We are a small consulting company that is in the process of being
acquired because of a software product that we developed.  We would
like to fairly compensate our sales/marketing VP for his work.  Our
acquisition is due to the quality/innovation of the products we have
built, the management team and our VP's efforts to promote us. He has
also been involved in the decision making process that has led to this
acquisition.

Our company has been in business for 5 years and the technology of
interest has been built over the last year with money that the company
made during the previous 4 years. Our Marketing VP has not contributed
any money to the company, but has not been compensated for any of his
six months of work. It should also be noted that the partners have
been working without compensation for the past year.
 
If there is an acquisition we would like to give our VP a percentage
of the sale of the company.  We would like to make a fair and informed
decision and believe we can only do this by evaluating what other
companies have done and/or any industry standards.

A valued answer would include a low to high range with a detailed
account of the sources/reasoning that led you to this conclusion.

---

Request for Question Clarification by ragingacademic-ga on 12 Dec 2002 11:04 PST

saul69 -

Where in the US are you located?
That will have significant impact on the appropriate compensation level. 
Best would be to provide me with a zip code.

thanks,
ragingacademic

---

Clarification of Question by saul69-ga on 12 Dec 2002 13:49 PST

San Diego, CA

Dear saul69,

You requested information about compensating a VP Sales & Marketing. 
Let me first mention that I wish to continue working with you on this
question until you are satisfied with the answer I have provided. 
Since I may need to make some assumptions on top of the facts you had
already provided, you may want to provide me with additional
information that I will then be able to integrate with my initial
response in order to provide you with a more complete answer.


I’d like to begin by laying down the facts as I understand them from
your question –

+ You are a small, private consulting company that has been in
business for the past five years

+ You are in the process of being acquired – not for your core
business, but for technology you had developed over the course of the
last year while leveraging the profits the company has retained over
the previous four years (consulting)

+ The VP in question has been instrumental to the acquisition both
through his efforts to promote the company pre-acquisition as well as
due to his active involvement in the acquisition process

+ The VP has been with the company for six months

+ During these six months, the VP had not been compensated


The fact that the partners, all of whom have a defined stake in the
company, did not extract compensation over the past year is
immaterial, especially given the fact that you yourself declare you
would like to compensate this VP in a fair and informed manner.


I assume that this individual came on-board pursuant to some
agreement, and that he was not just volunteering his time with no hope
of any financial gain whatsoever.  Note that if there was any
agreement, whether written or verbal, you will most likely need to
compensate him at the very least in line with this agreement. 
However, if neither agreement nor any promises were made then consider
this last paragraph irrelevant.


I also assume – and please correct me if I’m wrong – that this
individual was brought on-board (or joined the team in some other
capacity) in order to further the interests of the technology you had
been working on rather than to secure additional consulting work for
you.  In any event, it seems that he has had a material part in
securing the deal on your behalf.


Let me start with a couple of data points – I had held VP Marketing
positions with software startups in the bay area in the recent past. 
At one of these, I was paid an annual salary of $120k and was given 4%
of the company with a four-year vesting schedule.  At the other I was
paid $150k but only received 1% of the company (in relative stock
terms – i.e., I received 100,000 shares of 10 million outstanding). 
However, this 1% came with only a one-year vesting schedule, so that
by the time I had left 18 months later I was fully vested. 
Nevertheless, typical vesting is on a four-year schedule.  You will
soon understand why this is material.  Typical options packages for VP
marketing positions range from 0.5% to 5% of outstanding shares
depending on the stage of the company and the level of experience of
the executive – less for later stage and for less experience, and more
for early stage and less experience.


There are several sources on the Web that will allow you to extract
salary data by zip code.  It is important to extract such data by zip
code because salaries can vary so widely between one geographical area
and another.

Perhaps the best source is the Wall Street Journal.  The WSJ provides
salary and hiring info at –

http://www.careerjournal.com/salaries/index.html

According to the Wall Street Journal, a “Chief Marketing Executive”
(read: the highest ranking marketing executive in the company, which
sounds like this guy) earns an average salary of $134,188 in the San
Diego area (I used zip code 92019, but the exact San Diego zip code is
not material since there is basically one set of data for the San
Diego area).  50% of individuals employed in this position in the San
Diego area earn between $91,584 and $158,289, which correspond to the
17th and 67th percentiles, respectively.

The average bonus, as reported by the Wall Street Journal, was 19.7%
of salary, or $26,435.  Average benefits totaled 12.7%, or $17,042 on
average.  In total, then, Chief Marketing Executives in the San Diego
area received a total compensation package of $177,677.  Note that
this is based on “real, area specific survey data” collected by WSJ.


HotJobs, working with salary.com, also provides independent
compensation estimates by position and zip code.  Since in this case
zip code 92109 landed me in Pacific Beach, I used 92101 for downtown
San Diego instead.  The results are available at –

http://swz-hotjobs.salary.com/salarywizard/layoutscripts/swzl_compresult.asp?zipcode=92101&narrowcode=SM04&geo=San+Diego%2C+CA+92101&jobcode=EX05000006&jobtitle=Top+Marketing+Executive&x=101&y=6

- But are summarized here:

Median cash salary for the top marketing executive in a company based
in downtown San Diego is $184,863, with a low of $150,348 and a high
of $230,174.  Median bonus and benefits combined totaled $40,518, with
median
total cash compensation reaching $225,381.

The total cash compensation component is found here –

http://swz-hotjobs.salary.com/salarywizard/layoutscripts/swzl_compresult.asp?narrowcode=SM04&jobcode=EX05000006&zipcode=92101&geo=San+Diego%2C+CA+92101&jobtitle=Top+Marketing+Executive&compdatatype=1

(If you’re going to try and follow these links, you may have to copy
and paste them line-by-line into your browser’s address window)


The salary.com data seems to be on the high side, but the WSJ data
feels a bit on the low side.  Adjusting the WSJ data by 33% of the
difference results in an average salary of $150,910.

According to these two sources, bonus and benefits combined should
range between $40k and $43.5k.  We’ll use $42k in what follows.


Fairly compensating your VP for the six months of work he has provided
you with requires you to consider three components –
1. Salary
2. Bonus + benefits
3. Equity


As discussed briefly above, the range of equity awarded to an
individual in this position is a function of several variables –
+ Market conditions
+ Size of company
+ Stability of company
+ Individual’s experience
+ Individual’s negotiating prowess

I’ll ignore the last point because I have no idea how capable your VP
is in the negotiations arena – and this would be considered a mute
point if you did not negotiate an agreement apriori.

Market conditions at this point in time are not favorable to employees
since we are in an employers’ market.  Your company is small, but you
have been together for five years and it sounds like you have been
moderately successful even prior to the acquisition.  Your company is
therefore considered quite stable (without having access to any
additional information…).  I have assumed before that the individual
in question is moderately experienced.  It would be fair to say that
under these conditions your VP would be awarded a stake equivalent to
between 2% and 3% of your company.  For the sake of convenience, let’s
proceed with 2.5%.


The next consideration is vesting.  Typically, vesting is set at four
years.  However, the VP has only been with the company for 6 months. 
In some acquisitions, all equity is automatically vested – but not in
all acquisitions; further, typically, if the company is acquired some
or all of the employees’ options will be replaced with options in the
acquiring company that are subject to some other vesting schedule (in
a senior position such as VP Marketing, this will typically be one
year – the idea is to ensure that the executive will hang around for
at least that long).  Bottom line, it’s up to you to determine how
generous you want to be in determining what percentage of equity to
award the VP – from the appropriate range, of course.  Now, let us
discuss the appropriate range.


We have determined above that it would be fair to award the VP a 2.5%
stake in the company.  Since the acquisition happened within 6 months,
and 6 months represent 12.5% of a 4-year vesting schedule, you could
choose to award the VP anywhere from 12.5% of the 2.5% (0.3125%) and
all the way up to the full 2.5%.  I think it would be fair to meet the
VP half way and award him 1.25% of whatever the company sold for.


In addition, you need to compensate the VP for his time.


Using the salary and bonus averages calculated above and applying a
multiplier of 0.5 (6 months out of a full year) we arrive at a
half-year salary of $75,455.  Half-year bonus and benefits add an
additional $21,000 for total cash compensation of $96,455.  If you
provided benefits to your VP over the last six months you should
subtract the value of those benefits (health insurance, car, cell
phone, etc.).


To summarize, fair compensation for your VP in the San Diego area
should total $96,455 plus 1.25% of the company sale price.

The compensation can vary based on the ranges for full-year
compensation elaborated on above, and equity can vary between 0.3125%
and 2.5%.


I hope this response adequately addresses your request.  Please let me
know if you are in need of additional information concerning this
query, or if you want me to undertake any further analysis.

Thanks,
ragingacademic


Additional Links:

Hotjobs
www.hotjobs.com
or
careers.yahoo.com

salary.com
www.salary.com


Search Strategy:

WSJ Career Center: “marketing” AND “Chief Marketing Executive” AND zip
code = 92109

Hotjobs: “marketing” AND “Top Marketing Executive” AND zip code =
92101

---

Clarification of Answer by ragingacademic-ga on 12 Dec 2002 19:05 PST

saul69 -

Just had a long conversation with a friend who until recently worked
in executive placement for tech companies in the valley (he worked for
TMP, one of the major placement firms).  Ran over the numbers and he
supported my conclusions - but he will also pass me some "Radford
Report" numbers tomorrow.  The Radford is the preeminent survey in the
industry.  Will pass it on here once I receive, but he believes it
will confirm what I have already calculated and summarized above.

thanks,
ragingacademic

---

Clarification of Answer by ragingacademic-ga on 15 Dec 2002 10:44 PST

saul69 - 

I've not heard back from my contact yet, hope to see the info by
Monday.  Will keep you updated.

thanks,
ragingacademic

---

Request for Answer Clarification by saul69-ga on 15 Dec 2002 11:13 PST

First of all let me say that I think this is a very good answer to our
question.  It is well thought out and all of your assumptions have
been correct?  We are also looking forward to the numbers from your
contact.

Do you have any hard data that backs up the numbers you suggested for
equity?  I know this may be hard to find but it would be very useful
to us.

---

Clarification of Answer by ragingacademic-ga on 16 Dec 2002 14:17 PST

saul69 - 

I've finally received the Radford data, it is as follows -

Median % of total shares outstanding woud be 1.4%
25th% is 0.63%
75th% is 1.762%

This is for a VP marketing at a company similar to yours with Series A
financing.  Unfortunately, there is really no benchmark for pre-Series
A companies.

You would then want to decide how much vesting to apply to the above
numbers.  Industry standard is 25%/year for 4 years.  However, as I
had explained in the more lengthy write-up, employment agreements come
with a variety of different clauses, and companies setting themselves
up for a sale will typically allow automatic and full vesting for
senior execs upon acquisition.

The rest of the equity numbers I provided you with are "hard" in that
they were based on personal experience.  I could not find anything
specific that is in any way shape or form comparable to your
situation.  Nevertheless, WSJ's CareerJournal online has some good
articles, but most are dot.com era, e.g. -

http://www.careerjournal.com/salaries/benefits/stockoptions/20000614-gumpert.html

I hope this additional information has been valuable to you.
Let me know if you need anything else, and good luck!

thanks,
ragingacademic

Hi Saul,

Ragingacademic posted a great answer. Thought I'd post some additional
thoughts, which might be considered in conjunction with RA's. The
following is off the "top of the head" of a colleague of mine who's
been in a situation similar to yours with a software/consulting
company:
------------------------------------

1. Somebody (possibly more than one) has "ownership" of that idea
itself. Whoever actually came up with the raw concept, back when
he/they thought of it, if somebody had told them "I'll give you
$10,000 for that idea", would they have signed it over? $100,000? Hard
to do in retrospect, but there would have been a figure.
2. Given all of the skill sets, what is each contributor's work
reasonably worth "on the market"? Figure fairly high, preferably
higher than any actual salaries that may have been paid. Multiply that
by the effort and put a value on each individual's contribution -
whether or not they were paid.
3. Add in anything, whether goods or services, that WAS actually
financed with seed cash, and credit it to whoever laid out that cash.
Do NOT count goods or services purchased with revenues.
4. If some people have been paid during 4 1/2 of the 5 years, whereas
that Marketing VP just signed on six months ago, the long-term folks
have more "sweat equity" than he does, even though his unpaid
contribution might be equal to their recent unpaid contributions.
Subtract what people were actually paid from the higher figure in #2
and add their uncompensated contribution to the "share pot".
5. Add up all uncompensated contributions and cash advanced. Use that
as a basis for allocating "shares". Whether the payoff is roughly
equal to that, smaller, or a major windfall, allocating it along that
percentage would be quite equitable, and would reward the recent
Sales/Marketing VP for his efforts, but not out of proportion.
----------------------------------------

Sounds like you have the "good" kind of problem here. Best of luck
resolving it. And, obviously, don't forget to consult your CPA for tax
consequences of whatever approach you settle on.

ericynot-ga

Please see "VP Compensation (Part 2)" for a follow up question worth $100.
I would like to see the contributors of this question answer that post.

Many thanks,
ac