Negotiate Your Compensation (Part 3 of 3)
Navigating the Decision to Lead Sales at a Startup
This blog post provides valuable insights and guidance on negotiating equity as a Head of Sales in a startup. It explores the key clauses and considerations that executives should be aware of to secure their long-term financial success. From understanding stock options and 409A valuations to exploring additional clauses and strategies, this post equips readers with the knowledge they need to navigate equity negotiations effectively.
At the point that you’re negotiating for a Head of Sales position, you understand your core priorities (Part 1) and have an understanding of the startup’s business (Part 2). The company believes you’re the right person for the role and has now made you an offer.
When it comes to negotiating, you need to understand what stage of the startup you’re coming into as the Head of Sales to best be able to negotiate tying your experience along with the needs of the startup in that moment.
Roles that act in the capacity of a Head of Sales for a Startup
(1-5 reps with the team lead having a quota; a player + coach role)
(1-8 reps, no other leaders)
(8+ reps, maybe managing a couple of leaders)
(20+ reps, 3 managers)
At the more junior level when the Head of Sales has a quota and acts as a player/coach that individual tends to have a smaller cash and equity stake compared to the more senior person that comes in to oversee more reps or even a sales manager at a slightly later stage.
A Head of Sales can negotiate Base/OTE, but the bulk of the conversation should be centered around equity. If you’re joining a startup you should believe in the company’s vision, which means the real upside lies in the equity, not your yearly on-target earnings.
Of course you have to be able to support yourself and your family in the short term, but you should be planning to be with this company for 5+ years and be thinking about the company’s success as an executive. Equity is where life changing financial outcomes happen, and you should do everything you can to set yourself up to be rewarded in this way for the heavy lifting you’ll be doing.
Here’s a take from Sam Blonde, the former CRO of Brex and current partner at Founders Fund.
✨ Let’s start with understanding stock options as the foundation. Even if you’re comfortable with stock options I urge you to read this post from OnlyCFO.
Some Highlights
What are the fully diluted shares outstanding?
This tells you the size of the pie. Only then will you know how big of a slice you are getting with your stock options.
Fully diluted share count includes shares that are currently outstanding, and also shares that could be claimed through the conversion of convertible preferred stock or through the exercise of outstanding options and warrants.
What is a 409A valuation?
The company should have an updated 409A valuation (at least annually) which determines fair market value (FMV) of their shares
The reality: if your company raised at a huge valuation in 2020 or 2021 then the company may have received a 100x - 300x valuation multiple, but companies are getting a fraction of that today.
What was the preferred stock price and valuation?
You want to know how big the spread is between what the last investors valued the company at versus the price you can purchase shares at.
A good question to ask the founder: “With market dynamics changing, how has your 409A valuation changed, and have you done anything for employees whose equity might be impacted by the drop in valuations?”
I’ve seen a wide range of scenarios where a revenue executive receives 0.5% - 3% of the company in equity, with total cash compensation from $220k - $400k all-in.
Below is a chart from Carta Total Comp for comparison regarding equity:
The risk profile of a startup compared to what a Sales Manager or Director of Sales could be getting at a more established company at a certain point doesn’t make sense. You have to have clarity as to why you’re joining a specific startup, and make up for yourself what stake in equity you want to aim for in your package.
Note: the chart above is looking at the Head/VP of Sales entering at the Seed/Series A stage. Check out Carta Total Comp for references and ask the company what range of equity other executives at your level have been given.
Clauses you should consider:
Accelerated Vesting
While a standard vesting schedule is important for aligning your interests with those of the company, it's also important to consider the possibility of an acquisition or other exit event. In these cases, it's common for vesting schedules to be accelerated, which means that you'll receive all or a portion of your equity immediately.
As a Head of Sales, you should push for accelerated vesting in the event there is change of control. This can help ensure that you're rewarded for your contributions to the company, even if you're not with the company for the full vesting period.
Double Trigger Vesting
Double trigger and accelerated vesting are similar in that they require an acquisition or change in control of the company (first trigger). The second trigger is usually a termination of employment, either with or without cause.
Without double trigger vesting, your equity could be at risk if the acquiring company decides to terminate your employment. With double trigger vesting, you're protected in the event of both an acquisition and a termination.
Clawback Provision
A clawback provision is a clause that allows the company to reclaim some or all of your equity in certain circumstances. This can include a breach of contract, unethical behavior, or other similar situations.
You should be aware of any clawback provisions in your equity grant and ensure that they are fair and reasonable. You should also ensure that the clawback provision is clearly defined and that you understand the circumstances under which the company can reclaim your equity.
Extended Exercise Window
An extended exercise window is a provision in stock option agreements that allows employees to exercise their vested options for an extended period of time after leaving the company. Typically, when an employee leaves a company, they have 90 days to exercise their vested options before they expire. However, with an extended exercise window, employees may have several additional months or even years to exercise their options.
There are several benefits to having an extended exercise window. First, it can help employees who may not have the financial means to exercise their options immediately upon departure. Second, it can provide employees with additional time to assess the value of their options and make informed decisions about when and how to exercise them. Third, it can help employees avoid losing out on the value of their options if the company's stock price increases significantly after they leave.
Extended exercise windows are becoming increasingly common, and many companies are now offering them to all employees, not just executives.
Cashless Exercise
A cashless exercise is a type of stock option exercise that allows employees to acquire shares of stock without having to pay cash upfront. Instead, the employee sells enough shares to cover the cost of the exercise price and any taxes owed.
Cashless exercises can be a good option for employees who don't have the cash on hand to exercise their options. They can also be a good option for employees who want to avoid paying taxes on the exercise price upfront.
However, there are some drawbacks to cashless exercises. First, the employee may end up with fewer shares than they would have if they had exercised their options and paid cash upfront. Second, the employee may have to pay more in taxes if the stock price increases significantly after the exercise.
Secondary Market Sales
A secondary market is a marketplace where investors buy and sell securities that have already been issued by a company. This is different from the primary market, where companies sell new securities to investors for the first time.
The right for employees to sell their stock options on the secondary market depends on a number of factors, including the terms and conditions of the stock option plan and agreements established by the employer.
Stock options are typically subject to restrictions and may not be freely transferable without the employer's consent. In some cases, employers may include a right of first refusal provision in the stock option plan or agreements. This means that if an employee finds a buyer for their stock options, the employer has the right to match the offer and purchase the options instead.
For executives in super successful companies, it's not uncommon to end up with a personal financial portfolio where their company's stock options are north of 90% of the portfolio. Being able to take some chips off the table to diversify is justifiable.
Grant Refresh
Grant refreshes are not uncommon in employment agreements, especially for executives or employees in leadership positions such as a Head of Sales.
A grant refresh refers to the process of providing additional equity or stock options to an employee beyond their initial grant, usually after a certain period of time has passed or after the company has achieved specific performance targets. The purpose of a grant refresh is to incentivize and retain key employees, including those in leadership positions, by aligning their interests with the company's long-term growth and success.
The specific terms and conditions of a grant refresh, including the timing, frequency, and amount of additional equity or stock options, can vary depending on the company's policies and practices.
My recommendation is to keep this high level in your employee agreement and state that both the employer and employee will revisit this at the 2 year anniversary of the employee’s start date. Put it on your calendar and focus on building up the value of the business.
Final Thoughts
Negotiating equity as an executive can be a complex process, but it's an important one. Founders will have to go to their board of directors and make the pitch for anything you negotiate that is outside of the standard employee stock ownership plan.
By pushing for the right clauses, you can ensure that your equity compensation aligns with your interests and provides you with the protection and rewards that you deserve. Be sure to fully understand the terms and conditions of your equity compensation.
In a scenario where there is disagreement on compensation, consider taking on a fractional Head of Sales role for a 3 month term in exchange for a fixed amount of cash. This de-risks the full time move for both sides.
If you’re earlier in your career consider how taking this position will accelerate your growth.
The truth is most companies will not have a $1B exit let alone a $10B exit. However, if you believe in the founders and their vision, and if the opportunity aligns with your core principles, then pull the trigger on the opportunity and don’t have regrets.
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