In the startup environment, securing the right management team is a major challenge. You have a solid idea and you may even have some seed funding, but surely the cash that you do have is already earmarked for the development of your technology. Convincing major players to risk their stable career paths and join your risky startup will be a challenge, but there are some great ways to compensate your team while at the same time aligning their goals with yours.
There are certain qualities that a solid management team should possess. Traditionally, employing individuals with these skills is quite expensive. Here is a brief description of a possible (albeit bare bones) management team and some skills that would be valuable to have; notice the one quality that all three team members should have in common.
Chief Executive Officer: Understands the science and its potential market applications. Has a dynamic and trustworthy personality that investors will want to partner with. Is willing (and able) to take risk with their own personal financial situation.
Chief Financial Officer: Has experience with complex financing structures and accounting knowledge relating to equity transactions, intellectual property, etc. Is willing (and able) to take risk with their own personal financial situation.
Chief Science/Technology Officer: Has the ability to lead and manage research and development projects and may have experience as a grant writer. Is willing (and able) to take risk with their own personal financial situation.
At the early stages of the startup’s life, this team will likely be given a below market salary in order to conserve cash flow of the start up. There are ways to sweeten the deal for this team in order to increase their compensation and align their goals with yours, such as:
Stock Options: Stock option issuances can be made to your team members, board of directors, and service providers. Stock options are compensatory in nature and are intended to increase the reward to the recipient as the Company’s stock price increases. Stock options will be exercised by the recipients at the stated price (usually the fair market value at the date of the grant).
Restricted Stock Awards: Restricted stock awards provide an employee with the ability to earn shares of restricted stock over a period of time or through the accomplishment of certain specified goals. This type of award is a useful method of compensating employees who are not able to directly impact the Company’s stock price. The difference between stock awards and stock options is that options will be purchased at the stated price at the grant date and restricted stock awards are earned over time.
Variable Compensation: Startups can structure bonus programs such that the goals of the team members are aligned with the goals of the Company. These bonus programs will likely be financed through subsequent fundraisings, which these key employees will be highly involved with. Typically, the board of directors will monitor progress and approve compensation of this type.
Time and again we have heard investment sources say that their decision to invest in one company over another came down to the management team. They are looking for a team that provides expertise, is trustworthy and is a team that they feel comfortable working with. These investment sources want to know that they can rely on you to launch the technology into the market. Your technology may get your foot in the door with targeted investors, but it is your management team who will seal the deal.
Finding the perfect team without taking a major hit to your cash balance is possible, if you can show these individuals that in exchange for a certain degree of risk on their part (and some sweat equity) your startup has the ability to produce potential upside in excess of more traditional compensation structures.