Reflections

COMPANY COMPENSATION STRUCTURES
COMPANY
COMPENSATION
STRUCTURES
5
New compensation structures,
and in particular equity schemes,
can be confusing.
PRIVATE COMPANIES AND EQUITY
STRUCTURES
Most private companies seek to reward their employees
(especially the most senior ones) with some form of equity
incentive; these can be quite different to the types of equity
structure found in public companies.
Private companies usually have a pool of stock, typically between
10-15% of the company, available to incentivise key employees.
Whilst the founders tend to hold equity, options are used as a key
tool to attract and retain other senior executives. As you become
more senior, your equity incentives tend to grow exponentially.
Mid, or even relatively junior staff within a VC backed company
hierarchy might all have stock options – but these will likely be of
much less potential value than those which senior members of
the executive management team might possess. Candidates who
join companies at earlier stages can typically expect a greater
proportion of the option pool compared to those who join later,
as the business is likely to be less valuable when they join.
STOCK OPTIONS AND VESTING
Private companies typically offer equity incentives in the form of
stock options. A stock option is simply the right to buy a share at
a particular strike price (more on this later) once it has vested.
Vesting is a key concept associated with stock options - it is a
period of time that you must wait before you can use the stock
option. If stock options instantly vested when a new employee
joined a business, the risk would be that the employee could
leave and retain the options without having spent enough time in
the business to contribute to the value created.
Most private companies will offer a “four year vesting period
with a one (or two) year cliff.” A four year vesting period simply
means that it will take four years before you can exercise all your
stock options. The one year cliff means that you get the first
quarter of your options, all at once, on your first anniversary of
employment. Typically, your remaining unvested options would
then vest at a constant rate every quarter for the remaining
three years.
The reason why private companies like to have a “one year cliff”
is because most unsuccessful new hires will leave in the first 12
months – and this mechanism means that they don’t leave with
equity.
18 19