Is there a principle or guideline usually adopted in structuring compensation for a professionals being brought in to the leadership team of start up/ new ventures. Just how much of the market compensation cut that are you asking him/ her to take should be made up through stock? Our preliminary research seems to suggest the following formula - Cash compensation: 33-40% of market compensation or last drawn salary - Stock: equivalent to 200-300% of drop in salary
You need to pay people competitively. Just because you are at a startup does not mean you pay people way less than market for their services. It's important, if you can afford it, to pay your employees a wage that's market competitive. Of course, this is all dependent on your financial situation.
Stock option grants are usually dependent on the position. In a venture backed startup, the employee pool is roughly 20% of the total outstanding stock. The CEO usually gets the most of that pool (say 5%) and then it does down from there (VP's for example may get 1.5%, etc). If you are not venture backed, then it's pretty much wide open.
As for stock, that all depends on the position and the situation. Some employees will volunteer to work for less money if they can get some of it back in stock. The formula for the conversion varies, depending on the circumstances. In general, you can use the option price as the highest multiple and then work from their.
Good people don't work for free.
You might be able to get someone to join you but if you're not compensating them properly, they're going to leave for a better offer.
You need to offer a mix of cash and equity. The mix depends to two things:
While you can argue that your stock is going to be worth "mega-bucks" from some potential future value, I think it's more reasonable to use a blend of the most recent valuation with the projected valuation for the next round as the basis on which to value their compensation package.
As an investor, I want to know that the top talent is not going to leave for a bit more cash flow and has enough equity on the table to recognize and reward their contributions. I want them to feel like owners and not just employees.