Founder salaries after an acquisition: how much?

https://news.ycombinator.com/item?id=134708

by os111 • 18 years ago

31 17 18 years ago

news.ycombinator.com

Early-stage acquisitions usually involve an employment agreement for the founders.

I think the offer I was presented is below market value, but when coupled with the purchase price it seems like a moot point.

Should I put up a fight? Does the acquiring company have the right to discount my salary because they're already paying for the company?

pistoriusp• 18 years ago

No, they should be paying you more to make sure you stay... That's if they really want you to stay.

Steve Jobs earns $1 a year though...

sabat3• 18 years ago

Steve Jobs earns $1 a year though

Well, yeah, but god knows what he makes in bonuses, and his stock options are out of control. Not to mention the stock he owns, and its rising value (the past month notwithstanding).

admoin• 18 years ago

There are also tax reasons to heavily overweight his compensation in stock options. See IRC § 162(m)

eru• 18 years ago

Yes, tax may be the only reason to go for a lower salary / higher aquisition combo.

michaelneale• 18 years ago

He once got a Jet as "payment" in kind.

CRASCH• 18 years ago

It really depends on the state of the company and potential earn outs, etc. So it is completely dependent on the situation.

I have personally taken less than market value. I would never do that again. I would suggest that a founders value is much higher to the acquiring company than it is to the market. Hence a higher market value. On the other hand you are worth what you negotiate. Their job is to negotiate the best deal for themselves.

Make sure that there are escape clauses if your liquidity depends on a promised liquidity event. Mine has not happened yet and may never happen. Also if earn outs depend on anything outside of your control make sure that if those events don't happen your earn out goals are adjusted accordingly. We missed an earn out by less than 10% . The acquiring company did not sign deals they committed to signing that would have facilitated at least 30% toward the earn out. Ouch.

Flemlord• 18 years ago

I agree. I've taken a salary significantly less than market value after an acquisition and would never do it again. I actually think it caused other people at the company who weren't involved in the deal to discount my ongoing contribution. Whether that was true or not, you should always be paid what you are worth.

On earn-out, I've never seen a company actually hit their earn-out numbers. IMHO, they're usually set up to get the management or shareholders to accept a smaller valuation than they would otherwise. And the earn-out numbers are usually based on the best-case scenarios being presented by the company being acquired. ;) The scenarios were somewhat unrealistic, especially considering the major disruption of going through an acquisition, and possibly increased levels of big-company-bullshit it may take to get sales closed. In some cases, the fictional earnout values were obvious face saving measures for executives and the board.

webwright2• 18 years ago

What's your position after the acquisition? CEO? Lead Developer? Founders shouldn't get too much special consideration-- they should be paid a fair rate for the position they'll be filling.

Presumably the extra consideration for your startup is baked into the cash/stock part of the deal.

sabat3• 18 years ago

No special consideration for founders?

Why would they stay?

anamax• 18 years ago

The importance of "stay" is in the context of the acquiring company, not the acquired one.

webwright2• 18 years ago

The special consideration is in the stock options and MAYBE the subsequent position they are offered and not necessarily in the relative compensation for that position.

They usually DON'T stay. But when they do, it's usually due to stock option vesting plans.

SwellJoe• 18 years ago

Rather than "fight", I think I'd humbly suggest something more in line with market rates, and if that fails, become much more aggressive on the escape clauses, and shortening the vesting schedule dramatically...they might even do the math and realize you plan to leave as soon as possible if they don't value you as an employee post-acquisition. Of course, if the acquisition makes you rich, by your definition of rich, and not just on paper in the form of options in another startup or slow-growing established company, I wouldn't worry too much about compensation.

huhtenberg• 18 years ago

These are two questions really - is discounting the salary in your situation normal ? and should you do something about it ?

The answer to the first question is a "no". Slightly below market average is OK, but taking, say, a 20% hit is not.

Whether to fuss or not really depends on how much you are getting out of the actual acquisition. Just do the math. Assume you are going to stay with an acquirer for 2 years, add up what you will not be getting in salary and compare that to what you get from the deal.

All in all though .. this sort of an attitude is unhealthy and you should not endorse it. There could be two reasons for it:

# they think they are making you a favor

# the deal is so marginally beneficial for them, that the size of the salary makes a difference

In either case, I would be prepared for further surprises.

secorp• 18 years ago

The acquisitions I've seen typically have the following components to the compensation package to negotiate before closing:

* Salary (should be market for your new skills and position)

* Retention bonus (usually paid out over 1-2 years)

* Conversion of equity (either to cash or to new stock)

The above depend a bit upon the acquiring company. If you are acquired by a large public company, then you should expect a competitive salary, reasonable bonus to keep you around, and some combination of cash-out and new stock to keep you strategically aligned. If you are acquired by another smaller company then your salary may be lower (but fair for that size of company), bonus may be given in stock, and your equity package is probably pretty flexible depending upon how long they want to you to stay.

As a founder, I took $1/yr salary with the expectation that I'd get a market rates when we secured funding. As an acquisition I negotiated what I thought were fair market rates for salary and stock in the new company with a bonus to keep me happy to stay. When acquiring companies we would offer competitive salaries, retention bonuses (stock, cash, or both) for people we wanted/needed to keep around, and stock conversion (we were public by that point).

In your specific case, I believe that your salary should be market rate for your skills and your new position. The acquisition price is independent of your salary and should be treated as such.

nimrod• 18 years ago

I was the CTO of a company that was recently acquired. Before the acquisition I was being paid less that a Sr. developer should (my primary role), and way less than a CTO should be.

Post acquisition I was given a raise to above what a Sr. dev. would make, but less than a CTO. Coupled with the acquisition price, I'm very happy, and my stress level is lower.

delano• 18 years ago

CRASCH and Flemlord made some great points. I'll also add:

The paying price for your company and your post-transaction salary are separate issues. You wouldn't agree to be acquired for less than you feel your company is worth so why agree to become an employee for less than you feel you're worth.

And don't discount the other kinds of value a larger company can provide. Different positions, your working schedule (4 day week?), company car, etc... Now is the time to ask for what you want.

Founder salaries after an acquisition: how much?

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