4 equity terms startup executives must understand when negotiating their compensation package

https://www.linkedin.com/posts/samfjacobs_startups-activity-7031736651403907072-yNgq/

1. Double trigger: This clause ensures that, in the event of two important things happening (typically your company getting sold and you getting fired) some or all of your unvested options vest and you’re able to exercise them. You want to change the language in the double trigger from simple termination to include “material change in job responsibility or geography”. Sometimes you might not get fired but they make you move to Saskatoon to keep your job. Saskatoon is a beautiful place but if you’re not from there, it might be a tough pill to swallow. So make sure the 2nd trigger language is comprehensive.

1. Extended exercise: Most options expire 90 days from leaving the company. But modern organizations often give their employees longer to exercise. At Pavilion, we give our team 2 years to exercise. I think 2 years is fair. Some folks for even longer but it seems a little whacky to have an outstanding call option for potentially 5 years after you’ve done your work and made your impact. Regardless, 90 days seems overly punitive and I’d push for 12-24 months for your options to exist before they disappear.

1. Cashless exercise: This option can be a bit more complicated, but it can be an important tool in your negotiation tool belt. In a cashless exercise, you can use your existing options to “pay” to convert other options into shares without having to pay cash for them. It’s a smart way to choose when to liquidate your wealth in a company — and to do it without cash upfront.

1. Milestone payments: Milestone payments are one of my favorite compensation package options because they reward executive risk and talent and align employee and company interests to benefit both parties. In a milestone payment agreement, the company agrees to pay you for reaching specific, larger company milestones. These milestones might be hitting your ARR target and are tiered to reward performance from, say, 75 percent and up. This motivates you to work hard to reach company goals and targets, knowing that the company will reward and acknowledge your hard work in return. You can use milestones (which can include simple length of employment) to expand:
   • The amount of severance you receive
   • One time cash payments functioning similar to equity
   • A base pay increase
   • An overall OTE increase
   • A new title

We surveyed 300+ Pavilion Executive members for our (just released!) 2023 Executive Compensation Report. And one of the major takeaways was that executives should be VERY cautious about equity. Access the report here: https://lnkd.in/eC-ewQ-r