What’s a fair compensation plan for an entrepreneur (or CEO) with investors in his company?
I’d like to see an entrepreneur who is committed to the enterprise in more than words. To me, that may include, based on the particular situation:
1. Leaving all of the start-up cash in the company as equity, rather than carrying it on the books as debt, or trying to pay it from investment proceeds. (It’s certainly OK to pay yourself back if you don’t have investors.)
2. A salary package that is at least 15% to 25% below market for similar positions. As the venture becomes it is important for the team to receive year-end bonuses from the board if and when cash is prudently available. These milestones are usually agreed to in advance of the investment decision.
3. Vesting ownership of stock over several years based on achieving goals. There should certainly be latitude in the goals (worst - most likely – best) with vesting percentages tied to each.
4. For CEOs who are not founders and therefore have a smaller equity stake, a carry on the upside that pays some sort of bonus based on sale price is a good idea. I’d calculate these off of the IRR the investors receive. For instance, after the investors receive a 50% IRR, the CEO would receive 10% to 15% of the profits thereafter with the balance distributed to investors.
The general idea here is to align the interest of all of the people in the deal. The founders and managers have significant upside opportunity and a proactive structure by them makes this part of the investment decision much smoother, especially when this is a first time venture for them.
As the venture starts to meet milestones, cash compensation issues become much easier. It is terrific to be part of a success in which everyone succeeds.