Luck favors the prepared. Richard Harris and Scott Leese give you tips to make sure you don't show up to hiring negotiations ill-equipped.
Structure compensation packages that work for today's sales professionals...and your bottom line.
Surf & Sales, a podcast hosted by Richard Harris and Scott Lease, gives sales reps and leaders real-world advice and tips. They recently featured a very no-nonsense and to-the-point podcast, "Stock Options Straight Talk", featuring Sam Jacobs and Collin Cadmus.
This podcast covered all the things you don't know about stock options… but should. It's filled with gems of wisdom most people never learn about in school, rather by living through and learning from experiences (and more often, from mistakes). As employees and candidates become more and more savvy, read along to make sure you arrive at the negotiation table fully equipped to decide when to monetize for options vs salary… and answer a candidate’s tough questions about what those options are really worth.
Stock options are the right, or option, to purchase a specific number of common stock shares from a company. Employees can purchase at a pre-set price (the "exercise" or "strike" price), for a fixed period, but only after a predetermined waiting period, known as the vesting period (typically 4 years).
People often confuse vesting with obtaining any share of stock, when in fact it refers to the employee’s ability to exercise the right to purchase stock. This doesn't include any stock, rather junior security (common stock) in the preference stack. Preferential stocks always go to more senior members of the company or investors.
Different types of stock options exist, but the two most common are non-qualified (NSO) and incentive stock (ISO). ISOs are offered to top management and highly-valued employees and often qualify for special tax treatment, whereas NSOs do not.
Stock options are the most common way companies use equity to compensate and incentivize their employees, SDRs, AE's, VP of Sales, CRO's, and Sales Directors. Businesses sometimes offer contractors stocks to attract the best highly-skilled independent contractors from all over the world.
Offering a compensation package that includes stock options may sound like a great way to hook top talent, but offerings vary significantly based on role and tenure with a company.
Sales Development Representatives (SDR) are usually not offered stock options in the early phase but can earn them over time. In a best-case scenario, SDRs are looking at low 5-figure payouts with compounding interest on the exit.
Account Executives (AE) option packages differ slightly from those of SDRs, but not much. Most AEs are looking at mid-4-figures to low 5-figures.
As the company grows, SDRs and AEs can expect to not expect options. Even as the company grows and sees profits and SDRs and AEs advance in their careers, that doesn't necessarily translate to getting more options. Beware of junior candidates that are looking to get rich quick via ownership versus candidates with mentalities that are fitting to where they are in life and their careers.
Senior employees and seasoned VP of Sales, Sales Directors, or Chief Revenue Officers may approach the table expecting 1-2.5% ownership of the company, which is a reasonable ask.
Candidates don't always approach with a static figure in mind. Based on their appetite for risk, they may be inclined to accept a lower percentage if you can give them faith in the future upside of the organization.
Before you try to seduce an employee with a high number of shares offered, take a closer look at the full picture.
Typically, 20% of shares are allocated for employees. But how many stocks exist and how many does the company have outstanding (issued)? You must divide shares offered by the total shares outstanding to determine the implicit value.
Don't assume the candidate will think the value of the options offered is the price per share times the number of shares. A savvy candidate knows they need an outcome greater than that to equal a return.
The same sharpness and savvy that attracted you to a candidate or employee may be the very things that make the negotiations more difficult. Many precursors that stand in the way of an employee exercising their stock option rights may find their way into discussions and negotiations with the founder or hiring manager.
Seducing a candidate or employee with the staggering and impressive figures of capital raised can be risky. Raising a lot of money and funding isn't always a good thing for employees. Oftentimes, companies need to pay out their investors first. If they are paying back investors by the millions, it may be some time before salespeople see any payouts.
You also need to take a close look at how the vesting period factors into your company’s long-term plans. The vesting period is typically 4 years. Many argue that's an outdated figure and you may want to take a closer look at your company to see if that period should be shorter, or longer.
The average sales person’s tenure with a company is 1-2.5 years, so stock options that vest after 3 years may not register as a real incentive. Will their stock options vest during their tenure? Even stock grants may be meaningless if the employee isn’t staying for at least a year (or the predetermined time) or believe in the company.
First and foremost, thoroughly read all documents in full to ensure there are no omissions or clerical errors. Hiring a tax attorney or lawyer to review all the documents and translate any areas that may be unclear could also be a worthwhile investment.
Sam Jacobs recommends you are prepared to answer these questions during negotiations:
If you are hesitant or unwilling to answer these questions, especially if salespeople already work at your company, you're waving a huge red flag to employees and prospects.
At BurnRate we work with founders to help plan for onboarding new employees in a way that maximizes growth and optimizes VC money to plan realistically for the future. If you're interested in learning more about building a plan with BurnRate, get in touch for a demo.
You can listen to the full podcast (including a glossary of key definitions and terms) here.