative analyses of my 2006 equity-split data. This post will delve into #1 above, the factors that lead teams to split equity equally vs. unequally. Future posts will present the results for #2 above, along with some interpretations of the results. As always with these initial results, please post comments with your thoughts, reflections, and experiences, so that we can make sure that the analyses — and the paper that will be based on them — address the broadest and most relevant set of critical issues, and that we can identify where the patterns shown here either are consistent with or conflict with your experiences. The data include 998 founders from 326 multi-founder technology ventures. The factors that had significant effects (at the p<.05 level or better) on whether the team split the equity equally were: Team size Differences within the team regarding years of prior work experience Differences within the team regarding amount of capital invested at founding The timing of the split The market context at time of founding The table below summarizes how these factors tended to increase versus decrease the chances that the equity would be split equally. Interestingly, the prior relationships among the founders (friends vs. co-workers vs. strangers) did not […]

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Golden Handcuffs and Vesting: Initial Interpretations

The “Summary of Vesting Data” post presented the overall patterns in my vesting data and delved into the founder vs. non-founder differences. My “Early Analyses” post listed both the most significant drivers from my regression analyses of vesting periods and some of the not-significant factors. The core table from that post is reproduced here: This post presents my initial interpretations (and those of the 2 entrepreneurs and the 2 VCs who contributed their insights in response to those posts), along with follow-up questions in italics below. As always, love to get your input on all of this! Significant regression result: Founders vs. Non-founders Not significant: CEOs vs. Other C-level executives vs. VPs In his comment, Chris stated that it is “economically irrational” to stay at a company after your shares have fully vested, highlighting the critical retention issues involved in vesting. Scotty countered that founders in particular are motivated by strong non-economic factors and usually want to stay at their companies even after they have fully vested. (Presumably, then, Chris’ point applies much more to non-founders than to founders.) Tim also highlighted the higher level of “founder commitment” as a factor in vesting/retention decisions. These latter arguments are consistent with my observations elsewhere about founder vs. non-founder differences. In particular, as described in the Founder Discount paper (summary-postings here and here), founders have stronger psychological handcuffs tying them to the companies they founded, so when it comes to vesting, boards should view founders as posing lower “retention risk” than non-founders. In contrast, the weaker an executive’s psychological handcuffs (i.e., the higher the retention risk), the stronger should be the golden handcuffs used by boards, as suggested by the first result listed in the table. Furthermore, much as founders’ psychological handcuffs weaken over time (in “Founder Discount,” this leads to a […]

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Golden Handcuffs: Summary of Vesting Data

To complement the detailed early results, here are some high-level summary data on the years of vesting. Across the full dataset (1163 executives from 225 companies), the range of years is 1 year to 5 years. The widespread rule of thumb is that vesting occurs over 4 years, and as expected, the most common period is 4 years. However, more than a quarter of executives (28%) have vesting periods different from that rule of thumb, which is what originally triggered the question for me of what was driving vesting terms. More specifically, the average years of vesting is 3.46 years (standard deviation of 1.15 years). The distribution across the full range of years is as follows: 1 year: 16% of executives 2 years: 1% 3 years: 7% 4 years: 72% 5 years: 4% Technical note: Given the non-normal distribution of the vesting dependent variable (and of all of its standard transformations), I used ordered-probit analyses instead of standard OLS. Focusing specifically on the founder vs. non-founder differences, the distribution is as follows, with %-of-founders in black bars and %-of-non-founders in white bars. In short, the 4-year “widespread rule of thumb” mentioned above applies far less to founders (it doesn’t apply to 40% of them) than to non-founders (it doesn’t apply to 24% of them). Interestingly, this works in both directions: there are more founders in both the 1-year and 5-year buckets.

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Golden Handcuffs and Vesting: Early Analyses

For people holding equity that has not yet fully vested: Does the vesting status affect your thinking about when you might leave your company? For investors or CEOs: Are you worried that a key employee will leave your company when his or her equity vests? Some background: My Founder Discount paper examined how founders’ “psychological handcuffs” affect (negatively) the amount of compensation founders want and/or can demand from their boards. Because these psychological handcuffs tie them more tightly to their companies, founders are much less likely to leave if they are being under-compensated. Therefore, founders are paid significantly less than non-founders, especially during the early years of venture growth, when founders’ psychological handcuffs are strongest. In a new working paper that follows up on the Founder Discount paper, I examine whether boards use “golden handcuffs” to tie executives to their ventures. The specific form of golden handcuffs I examine are the vesting terms for each executive’s equity, most centrally the number of years over which an executive’s equity (received at the time of hire or when vesting terms are introduced into the company) vests. Investors often impose vesting terms as a condition of their investments. In a post that takes a “Term Sheet View” of vesting, Brad Feld, a VC at Mobius Venture Capital, highlights the importance of vesting terms: “[T]he impact of this term is crucial for all founders of an early stage company … it can have profound and unexpected implications … many entrepreneurs view vesting as a way for VCs to ‘control them, their involvement, and their ownership in a company.’” A couple of years ago, I decided to get a more systematic view of the drivers of vesting, in particular examining how it is used ex ante to affect executive retention. The table below summarizes the […]

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