Module Description:
Ubiquity Extended Team member bethanye Blount talks about startup employee compensation benchmarks (and their pitfalls), simultaneously negotiating with candidates and your board, and the use of recruiters (contingent & retained).
Full Transcript:
Welcome, everyone, to our next Ubiquity University session on employee compensation. In our prior session, we talked about the basics, and today, in our part two of employee compensation, we'll be talking about equity and hiring. Ubiquity Ventures is a pre-seed and seed-stage firm that focuses on software beyond the screen startups. These are entrepreneurs at the earliest stages moving software to solve real world problems by moving into the real physical world. Today, I'm happy to have Bethanye Blount with us today as we dive deeper into equity and hiring. So thank you again, Bethanye, for being part of the extended team and doing these sessions with us. Let's dive right in. So one of the biggest ways to think about compensation, you know, my mind jumps right to cash and equity. So how do you think about cash and equity?
Well, first, thanks for having me back. I love doing these. Okay, so last time we talked about some of the very basics of thinking about organizational structure and compensation philosophy, and we used something like levels, which is usually a big company thing, as a, as a proxy for that, but thinking about it as an accountability exercise. Now, the thing about doing levels cash and equity is that you also use it as a finance exercise, right? You use it as an exercise to say, "For our company," after you go through all of the really angsty, like, "who are we" stuff that you sorta have to go through when you're, you know, "Who are we culturally?" "Who do we wanna be when we grow up?" "Where are we?" "What do we hate?" "Who do we never wanna be?" Like, you kinda go through some of that stuff, and then you craft your compensation philosophy to support those values, those things around it. Otherwise, it's the tail wagging the dog. You don't wanna accidentally become the kind of company you didn't wanna be because you made hasty decisions. So after you go through the, some of the angsty stuff, the next thing is gonna be thinking about making some, some target ranges that you wanna use for different kinds of hires. Now, if you sketch out that you think your company's gonna have about five levels that you're gonna think about, per se, engineers, you don't need to have ranges for all five levels to start, but you should have an idea, kind of like if you think you're only gonna hire a certain level of engineer, maybe you're only gonna hire senior engineers with at least five years of experience or eight years of experience, you should have an idea of like that one level below and one level above to give you some flexibility if you meet candidates and you kind of fall in love, that you aren't having to improvise on the fly. Now, when you're thinking about your compensation philosophy, you also wanna consider what that blend of stock and cash is. Think about it first in terms of percentages. Think about it in the percentages that we think that we want somebody's comp to be heavier on cash or heavier on stock. And then what you wanna do is go do some research, go out in the world and see what people are saying. Now, you have to do this exercise before you post a job posting anyway now, because in the state of California, for most companies, you have... And everybody sort of follows this at that point. It's not just California, but if you wanna hire in California, and you probably do if you're one of Sunil's portfolio companies, then you wanna take a look at your, you wanna take a look at what your legal requirements are. If you're gonna post a job listing, now you have to post the range, the target range in the job listing. We talked about this a little bit last time. Don't be those jerks that do something ridiculous. Actually do some thought and planning ahead of time on this. So this is also, like I said, a really good finance exercise for you to have, both with whoever is supporting you, if you have like a third party fractional CFO, or if you're just, or a bookkeeper, just make sure you're thinking about what your budget and planning kind of look like, I was gonna say for the next 18 months, but candidly, until your next fundraise, depending on when you think that's gonna come up. How do you wanna grow and what do you wanna do in there, and who do you need to hire in that space? We talked about remembering to account for benefits last time as well, but I'll just mention it again, 'cause it's a classic mistake. So after you do that, what you wanna do is go through and say, "We're gonna hire this number of engineers that we think are this level, maybe another that are this level. We're gonna hire two salespeople. We're gonna hire some customer success." Think about the different groups you wanna do. Lay out what you think are those target ranges in both your equity range and your cash range. And then you wanna bring those to the board for an annual review, or twice a year, depending on how frequently you do this, of your plan or your budget. Some people call it a plan, some people call it a budget. Functionally, it's performing the same thing here, which is going to the board and having a really candid conversation about, "This is what I wanna accomplish. These are the humans I think we need to accomplish that. This is the money I think we need to get these humans, and this is how we're planning on spending the money we've raised up to now." Couple of places you can go to look for to help you inform your ideas on this. First of all, if you're hiring for technical talent, levels.fyi is a really good place to go look. You are probably not paying what people on levels.fyi are paying, but you will be able to get a nice idea of the differentials and sort of what's covered in different kind of roles. So for example, maybe an infrastructure cloud DevOpsy kind of person, compared to, say, a web dev who's really great in React. How do they compare to each other? Are they paying about the same? Are they paying a little bit different? And if you need some of each, once you sort of anchor on one, you can use that to sort of triangulate where you wanna go for some of the other roles as you grow out your structure. Another place that you can go for sort of general talent is look at, like I said, job boards, especially job boards that'll cover companies like, like that you're competing against. Because remember, you're probably, probably, not competing against Facebook. You're probably not competing against Google, right? Because we're just not, okay. We can't pay that. We're not making, we're not manufacturing money, right? What we're doing instead is we're telling a total story, and that total story is the total value of what it means to work on this thing that we care about and to build this thing together. And what that means is that if you have somebody who's like, maybe they can make a half a million dollars at Facebook, total comp, including stock, you're not gonna probably pay them that. You don't need to tell the story of how your stock is definitely gonna be worth half a billion dollars to them. You can try that story, okay? But to be clear, most people are like, "Yeah, I know that that's the most obvious, optimistic answer. But what about between now and then?" Think about both the big vision, which of course is the billion-dollar story. We all love it, right? Like, "This is where we wanna go," and you have to be excited about it. But also make sure that you can come back and say, "But in the interim, while we're getting there, this is what it's gonna look like to be here. This is what it's gonna look like to do this work, to dig in, to make this thing, to make these changes possible in the world. These are the skills you can develop here. These are the cool problems you can solve here. These are the other people that you can work with. And we'll also pay you what we think is a very reasonable amount, with the opportunity for this big upside if we all pull together and win," right? So you don't need to, you don't need to oversell. Just don't sell past the close on that, you know, just take it and go. I think those are some of my... Oh, a couple of other things. Go look at Angel. They've been doing a pretty good job on their listings lately. And though it is necessary legally for you to post your compensation for your salary, it is not necessary to post your total compensation story. Nobody does. They're only doing like salary, right? In California, that's not legal, that's not the legal requirement. Doesn't include bonuses, which we probably don't do at our size. Doesn't include stock, right? So what that means is that when you go to someone like say AngelList, they usually show both. Just remember that they tend to, people tend to exaggerate their stock offerings a little bit on AngelList, so those numbers tend to be a little bit high on the stock side. And if you are hiring for someone very senior, by that I mean like your first VP of Eng, or your first VP of of Sales, or something like that, there is the VCECS, which is the Venture Capital Executive Compensation Survey that many, though not all, investors participate in. And what they do is they help... They get this report back, which is this big spreadsheet, that helps them see, give you information about like feedback on, "For a company at this stage and this size that's raised this much in this sector, in this area, here's about how much they're paying for," say, a VP of engineering. That's a really handy tool. And, of course, you always wanna collaborate with your investors and your board to see what other things they can bring to bear to help support you in this, what is a pretty challenging process.
Bethanye, let me comment on that last part. I'm glad you went through all the slices that you have to go through on that data. I think it points out something that is critical. The opposite of that is, my friend told me that CTOs should get 2%, right, which is very different than-
Very common.
Maybe 50 data points, but you sliced it by Pacific Northwest, raised under a million, over 10 million, founder versus non-founder, all of these cuts, pivots on the data, would change dramatically what those benchmarks are. And so I think it's, there are people who say benchmarks, always take 'em with a grain of salt, but at the very least, slice 'em down to sort of the relevant comparable set, I think is useful.
Yeah. And I'm definitely a person who says benchmarks, always take them with a grain of salt. Anybody who tells you like the market is the market does not know what they're talking about when it comes to pay. Let's just be clear.
But why, why is that? Why aren't the benchmarks reliable? Just to clarify out loud.
Because only you know what it means to run your business. And if you think you're gonna do, go into a lookup table and have it give you the one answer of like, this is exactly how much this should pay, it's just not how real life works. Like, companies are literally made of people, and people are these squishy, complex systems. We care about different things. And while they can give you things like averages and general, general targets, and maybe the main compensation for this role in this area, they don't know what it's like to be in your company right now. It's kind of the same reason that just 'cause you worked with someone at another company and they were great there, maybe they're not so great when you work out at another company. It's all about you right now, the problem you're working on, the people that you're with right now. It's just not as simple. This is not a math problem. I wanted it to be a math problem, and it's not. I really did. Compensation is an art problem backed by math. So you should get the numbers, but remember that it's art, it's not science.
Mm hm. I like that... We talked about cash versus equity and for engineering-driven companies, or just analytical CEOs, it's very tempting to work the numbers.
Oh, it's so hard.
Even I prompted the question: Is cash plus equity? But there's that intangibles, and I think, in my experience, almost no one leaves a large successful company they're doing a well at for the economic opportunity of joining a startup.
That's so true!
Right? Like, maybe they start something and they have the, you know, the shot at... But in terms of joining, it's not a financial decision, I don't think, primarily a financial decision to join an early stage startup. I think there are so many things that we can forget are so beautiful about seed-stage startups. The sense of agency, the culture, feeling like you're not just part of a wheel, not getting yanked around by the bureaucracy, all those things can matter as much as a meaningful amount of equity.
Yeah, some of us are really wired to just need to feel like we have some skin in the game. I know... I don't think anybody in your portfolio knows this. So I was at Facebook. Oh, you know, we talked about, like, you were on my board. Went to Facebook in 2011, and I was there for three-and-a-half-ish years. And then I started to get itchy. Like, "Man, this isn't, I don't know, fraught enough." I don't know, it was something where I just wanted to feel like I had more skin in the game. Some of us are just wired for it.
I agree. I agree. And even if you, you know, if you've never done it before, you know, jumping in, it's just a totally different experience in startup land. And I think that's an asset, actually. So, okay-
Agreed.
So we talked about baseline figures and benchmarks, where to find them, VCECS, levels.fyi, or Angel, or AngelList, and seeing what other folks are offering. And then the process, though. So you said, and I think this is important, especially as you raise venture capital, hiring decisions are in some part a board decision with regard to, like, equity. So I just wanna go through like what your recommendation is on just the tactics, maybe like week by week or day by day. Like if you have a candidate, a meaningful one, let's say VP of engineering, or a head of product, how do you negotiate that with the person, your own mindset, and the board at the same time?
Let's break this into two chunks, actually, 'cause I think that it's a great question. Let's do not the the topmost critical hire in the company, but we wanna grow our engineering organization. We've already planned with the board that we were gonna hire three engineers this year, and we thought that each one of them was gonna get this, I don't know, sub 1% of the company, and that's how we were gonna go. If you're basically holding to the plan that you did with the board for those hires, you should just be able to go. Like, you don't need to go back and re-get permission. What's gonna happen in practice is that you're going to, when you write your offer letter, get legal advice when you write your first offer letter. Make sure that you're like writing a good one. There's some good forums out there that counts as the legal advice, but make sure you get the right kind of forum. Especially if you're hiring in a different state, make sure that the letter you are sending is reasonable for the state where the person resides, or country where the person resides. In that letter, you're going to have some language that says, "You will be offered up to X number of shares." Usually, people like round numbers for shares. For some reason it makes them feel good. So remember that even if it's like a certain percentage, round numbers for shares. A little squishy up and down doesn't really matter, it kinda comes out in the wash. "You'll be offered X number of shares." Options to purchase, probably. "Options to purchase blah blah at the current, at the market price per our, you know, 2023 agreement, upon agreement with the board." So there's gonna be some language in there that says we're gonna probably do this once the board signs off. So make sure that language is in there. You can't make a promise until, you can't give it to 'em until the board signs off, but just, that's the, the language that you use. So, as long as you're basically following for normal hires what you said you were gonna do within like just the tiniest bit off, maybe a tiny up, tiny down, it doesn't fit, it washes out. I wouldn't worry about it. Ah, but what happens when you're talking about something substantial? What happens when you're talking to the board about something like this? First of all, I'm a big fan of the idea that your board are basically these really high-powered interns that help support you in the growth of your company. They generally are there to help you, and they want to see you be successful. And what that means is that, if it's your first time doing this, find someone on your board who has some experience that can kind of be your buddy to talk to a little. No, not your buddy. You know what I mean. Your mentor. Someone who can help you work through this process and make sure that you're covering it correctly. The general timeline, in my experience, that works well, and I have done this well and I have done this badly, to be clear, so let's go with what went well. What went well is when I went to the board ahead of time and said, "I intend to hire somebody who will fulfill this role, and I'm expecting that their comp is gonna be about this, based off of the research I've done," the things in the VCECS, all of that stuff. There will be a lively discussion that ensues. There always is, at which point you'll say, probably, "I understand that, but I've done my research and this is why I feel like this is the right range for this role." If you are hiring somebody who's very senior, a good way to do a little bit of that research also, because that can move pretty quickly, and you know you wanna fall in love and go after someone. If you're going to hire a recruiter, an outside recruiter for a very senior role, this is a good time to pick their brain, because they are making offers, they are doing things like that, and they can give you an idea of what a competitive offer looks like for a company at your size and stage in the landscape right now. So if you're hiring, say, say, your very first, you know, VP of revenue, like your first like big VP of revenue generation, or something like that, or your first CMO, or something like that, definitely, if you are thinking about using a recruiter, use them to help inform this, and then have that conversation with the board. "I've talked with a couple of recruiters. I've done some research, I've got it together." When it actually comes time to have a conversation with this human that you want to talk to about the job, they may ask about comp relatively early on, which is great, be prepared to have those conversations with them. If you get to where you're having a serious conversation, they may want to go up on the cash or up on the stock, or up on both, depending on what's going on. Make sure that if you are... This is, I'm a big fan of not leading with my top number. This is the deal, right? So if I went to the board and I said, "Hey, I think this is gonna cost like up to 2%, and maybe, or up to two-and-a-quarter percent, and I think it's gonna cost me $225,000 a year," I'm gonna actually lead the conversation with $200,000 a year and 2%, so that I have a little bit of room to wiggle if I need to. There's no rule that says you have to spend a hundred percent of everything, right? You can give yourself that space. It is very normal for someone as a candidate, if you're trying to go get a job somewhere, I mean this for you too, to negotiate some as part of that conversation, unless you have a company policy that you'd never negotiate, which you should have done back in your whole company philosophy thing. Unless you have that as a company philosophy, prepare to negotiate. When you post your ranges, oh, here's the other trick. I'm gonna bounce back really quickly. Here's my other hot tip on that, by the way. Let's say that for an engineer four or an engineer three, you say that you're gonna pay, I am making this number up, by the way, don't get excited, your internal number that you like is like between 120 and 165, made that number up. I would probably not post that entire range in my job listing, right, because you wanna give people room to grow. You wanna say the range for this job when you're hired is maybe just the middle third of that, right? "This is our range that we're hiring people in," because you wanna give people the opportunity to grow in a role without being forced to promote them too early. So that's the other sort of flavor of that trick.
Okay. That makes perfect sense.
It's not sneaky to do that either. It is a deliberate corporate decision to do that. It's not trying to be sneaky, it's trying to plan and use your economic resources well.
Bethanye, can you touch on the role of recruiters, and contingent versus retained for a second here?
Yes. I mentioned them very briefly before, so let's talk about it again. When you're hiring somebody and you don't have a lot of experience with that kind of a role, it can be incredibly helpful to hire a recruiter, a third-party specialist in that role to help you fulfill your, fill up your org with great people and fill your pipeline with people that are great that you might wanna work with. A really good example of this for me. So I'm an engineer by trade. I am not a sales person or a marketing person. I don't have those resources. So as we were growing our company, we did well hiring engineer and technical people, product. We could do that. Like, we were good at it. But we weren't good at hiring for sales yet. We hadn't figured out how, we didn't have those muscles. We just hadn't built them in our career. So working with a third-party recruiter to, say, hire an enterprise salesperson, which is critical for the organization, it cost money, but it was good strategically for us, because it meant that you were going to, sometimes you have to spend money to save time, right? And at that point, maybe I could have done it, but it would take me a lot longer to do that. They also can help you in areas where you aren't as comfortable or as fluent understand the sorts of things that you're competing against. And also, because of some of the things that a, an experienced executive recruiter, or, say, sales or marketing recruiter, depending on what, engineering recruiters, I guess. I don't know, I don't need those, but sure, maybe you do. What they'll do is the questions you'll get on intake are also really good to help you answer a lot of these questions for yourself if you didn't anticipate it. So when they're actually onboarding you, or considering to onboarding you as a client, they'll ask you a lot of questions, like, "How do you feel about this?" "How does this work for your sales organization?" "Can they be anywhere?" If they are anywhere, "What's the breakdown look like?" "How are you gonna do..." "How do the territories get divided up?" "I don't know." I hadn't thought about that, right? So they help you level up. A really good one helps you level up your maturity in that area at the same time as you're trying to grow in hiring new, more senior staff.
That makes sense. I like, I like two birds with one stone. So you're-
Yeah.
you're getting smart while you're also gonna get some leads,
Yeah.
and the like. Maybe, the last topic, you had mentioned before our call you really don't like this idea of presenting two offers to a candidate with different classes-
I really don't.
in equity. So say more about that.
I don't love it.
I've seen it happen many times. I'm curious what you think.
Yeah, it's super trendy. I don't like it. Let me tell you why. It is super trendy for a company to present an employee with two offers, one that is higher in cash and one that is higher in stock. Now, if those, to be clear, if those offers are actually pretty close, like if it's like, oh, like a little bit more cash or a little bit more stock, then I don't feel strongly about this. Then my, it kinda goes by the wayside. I don't get a little washy about it. But if you have it where, if you were gonna offer somebody $150,000 and, I don't know, let's say 10,000 options, making these numbers up, or you were going to offer them like $80,000 and three times that number of shares, that's not an okay offer from my perspective, though they do happen. I understand wanting to be thoughtful about having rigor and like wanting to be thoughtful about conserving cash and all those other things, but that kind of, that kind of offer has some significant problems with it. Let's do the easy one first. The easy one is that it makes it really difficult for you to plan when you're looking at how to best utilize your option pool. Don't blow your whole option pool. Lots of people make the mistake of doing this. Remember when you do your option pool, you're not just looking for hires, you're also looking for refreshers and how you're gonna give people more shares later, which we can talk about next time, if we wanna get together again on that. The other thing that this does is it creates... There are people, there are founders, they're wrong, I'm gonna say this right now, who will say this wrong thing, and they will say, "If anybody ever takes the more cash offered, then I'm not gonna hire that person, because that person obviously isn't dedicated to the company." And that is some BS. What they're actually saying is, "I'm only going to hire people who are already rich and don't need to make any money to come work at my company. I'm going to hire people who don't have a family or don't have to be a caretaker for anybody, or have already made some money at another company and so they're sort of taking some time off. I'm only hiring a very, very narrow demographic of kinds of people." And what that does is two problems. One, of course, it means that everybody in your company looks the same and has exactly the same background, which makes it much more difficult for you to do what? Hire, right, because then everybody needs to sort of fit in. But it also makes it harder for you to solve, to creatively solve challenging problems if everybody already knows all the same stuff. You know, nobody's bringing anything new to the mix, and you're undercutting the success of your company when you do that. And it also has a different, just some other issues for diversity, equity and inclusion. I'm even setting those aside. I'm just looking at sort of the ruthless business stuff here. It's bad business to do this. I do like it. There's a couple of companies that I know of. I can't mention the name, 'cause I don't know if I'm allowed to mention the name. But I'll give a basic sort of thing here that one company does. One company that is right at the very edge of what I like because of this, but I think it's consistent so I'm gonna let 'em have this one. It's a startup. They've raised, oh I don't know, maybe a couple hundred million dollars at this point, but they've been doing this for a long time. And what they do is they start out with a cash offer and they're like, "Now you get one of two options, where you can either go up a little bit on your cash or you can get more options," right? I think, "Or you can get a little more PTO." I think those are the three options. So everybody gets a little bit of icing sugar on the base option and on the base offer, and you kinda get which one makes sense to you. But there aren't such, there isn't such wide variability in those offers that it makes it so that you don't do the last problem with giving those two, and I'll tell you that, if you hire the guy who takes less cash and more stock. After you do your next fundraise, say you're series B, God forbid seriously, somebody does the evaluation of, "Why are we paying this guy so much less than everybody else? Oh no, he's so underpaid." And then you end up double paying that guy. Everybody does this. Don't fall into that trap.
It makes sense. Well, Bethanye, this has been fantastic, our session on equity and hiring, stock equity and hiring. I think we will take you up on that offer to do a part three. But thank you again for being part of this Ubiquity University session. Again, Ubiquity, we would love to hear you. We'd love to hear your pitch at pitch.ubiquity.vc. So again, thank you, Bethanye. And this will conclude our session.