The Costs of Hiring Executives and Navigating Stock Options

Crafting executive base salary and negotiating compensation packages for candidates involves careful consideration of several factors. For instance, a first-time or second-time executive with limited experience should not expect a base salary higher than 250K gross per year. Negotiations for a serial executive with 10-15 years of experience should fall between 200K-300K, while a veteran executive with several gigs under their belt may cost between 300K-450K.

It is important to avoid asking candidates in the US about their current or previous salary since it’s illegal and can lead to uncomfortable situations. Instead, it is better to ask them about their salary expectations for the future.

During the negotiation phase, consider whether the candidate is suitable for your stage of the company. Someone with more corporate experience might need to take a leap of faith to join a startup, which could mean a compensation package with more stock than base pay. Candidates who understand the potential of stock options and are willing to take the risk can be a good fit, but those who are too risk-averse may not be suitable.

Determining Potential Earnings Based on Stock Value Offered

Talk about how much money the person can make given the value of the stock you're offering. This approach helps to emphasize the long-term potential upside of the equity rather than just its immediate value. It's important to avoid discussing the number of stock units and strike price when hiring executives due to legal implications and potential changes in company valuation. Instead, it's better to focus on the value of the stock on the day that the person is joining.

When explaining the value of your stock, present two or three scenarios - a normal estimate, a conservative estimate in case of an economic downturn, and an optimistic estimate if tailwinds support your business. This approach is especially important when hiring super senior people who understand the evolution of stock value over time. By doing so, you can help them make informed decisions about joining your company.

Avoid common pitfalls when offering stock packages

Do not promise stock options to candidates before having a program in place and ready to roll out within a reasonable timeframe. Additionally, having a framework in place for stock options is crucial, especially in later stages of funding rounds. Without proper structure and transparency, issues may arise, causing frustration and disappointment among executives.

Do not rely solely on the discretion of the CEO when it comes to stock options. Series A-B-C companies still practicing this approach may face issues. Instead, establish a framework or guideline for stock options. Early-stage companies incorporated in the US typically benefit more from stock options than restricted stock units (RSU) due to a lower strike price. However, as the company approaches IPO or liquidity events, the value gap may narrow, making RSUs a more suitable option for executives.

When offering stock packages, one way to go about it is to consider offering a base salary multiple. For example, for engineers and engineering leaders, the multiple can range from 1x to 4x based on the stage of the company. As the company approaches liquidity events, the framework should evolve and skew towards higher multiples of the base salary because of the lower upside in the medium term. This approach applies to executives as well.

Once a framework or guideline has been established, it's important to stay within the intervals of offering stock packages as multiples of base salary. Going too high or too low can indicate that something has gone wrong in the negotiation process or that the person being hired is either too senior or lacks necessary experience. Beware of the extremes and ensure that the stock package is appropriate for the role.

Become familiar with standard and unusual clauses

There are common clauses related to stock options for executives that you may come across, such as single trigger acceleration. This allows executives to receive full vesting in the event of a liquidity event or change of control, even if their stock has not fully vested. This is because experienced executives know that their average tenure is around two to two and a half years, and a liquidity event may occur before their four-year vesting period is up. Some executives may ask for double trigger acceleration, particularly in the case of a change of control and being terminated without cause, to ensure they receive the full value of their stock, which is reasonable.

As a founder, you do not need to accept accelerated vesting in the case of termination with cause for an employee. The best way to proceed in case of termination, with or without cause, is to have an exit conversation and clarify all outstanding details for the individual exiting. Additionally, it is not recommended to have liquidation preference for executives, as it can add unnecessary complications to the already complex investor agreements in later funding rounds.

It's important to remember that for those ending their tenure during the trial period, you are not obligated to offer severance pay, garden leave, or accelerated vesting. You have the right to a trial period with any new hire and the new hire also has the right to leave the job with little or no notice during the same period.

Remark: The European definition of an executive is based on possessing executive functions. In the United States, the title of Senior Director or above, including VP, Senior VP, or C-level, designates an executive role. Despite differences in terminology, these individuals are typically compensated as executives, and their past experience as a team manager or individual contributor is often not considered. The VP level and above is often considered the final layer of executives in the US.

About Marius Istrate

Marius Istrate is the ex-Chief People Officer for UiPath, where he grew the company from 120 to 3000 people in the span of 3 years. He is currently a Business Angel, Venture Partner at 3VC, and advisor to multiple fast-growing start-ups.