By Gary A. Paranzino
The technology industry’s “nuclear winter” is beginning to thaw: Job offers are starting to bloom again for start-up executives emerging from hibernation.
Although it’s still a buyer’s job market, savvy executives can negotiate greater cash compensation, more stock options, better exercise terms, real protection from downside risks and meaningful fringe benefits. But knowledge is key. Here are seven points that could help you clear out the tangled underbrush of negotiating and garner a smarter compensation agreement.
1. Stock options: Employees routinely overvalue the worth of their stock options and fail to understand how their options work in crucial scenarios. Nevertheless, stock options provide a unique value that cannot be matched by non-equity compensation. As you may have experienced, many executives do not make money from stock options. Whether you can wring value from your options may turn upon your ability to negotiate some small but hugely important adjustments to your stock option grant (such as):
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Size of Option Grant: The number of options, alone, has no independent meaning. To evaluate the size of your grant, you must first determine the fully-diluted number of shares outstanding in order to calculate the percentage you would potentially own when fully vested. Seek advice as to how much this percentage will be reduced by dilution from future financing rounds. Evaluate this percentage against your expectations.
Upside potential: Assume a reasonable success scenario such as an IPO or an acquisition. Take the estimated value of the company under that scenario and determine the value of your percentage of potential ownership. Deduct the exercise price of your options, discount the total by the possibility of failure and discount further for the number of years it takes to become fully vested and for the various legal roadblocks which prevent corporate executives from freely selling their shares. And don’t forget to include the impact of taxes.
Vesting issues: While some executives can negotiate for immediate vesting of a portion of their option grant, a more broadly attainable goal is to seek monthly vesting with no “cliff”.
Companies commonly set a one year cliff, where a year of options vest on the first anniversary of your employment start date, with monthly vesting thereafter. Some companies attempt to restrict vesting to once a year. For the same reasons you would refuse to be paid once a year on December 31, you might want to resist an annual vesting scheme.
Exercising vested options: Pay attention to how long you have to exercise vested shares after leaving the company. Typically you get 90 days or less. If your unexercised options are not “in the money” — valuable — during that 90 day window, they will expire worthless. Negotiate to extend the length of this post-employment exercise period, as it costs the company nothing tangible while it provides you with a valuable free option with substantial upside.
Other options issues: Think through what happens to your options in the event of a merger or acquisition, whether you can engage in a cashless exercise, what happens if you leave your job voluntarily, or are terminated by the company with or without “cause” as defined, and what restrictions exist on sale of stock you acquire on exercise of the options, both before and after an IPO.
2. Salary: In any funding environment, companies may utilize various stratagems to temper your salary demands. When negotiating salary, remember that few companies can truly maintain pay equity across the executive team and that a dollar, whether labeled as salary or bonus, is a dollar. You can demonstrate respect for salary austerity by moderating your salary demands while proceeding to secure additional compensation through bonuses.
3. Bonuses: Bonuses draw less scrutiny than salaries. As they are associated closely with strong performance, bonuses are more readily justified. When crafting your package consider including one or more of these bonuses to increase your effective salary:
Signing Bonus: A signing bonus sweetens your start date and increases your salary up-front. The company has invested time and energy to determine that you are the best candidate. A reasonable figure will mean a lot to you but should not register on the company’s radar.
Performance Bonus: Supplement the salary figure by seeking a quarterly bonus payable upon achieving performance criteria to be set mutually by you and your direct supervisor. Pay-for-performance is the most compelling rationale for you getting paid.
Retention Bonus: Where you can demonstrate you are taking a risk to join a company, structure a periodic bonus tied to your remaining with the company over time. Retention is the next-best rationale for getting paid.
Sales/Revenue Bonus: If your position is expected to drive revenue growth, construct a bonus plan tied to your contribution to sales or profitability. Your company’s future prospects are dependent on revenue, and it will often be willing to incentivize an expected producer.
Relocation Bonus: If you are relocating or undertaking any other significant inconvenience to take the new position, consider asking for a relocation bonus, grossed-up for taxes, to make you whole. Consider not only your moving expenses but all of the costs associated with making your family happy to live in a new area. Those expenses are greater than you may initially think.
4. Termination: War-game the eventual departure scenarios. With employment “at-will” you can be terminated at any time. Short of a guaranteed employment term, focus on negotiating the severance package you want to receive upon leaving the company. Consider that you may leave voluntarily (perhaps because the company made employment less attractive), be terminated for “cause” (try to define it narrowly as an act of illegality or objective misconduct only), be terminated without cause (for performance reasons, in a layoff or for no reason at all), become disabled or die. Attempt to negotiate for a period of continued salary, bonuses, benefits and vesting (or acceleration) of stock options in each of these scenarios.
Address also protection in the event of a merger or acquisition, insolvency, diminution of your salary, bonus opportunity, job title, responsibility or reporting relationships.
5. Non-competes: Review all company documents for elements of a non-competition agreement. These provisions prevent you from working for another company for a period of time after you leave, subject to your state’s law. You could be prevented from earning a living in your field. A non-compete might be acceptable if the company is willing to pay salary and benefits if they enforce the non-compete.
6. Documents: You may be required to agree to restrictions prohibiting your solicitation of company employees for another venture, protecting company secrets from disclosure and assigning ownership of job-related inventions to the company. Most candidates accept these provisions, but close review is necessary to avoid agreeing to non-standard terminology that expands upon your concessions.
7. Fringe benefits: You can negotiate for an expedited performance review after six months (to obtain a raise), a specific number of vacation weeks and the right to be paid for unused days when you leave the company, protection from a health insurance waiting period, special work equipment (pagers, cell phones and home office equipment), traveling privileges or limits and anything else that would be better resolved in advance.
Gary A. Paranzino (firstname.lastname@example.org) advises technology companies and coaches individual executives through their compensation negotiations. He was vice president of business development, chief legal officer & secretary of Ashford.com, Inc. and vice president, general counsel & secretary of PointCast, Inc., both prominent technology ventures. Previously, he practiced securities law for Wall Street firms including Morgan, Lewis & Bockius, LLP. He is a member of both the New York and California Bars.
This article is provided for background information only. No attorney-client relationship is created by reading or acting upon this article, unless a written agreement is entered with Paranzino. You are strongly encouraged to seek professional advice from an attorney regarding the specifics of your own situation. For more information, go to: http://www.paranzino.com.
Editor’s note: This column first appeared on @NY, an internet.com site.