Is a high growth equity backed venture right for you?Author: Laura Montgomery, Head of Executive Services, iMultiply
There has been a noticeable increase in start-up businesses in Scotland achieving investment goals and exits over the past decade. Along with this comes a choice for talented finance professionals. Previously Scotland’s top finance talent would progress through enviable plc’s and global corporates. However, an increasing number of talented people are trading climbing the corporate career ladder for a very different type of career – to join an entrepreneurial high growth venture, offering equity.
There are plenty of perks when it comes to working for a start-up/high growth venture. Being at the forefront of shaping and building a new company is undoubtedly a big attraction – and of course, owning a piece of paper that could pay out a life-changing sum of money.
However, there are quite a few things to consider closely when you enter an interview process of this nature. In particular, an equity compensation contract is no simple matter. It comes in various forms, and it’s imperative that you fully understand what you’re signing up for. Here are a few things that you should consider when evaluating an offer from a start-up/high growth business.
Is an entrepreneurial high growth venture right for you?
Two main things come to mind here. If you are someone who needs a lot of structure day to day, perhaps a start-up environment is not for you. Start-ups can be chaotic and move at a breakneck pace, although good leadership will dull the chaos. So you must be honest with yourself about whether you thrive in this type of culture. You will feel far more exposed, and you must be comfortable with this.
It is also key to identify what is important to you in a remuneration package. If you prefer the security of a larger base salary, then the typical structure of a start-up/high-growth company may not be right for you. Any sensible founder/investor will incentivise the leadership team to build the business and grow the company’s value. This encourages everyone to focus on the same end goal and ensures all parties share the benefits, so you will find the financial reward pointed more towards the equity pay than the base salary.
Kevin Meechan, CEO, Sense of ARRAN comments:
“The key consideration for me when making the transition to an entrepreneurial venture is to find the right project. I am a strong believer that Passion brings Progress and unless the Executive Team is passionate about the journey they are leading the business and its people on, it’s unlikely to realise its ambition.
It can seem like a big change moving from a corporate to more of an entrepreneurial business environment. That said, never underestimate the importance of the “Corporate Disciplines” in an entrepreneurial, high growth business. These help manage the growth journey while giving it the best chance of success. In my experience, finding the right CFO is a critical component of this, someone who can provide structure and planning foresight without dampening the entrepreneurial spirit of the business.
Every move I have made in my career has been about learning and developing as a business leader. This has been ‘turbo charged’ during my time working with Private Equity backed business and hugely rewarding as a result helping me to develop in areas that I may not have otherwise had the chance to in a corporate”
Identifying the Company’s Capability
No one wants to work for a business where there is an apparent lack of capability or direction. The cultures that exist within start-ups/high growth ventures can vary dramatically. It is essential to get a good feel for the calibre of people at the top of the organisation and the environment before accepting an offer. During the interview process, make sure that you spend a fair amount of time with the main decision-maker(s) to understand their leadership and communication style. The decision-maker should be very clear on the company’s identity and strategic mission; will show a strong appreciation towards the importance of good working relationships, and acknowledge the importance of having a talent strategy.
A talented CEO/Executive/Investor will have a robust but agile business plan with a clear idea of how this plan will be executed over the course of, for example, four years – and how you fit into this plan. Identifying the plan upfront will ensure that you will be working for an organised and well-run business that knows where it’s going and how to get there.
It’s important to note that investors buy into a company with cash, but you will likely earn the equity through your time and effort, also known as ‘sweat equity’. Albeit these adventures are very enticing, you need to think rationally about the growth prospects of the opportunity being put in front of you. Understanding this will help you identify the actual viability of the prospect.
What is the Exit Strategy?
From my point under ‘Identifying the Company’s Capability’, you should ask the founders what their overarching exit strategy is as part of your evaluation. Do they want to execute an IPO, or do they plan to sell in the next four years? This is crucial to understand if your equity will amount to anything within the timescales you have in mind.
Type of Equity – Restricted Stock or Stock Options?
You will have to establish the type of equity the company is offering you. Restricted stock, also known as the aforementioned ‘sweat equity, is stock granted to you but will come with restrictions. You don’t have to buy restricted stock; it’s granted to you, typically given to early employees of start-ups when the value is very low. It’s essential to understand if other shares are outstanding, and if so, the number of shares left. Naturally, if shares are outstanding, this will impact the value of your equity.
The most common form of employee equity is stock options. This allows employees to buy stock at a pre-determined price or known in sophisticated markets as the ‘strike price’. You ‘exercise your options when you purchase the underlying stocks at the strike price.
Anyone receiving an offer of equity should evaluate the offer through their analysis. To do this, you need to look at the company’s valuation and capitalisation. If the company is private equity-backed, this information can be found through the last round of funding. If the company is privately owned, don’t be shy in asking for the valuation. Any genuine Founder/ Executive should be concerned if their potential new CFO is not asking for visibility of such crucial information. After all, how you evaluate the job proposal will give insight into how you will support the company’s growth.
At this stage, understanding the fundamental components of equity is important:
• Vesting is the process of earning an asset. Incentivising you to stay for the sale and to meet the milestones stated in the plan. Every company will have their vesting schedule, so you will need to understand the specifics to know how much you’ll own and when.
• Strike price is the fixed price of each option that can be bought or sold by the owner. The market price will dictate the option price on the day that the contract is agreed.
• Cliff Vesting is how companies can incentivise employees when first hired (at the strike price). Typically plans have a four-year vesting schedule plan with a one-year cliff. When completing the cliff period, the employee receives the full vesting benefit. If the company doesn’t issue equity from the offset, you could propose ‘cliff vesting’.
This will ensure that you are offered shares based on the valuation on the day you join.
A summary of what you need
In summary, to calculate what your equity could look like, you will need the following information. All of this should be clearly detailed in your offer letter:
• the last price per share for preferred stock;
• the company’s valuation after the last round of funding;
• the value the company could exit at;
• the total number of options offered to you;
• the price per share to exercise your options.
Equity SHOULD NOT be the main reason you are interested in the job offer. You should see clear career development. Although the offer will likely be weighed towards the equity, a decent rounded package should be on the table — for example, a very respectable base salary, milestone bonuses and health insurance. A discrete head-hunter with who you have a good relationship will be able to advise you on the healthiness of your overall offer.
In the unlikely event that a head-hunter is not representing you, always approach an equity negotiation with caution and never negotiate until you have been identified as the candidate the company wants to hire. You want to show that you are passionate about the company’s journey and not just the pay-out, but at the same time, you should know your worth and the value that you can bring.
If you feel that the offer is slightly below par, the best way to approach the negotiation is by quoting the going market rate for a similar-sized venture being clear that this opportunity feels like the right one for you if you can get the commercials to land. Again, a head-hunter that you have a close relationship with will help you benchmark. If there is no movement on the equity, think about what other parts of the package you can influence.
Gather most of your information at the offer stage, and this will allow you to make a far more informed decision. There is a lot to think about when joining a high growth venture, but one thing is certain: the pace of change, the excitement, the learning curve, and the personal investment you feel when joining a high growth venture is like no other. It’s not for the faint-hearted. However, for many, it’s the most enjoyable and rewarding (not just financially) journey of their career!
If you would like to join an entrepreneurial high growth venture and are looking for someone to represent you please contact Laura Montgomery, Head of Executive Services on 07514 623 461 or by emailing firstname.lastname@example.org.