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Apr
13

Communicating with Your Board: Equity Grants

As your company grows, you’ll find yourself frequently seeking approval for grants of equity from your board.  Most often, the desired grants will be for new employees, but you’ll also want to use equity to recognize and retain existing employees, consultants, advisors and even your board members.  Since many grants will be made, it’s important to be able to present a request for equity,

  1. In a standard (for your company) format so the basis for making decisions between meetings is as consistent as possible.
  2. Relative to other similar grants whether being done at the same time or having been made previously.
  3. With as much contextual information as possible about the people and the grants, themselves.

First, I’ll take a step back by saying that in almost all cases, your board needs to approve any grant of equity to anyone.  When you’re starting out, it may be the entire board who approves such grants.  Later, though, there is likely to be a formalized compensation committee of the board that will be responsible for review and approval.  Even though the compensation committee is responsible for being closer to the compensation information than the general board, it would be a mistake to believe that the members of the group remember what has happened before or understand the state of things in the company the way that you do.  There is just too much information to remember when they are not exposed to it on a day-to-day basis. 

The good news is that it’s relatively easy to present all the information needed to bring your board up to speed on the critical and contextual data in this area.  First, always include a cap table with your board package even if it hasn’t changed since the last time one was distributed.  The cap table gives the board/comp committee a great picture of who has what and makes it easy to make sure that there is some consistency in how grants are made.  Additionally, board members, especially those who are also investors, will be thinking about how any grant is going to affect their overall ownership in the company, even if they don’t admit it.  By giving them an up-to-date cap table, they can do the math themselves.  After all, it is all about me.

Second, have a table like the following in your package [note: I include the concept of options to acquire shares as part of shares]:

Name Position # Shares % Ownership # Existing Shares/% Vested Range
           

 Where the columns are:

  • Name: the name of the person who will get the proposed grant if approved.
  • Position: their current position in the company or the position that they will take when hired or retained.
  • # Shares: the number of shares and type of equity the person will receive.  Are they options, restricted stock, performance shares, etc?
  • % Ownership: what percentage of the company is being granted on a fully diluted basis.
  • # Existing Shares: how many shares of the company does this person already have (applicable for existing or former employees or consultants).  It’s also good to include what percentage of their options, if any, have already vested.
  • Range: what is the range of shares previously granted to people in this position or, if the position is new, what is the range of company ownership for this position in other companies at the same stage of development.

Third, be prepared to discuss the background and/or performance of anyone on the table.  In my experience, detailed descriptions are generally only required for people getting big grants, but it really looks bad if you can’t explain why someone is on the list in the first place.

This may seem like a lot, but it’s really quite easy.  It’s likely that you process all of this information already and just don’t formalize it.  The key, of course, is to not just do this one time, but to keep it up.  Consistency is important and will become increasingly important as the company gets larger.  By showing the proposed grants with context and making the comparison to previously approved ones straightforward, you increase the likelihood that you’ll get the grant approved without issue while making the entire process as smooth and fast as possible.  After all, it’s not fun having to go back to a new employee and tell them that their grant was not yet approved because the board needed more information . . .

If this stuff is interesting, you should also check out Chris Wand’s How to Create a Good Board Package series over at Ask the VC and my previous post, Board Meetings – A CEO’s Point of View.

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 April 13th, 2007  
 Will  
 Boards, Management, Startups  
   
 8 Comments

8 Responses to Communicating with Your Board: Equity Grants

  1. A couple of things I’d add:

    – As part of any company’s budgeting/planning process, it should have a standard range of salary and option grants for various levels of positions, and this should be annually approved by the board. This range should be shown in a column in the table shown above. That way, when you present the equity grants for approval, they can immediately see that the grant is in the range (this is true for both new employees and promotions). No one need waste time on these. Anything OUTSIDE the range is automatically deserving of explanation.

    – I have found that board members frequently want to know how much stock is left in the option pool(s), so the package should actually have a complete reconciliation of the option pool (in summary form) so they can see the total pool size, total granted, total exercised, and remaining to be granted. I also find it useful to include all BUDGETED positions on this reconciliation so the board can see how the current grants fit into the grand scheme of things.

    If you’re not already tracking all this information, you are not running a tight ship.

  2. A couple of things I’d add:

    – As part of any company’s budgeting/planning process, it should have a standard range of salary and option grants for various levels of positions, and this should be annually approved by the board. This range should be shown in a column in the table shown above. That way, when you present the equity grants for approval, they can immediately see that the grant is in the range (this is true for both new employees and promotions). No one need waste time on these. Anything OUTSIDE the range is automatically deserving of explanation.

    – I have found that board members frequently want to know how much stock is left in the option pool(s), so the package should actually have a complete reconciliation of the option pool (in summary form) so they can see the total pool size, total granted, total exercised, and remaining to be granted. I also find it useful to include all BUDGETED positions on this reconciliation so the board can see how the current grants fit into the grand scheme of things.

    If you’re not already tracking all this information, you are not running a tight ship.

  3. Dave,

    Both great points. On the former, I used to do this all the time, but, as with salaries, I’ve found that annual planning of option grants has gotten far more difficult than it used to be. With dynamic hiring needs and rapidly changing markets, the competition for great hires has gotten absurd for many companies. This means that small companies that are only hiring a few people can have a 100% swing or more in options required to hire the right people.

    Of course, you still need to make a cut at budgeting, but the board needs to recognize that the budget may be no more than an initial guideline.

    You’re right on on the option reconciliation. i actually like to see this as part of the cap table.

  4. Dave,

    Both great points. On the former, I used to do this all the time, but, as with salaries, I’ve found that annual planning of option grants has gotten far more difficult than it used to be. With dynamic hiring needs and rapidly changing markets, the competition for great hires has gotten absurd for many companies. This means that small companies that are only hiring a few people can have a 100% swing or more in options required to hire the right people.

    Of course, you still need to make a cut at budgeting, but the board needs to recognize that the budget may be no more than an initial guideline.

    You’re right on on the option reconciliation. i actually like to see this as part of the cap table.

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  6. Will – I happened to bump into your blog today… Good to hear your measured, thoughtful postings here.

    I also found that it is important to provide a copy of recent salary/option survey to the board as a comparison. I have frequently used Venture One surveys in the past. Some VC firms have their own surveys, but most don’t. So a comparative data makes it easier for the board to approve employee options.

  7. Will – I happened to bump into your blog today… Good to hear your measured, thoughtful postings here.

    I also found that it is important to provide a copy of recent salary/option survey to the board as a comparison. I have frequently used Venture One surveys in the past. Some VC firms have their own surveys, but most don’t. So a comparative data makes it easier for the board to approve employee options.

  8. Pingback: 2-Speed » Communicating with Your Board: The Summary