Executive Compensation in Early Stage Companies

Early stage firms are highly dependent on the key executives who lead it into its growth journey, to an extent they are called ‘founders’. The term is used to describe executives who are involved in 'building' an early stage company, which has limited revenue and limited or no profitability, and whose role is not limited to sales or whose efforts are not directly attributed to specific sales transaction. They will usually receive remuneration different than those in mature companies. Their engagement, or absence of, can make or break a startup venture. And since compensation is a founding base for executive engagement, it is worth approaching it mindfully before committing capital or time towards a venture.

Executive compensation in early stage companies may be structured with the following components:

1. Subject to their starting equity stakes, if any, executives in early stage companies will receive fixed monthly pay that is 10 - 33% less than their market pay, depending on the seniority and the equity stake each of then starts with. Absence of this components could mean the firm has no engaged management, and that is a guaranteed terminal failure in the medium term.
2. Entrepreneurial executive’s financial growth comes from building a business, thats why their reward should be primarily from the growth in equity value. A ‘Long Term Incentive Plan’ is the tool for making this work. It is a plan where executives in early stage companies are awarded equity over a long period of time during which the company’s growth is realized. This period is usually from 5 to 10 years, and may include earning the shares gradually (vesting) and may include a ‘cliff’, which is like a probation clause for early leavers. If vesting exists, the cliff will usually be between 0 & 12 months. I do not recommend gradual vesting because it is not fair to investors when executives leave before the job is done.
3. Variable pay is a popular component used for sales executives or executives in small & medium businesses. It keeps people sharp focused on short term results, which is important, but it does not incentivise long term growth behaviour, and you may want to be mindful that early stage companies are in a long term game.?

Finally, I like to share that absence of short or long term compensation incentives can make life difficult for a business. You can get people hired by ‘bankrolling’ them into the business, but that does not win you their passion. The difference can go up to 10 folds in economic output.?