The following is from Ask The VC, where Brad Feld and Jason Mendelson of Foundry Group answer questions related to venture capital investment and startups:
(Brad) In response to the post Compensation In A Very Early Stage Company I got the following question:
Q: If comp is at say 50% with 2x equity vesting over a standard term, then in 6 months a series A is completed and there's more comfortable level of cash in the bank, salary can be renegotiated but options cant, so the scale doesn't shift accordingly; to, for example, 1x comp and 1x equity. How can the shareholders in the company not overextend their cash capability, but without over-diluting investor stake? Have you any experience where a balance was made to make both investors and early hires content?
A: I don't think this is a reasonable concern for the founders to take. Specifically, the reason the early employee is willing to make the trade discussed is because he is taking the risk that the financing isn't going to get raised in any reasonable period of time.
One way to manage this is to set expectations with the person getting this trade that it will last for a specific period of time (say - one or two years.) This addresses the "hey - we raised money faster than expected." Alternatively, you can put a structure in place where if compensation goes up in some period of time a certain amount of the equity granted gets canceled. I personally don't like these approaches because they both (a) create weird incentives and (b) generate additional complexity. If someone is willing to take a risk like this early one, reward them!
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