Each quarter we survey growth stage CEOs who are running innovation driven companies.  This quarter,  we had more than 60 CEOs responding.  CEOs were running companies in broadly defined technology (software, hardware, semiconductor, telecom), Internet (e-commerce, media, social, entertainment), medical devices, biotech, and cleantech / renewable energy sectors.

A note on methodology.  We send these surveys only to those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies).    All responses were anonymous due to the web-based survey technology employed. The majority of respondents were in the United States, with the highest concentration on the East and West coasts (New York, Boston, and San Francisco/Silicon Valley areas).

For prior survey results from Q2 2010, titled “Impact of Economy and Renewed Growth”, go to http://www.bostonsearchgroup.com/blog/ceo-survey-results-q2-2010-%e2%80%93-impact-of-economy-renewed-growth/ .

ECONOMIC CLIMATE

The first set of questions was around the economic conditions in which each CEO felt s/he was operating.    One question we continue to ask and re-ask over the last six quarters or so targets the turbulence in the macro- economic climate.  It is interesting to compare CEO responses to the same question, “Do you anticipate a double dip in the near term future?”

* In Q3 2009, more than half  (54%) of CEOs polled were expecting a double dip, and planning accordingly

* In our Q2 2010 survey,  again 50% felt a second economic correction was likely, the biggest percentage of those CEOs believing it would be in either Q3 2010 or sometime in 2011.  The other half  of CEOs felt the specter of recession was behind them

* Currently in Q4 CEOs were consistent with prior quarters with a bit more than 50% indicating they didn’t feel a double dip was likely, and the other half of the CEOs saying either a 50/50 probability or greater (16% feeling more likely than not)

So less than 1 in 5 CEOs feel another economic dip is likely.  No CEOs selected the ” greater than 75%” probability.

It’s interesting to do a meta graph of the changing CEO sentiment on this question.  Surprisingly, the graph would be sloping downward, but not as much as many would hope.  The high point was certainly back in Q3 2009, but even throughout 2010, as many CEOs were fearful of a negative correction as those who felt it was behind us.  No doubt this “lack of confidence” index doesn’t inspire the CEO with a swashbuckling, damn-the-torpedoes-full-speed-ahead attitude toward growing their companies.  Rather, it makes CEOs think in short-term windows, perhaps 3 months at a time, with little appetite to make medium or long-term bets.

Those CEOs who felt another downturn was likey referenced several factors that might tip the scales negative–  gridlock in Congress due to midterm elections and likelihood that Democrats lose congressional majority, a belief that a bad Q4 holiday retail shopping was likely, and the persistent overhang of ongoing commercial and residential loan defaults.

As for when another economic dip might occur if it were to occur, the vast majority of CEOs pointed to Q1, 2011, with Q4 of this year and Q2 2011 tying for second at 18% each.

STRATEGY

Almost 50% of CEOs polled said that they had either made a shift in strategy in 2010, or were planning to in the near future.  Granted, growth-stage companies are prone to shifting strategy until they land upon the best formula for significant and sustainable growth.  However ~50% is a big number, and clearly a chunk of those companies have been driven to rethink their strategies because of the challenging economic climate, the concern over the future, and the possibility that 2010 might represent “the new normal” where with no economic “rising tide” no help generated to float all company boats as in periods of economic expansion in the past (1997-2000, 2005-2008, etc).

CASH FLOW

The majority of CEO survey respondents (49%) indicated that they were still planning on burning cash over the next 2 quarters.  24% indicated they would be profitable.  CEO comments regarding this question indicated an overwhelming drive toward cash flow break even.  That was the big push and focus for their companies in 2010, and if they hadn’t achieved it yet, they were gunning to by end of the first quarter of 2011.  CEOs also commented that they were trying to run their companies at break even, with any extra EBIT being reinvested back into the company for additional growth.

COST REDUCTION PLANS

When asked what were the top 3 areas CEOs were targeting for cost reduction, the following table summarizes their responses, representing a combination of spend reduction and staff reduction in non-core areas.  There was a preference by CEOs to favor non-staff cuts over cutting headcount if at all possible, but many acknowledged that in order to make meaningful cuts, staff had  to be considered in the equation.

CEO responses when asked about increasesin spend were logical.  The top three in order were sales, marketing, and R&D.  Many of the comments about this question noted the fact that outside of directly growing revenues, additional spend was hard to build in when many CEOs are driving toward a minimum cash-neutral mandate and economic uncertainties are driving CEOs to think conservatively rather than expansively.

[Click on "more" below for remaining 8 slides and narrative from Q4 2010 CEO survey]

More…

September in New England is all about Fall, football, and at least for the last 4 years, philanthropy.  On September 23rd, 2010, venture capitalists, entrepreneurs and professional services providers celebrated the 4th consecutive year putting this tournament on.

The goals?

1) Sweat doing one of my favorite sports on one of its most challenging surfaces–

chasing a white ball around a grass lawn where the verb “to bounce” is used only in a relative sense.  Imagine a super-high gravity environment where what goes down, stays down.  A bit more like dropping a plate, versus bouncing a ball.

2) Compete in teams, with venture capitalists comprising one team, pitted against entrepreneurs, the other team.   This brings together the two key stakeholders in the business ecosystem in which our firm operates.   OK, so the entrepreneurs always get a bit feisty because they often feel the perceived chafe of the unspoken universal order, “those who have the gold make the rules.”  But in this format, spicy works.  Feisty is good. For further flavor,  see video mash-up of the tournament highlights below.

3) Give to charity, and create a collaborative giving engine that may at some point outstrip at least this author’s individual efforts.

The supplemental benefits of combining these three above?

1) Sweating couldn’t be in a lovelier setting.  The Longwood Cricket Club is just a spectacular venue, and again this year we were graced with perfect early Fall weather–blue sky highlighted by  brilliant reds of the autumn maple trees ringing the club house and the courts.  Sweating somehow is also a whole lot more fun on a tennis court if you play barefoot.  Don’t try this on hard courts or clay folks.  But at Longwood, all 40+ players doffed their togs and got back to nature (photos and video for up close and personals).

2)  Competing with VC and entrepreneur teams brings out…  well…  a prime opportunity for trash talking in the safety of numbers let us say.  It’s great to get both sides out in a friendly face off, united at the end for a good cause.

3) Giving to charity is something that seems easier the more perceived value is generated (for the altruist), or we receive (for those solipsists).  This year’s charity was again the Tenacity program, founded by Ned Eames.  We heard from some of the at-risk urban middle school children who have found Tenacity a backbone for discipline and achievement in an often keelless school environment.  Hearing some of their stories made us all reflect on our paths to relative success, and how those challenges compared to what these children face.  The goal was to raise $5,000 or more, and although the P&L is still being cyphered, we either met or came close to the target.

Who won this year? Technically, the Entrepreneurs won when toting up the total games score.  However, the VCs took it in a hotly contested 10-game pro set finals match   [see score card below]

The VC team was represented by Michael Balmuth of Edison Ventures and Michael Quinn of sponsor Silicon Valley Bank.  This fearsome duo faced off against entrepreneurs Bill Stone, co-founder of OutsideGC and Dean  Bogdanovic of CounterPath .

No doubt however that all players won in the larger sense what with the weather, the setting, and the collegiality.

Attributions:

To Sung Park who– as the poster-child for entrepreneurial ideation– decided years ago to innovate the fundraising process for his son’s school.  To do this, he cooked up the first VC vs. Entrepreneurs golf tournament we took part in some 6 or more years ago.  I asked him if he had the IP locked up on the idea or could I port the concept to the tennis court, and being the philanthropist that he is, he said heck no, it was “open source.”   Thanks Sung.

To Longwood Cricket Club, who has been a supporter of the event from the beginning, and Larry, the head tennis pro, who makes it a pleasure to orchestrate.

Tenacity’s Ned Eames, who’s vision and personal tenacity has grown a philanthropic organization that touches thousands of inner-city youth with a caring and purpose driven mission. See www.tenacity.org for more.

To our corporate underwriters without whom the event would not achieve its goals–  Silicon Valley Bank, XConomy, Version 2.0 Communications, the Boston Lobsters, and Microsoft.

To the captains of each team, who were elected in a rigorous vetting process operating under the game principle of “tag, your it!”

And of course, our guests/the players.  Getting ~40 or so players to set prioritize their time and money during a weekday afternoon is definitely worthy of acknowledge and appreciation.

And Cristina, no doubt all of us thank you for all you did in helping to pull the event together yet another year!

Photo Gallery

Pre-tournament chalk talk

For the last pro set of the tourney, barefooting experiment for all

Boston Lobsters mascot, offering support for which team?

Grass court form can be quickly compromised by a bad bounce

Dynamic Xconomy sponsored team with ringer Lyn Calkins

Perfect serve form demonstrated by none other than Tenacity's Ned Eames himself

Doug Denny-Brown in serve-return combat pose

VC vs. Entrepreneurs 2010 Longwood Team

Entrepreneur Doug Denny-Brown, tennis gladiator at the ready

Registration is Now Open

4th Annual Benefit

VCs vs. Entrepreneurs – Davis Cup Challenge

Thursday, September 23, 2010
Longwood Grass Courts  /  2:00 – 7:30pm

Welcome Back!  BSG Team Ventures is proud to once again host the 4th Annual  Benefit: VC vs.  Entrepreneur Tennis Tournament – Davis Cup Challenge, and we are thrilled to have you join us.

The VC/Entrepreneur tennis community has been growing every year so please register now so we can build the teams early.

Entry is by donation of $175.00.  Please click here to register!

For questions, please email Cristina Vieira Abramson at cvieira@bsgtv.com or call 617.784.4987

Agenda Overview

VCs vs. Entrepreneurs - Thursday, September 23, 2010

Format - Round Robin, Doubles

Time - 2:00 – 7:30pm (includes tournament, finals, cocktails, dinner and networking)

Location – Longwood Cricket Club, Chestnut Hill, MA

REGISTER

I have it on good authority that  June has been declared New England Innovation Month, per Scott Kirsner who has been tireless tender of the innovation flame here in New England for years now (http://www.boston.com/innovation).  See the growing list of June events at http://neinnovation.com.

In honor, a few thoughts follow on Innovation in New England.  First, a pointer to a related concept, called National Entrepreneurs’ Day to recognize what entrepreneurs do for this country.  It’s an idea sparked by a fellow New Englander, David Hauser, founder & CEO of successful tech start-up Grasshopper.  The date being requested of the Obama administration happens to be the first day of spring each year.  [Coincidence that the French word for “start up” also references the spring season–“jeune pousse,” loosely translated as “young sprout” or seedling).

See the video clip below for serious entrepreneurial inspiration, and the other link to add your John Hancock (yes, yet another famous New England innovator) to the virtual petition.

* Killer link for entrepreneurial inspiration– http://grasshopper.com/idea

* Link to petition– http://www.entrepreneursday.org/dh

Now, back to June’s month-long celebration of innovation.   Indeed, New England  has a storied innovation past.  However,   what may begin as a strength in our region can at times turn to weakness, the metaphorical double-edged sword.   I’ve penned a wish list of five ideas for innovation here in New England along that thematic refrain, akin to “innovation on innovation”:

• #1 “Coopetition” in New England to foster national visibility
  New Englanders are known for their fierce independence and self-reliance.  We needed this when we came over as settlers 300+ years ago and put our MacGyver-esque skills to the test to survive (note, MacGyver was no doubt was an Irish immigrant from good New England pioneering stock).  It’s been said that unless you can trace your lineage to the Mayflower, you’re still considered an outsider.  New England has never been known for leaving fresh-baked pies for the neighbor who just moved in next door.  In fact, at times, neighbors live next to neighbors for years without getting to know each other, all in the name of “independence” and a desire to not meddle in others’ affairs.  However, New England could benefit a great deal if we pulled together and collaborated just a wee bit more.  Example, Peter Rothstein, recently named Director of the New England Clean Energy Council, has been driving for both State and Federal government resources (Department of Energy and other), to fund the concept of a “Regional Consortium” that would bring together all the components of the cleantech ecosystem in New England in a thoughtful, harnessed approach.    The only way New England can achieve this national recognition (and funding) is via collaboration.  OK, just to prove to hardy New England stock, we’ll call it “coopetition” just to retain a bit the independence streak that runs so deep up here.

• #2 Greater sense for openness for new ideas/ways of doing things
  New England also has a wonderful sense of tradition—Mayflower, Plymouth Rock, the Boston Marathon, Red Sox, clam chowder… we’ve pioneered our fair share of “we were first to….” And “we have the oldest of….”  I’d like to see us bring back a bit more of the revolution versus  evolution.  A bit more General George Washington and Lexington/Concord derring-do, rather than what has grown to be our reputation as conservative  in all things “blue sky”-oriented.  Wouldn’t it be great if we didn’t have to wait for the imprimatur from an MIT lab or a Harvard Business School professor before we tried something new?  New Englanders are possessed with pedigree.  And until something has been anointed with pedigree pixie dust, an innovation often languishes in ignominy.

• #3 Be more “what you know” versus “who you know”:
  As an outgrowth of #1 and #2 above, New Englanders often suffer from an acute case of “who you know.”  This to some extent is a derivative of the circular logic involving #2 above on pedigree.   Despite our reputation as the nexus of sophistication and erudition, New England seems to grow more and more insular in letting outsiders into board rooms as well as bar rooms.  New England, despite being the original crucible of diverse cultures, has homogenized. Amazing ideas and innovations come from equally surprising and diverse sources.  One of the best examples of “what you know” is exemplified in one of my favorite recent Malcolm Gladwell articles in the New Yorker Magazine (dare we say also a New England masthead), chronicling a Silicon Valley entrepreneur from India who heretofore knew nothing about the sport of basketball, who—when tasked with coaching his daughter’s middle school basketball team—innovated game strategy to turn a weakness into a strength and a last place team into a near division winner (see http://www.bostonsearchgroup.com/blog/type-leaders-required-to-outpace-competitors-in-recovering-economy/ )

• #4 “Hold” vs. “Fold” or “Sold”
  OK, so I’m not pioneering this idea, but if imitation is the highest form of flattery, I’m a big fan of this growing mantra in the innovation community here in New England that goes like this.  Massachusetts used to have an incredible set of tech & science crown jewels:  in biotech, Genzyme, Biogen & Millennium Pharma.   In tech, companies in hardware and systems like Data General, Digital, Wang, 3COM, and Banyan Systems.  In software & Internet the likes of Lotus & Lycos.  However, over the years, these companies have either been sold or forced to fold.  One of the few remaining companies embracing the “hold” mentality is EMC, preferring to buy others than sell themselves out.  However, just one EMC, or even a handful more doesn’t make for a robust, sustainable innovation ecosystem.  Innovation can metaphorically be cast in the same light as combustion– that combination of spark, oxygen and fuel that powers innovation and drives creativity.  Spark is the new idea, fuel is the money provided from investors in the idea.  And oxygen is the people who take the idea and the money, the business-saavy entrepreneurs who partner as the steel to the innovator’s flint to spark the novel idea, tech innovation, or scientific breakthrough.  I wish we were making more oxygen in New England.  This type of oxygen only comes from the talent that grows up and makes small companies into big companies.  These bigger companies serve as a training ground for the next generation of entrepreneurs to cut their teeth, get their training, build their network.  These larger companies offer entrepreneurial training wheels.  When we sell companies too early, they never get the chance to develop a critical mass of next generation talent who can apprentice at the knee of others and with greater security to make mistakes without having each decision be a bet-the company-one that risks putting the company in mortal peril.  When there is no larger company safety net, fewer young talents practice jumping into the uncertainty of innovation acrobatics, often key experiences required to be able to drive younger companies to success later in their innovation careers.

• #5 Create a “Celebrate the student Week”
  I’ve always been in awe of many of the Asian countries who celebrate things that we in the U.S. might find odd.  I believe they have a day that celebrates children.  And a day that celebrates the elderly wise ones in their communities and cultures.  There is likely no region in the U.S. that has more undergraduate and graduate students than New England.  And these students are the equivalent to our regional “innovation fountain of youth.”  Undergrads, Masters students, PhDs, Post-docs, Fellows.    I wish we could celebrate them.  What better time to do it than during New England Innovation Month.  Make them feel welcome.  Give them social stature to counterbalance the grumblings around U-Haul vans that descend like locusts in late August, or parties that get a bit too raucous.   New England students should be lauded.  Perhaps a regional “student innovation awards” as capstone to this celebration.   OK, at minimum, a free scoop from yet another New England innovation legend, Ben & Jerry’s.  A  scoop of a new flavor in their honor, “College Cram Crunch.”

One of the many challenges for early-stage technology and science-driven companies revolves around compensation for founders.  When a start-up is created, how do those there at the beginning get compensated?  When there isn’t any cash in the bank yet, and there may be a period of time where products are in development, do founders get compensated, and if so, how?  When angel investors seed the company, what happens then? Founders usually will get cash compensation, but perhaps not at the same levels as when the company later gets venture capital funding.

We were asked by one of our clients to help determine appropriate compensation parameters for an angel-funded enterprise.  From this, there were clear norms that emerged–

Looking at a half-dozen angel-funded companies in the New England region (Boston, Massachusetts, New Hampshire), we assembled some data that helped inform the above mentioned principles.

Note that there are rarely more than 2 founders.  Therefore, two can initially split the equity 50/50, and even with significant dilution, still end up with a meaningful equity stake after either angel, venture capital rounds, or both.  If a higher number of co-founders split the equity pool, fully diluted equity stakes can dwindle to amounts that make it hard for those founders to retain meaningful upside in their enterprises at later growth stages.

Just food for thought for those who are creating new companies in today’s market conditions.

Senator Markey addresses the formal-wear only crowd at the JFK Library during Clean Energy Week in November.

An annual event in Boston punches up the fact that we have an incredible cleantech cluster-New England Clean Energy Council’s annual Green Tie Gala.

Although this event took place back during Clean Energy Week in November, I was reminded of it when out in Denver recently.  Denver has some great stuff going for it.  NREL (National Renewable Energy Lab), University of Colorado with multiple campuses in Denver and Boulder that have significant funding from both Federal and State agencies, and a history of technology oriented companies, albeit with a heavy emphasis on telecom (Qwest, Level 3).

However, what there isn’t as much of in Denver is what some call the “ecosystem.” Others call it the “cluster.” This is a body of people who hold different but overlapping responsibilities in the entrepreneurial ecosystem and whose fusion is its wellspring–

• Academics: These are those most often with the new disruptive technology or science breakthrough that serves as the seed of a new company
• Business entrepreneurs: those who have experience taking the seed of an idea, and building a company around it
• Investors: The first friends & family, then angel investors, and often venture capitalists or corporate strategic investors who pour money into these new ideas to fund the business entrepreneurs scale the disruptive idea
• Professional services providers: These are often the “connectors” in the ecosystem. They’re comprised of lawyers, accountants, executive search consultants, and start-up advisors. They act as the glue between the prior three categories, more often than not introducing one to another, supporting the growth of these companies with their area of specialty

[Footnote: If you compare Boston to Silicon Valley however, Boston is shallower in large technology and sciences companies that serve to spawn "runners" to new start-up companies.   The biotech industry is perhaps better in Boston at doing this than the pure technology industry in the last decade, with a growing base of larger biotech and pharma companies including Genzyme, Cubist, Biogen and Sepracor.  Medical devices companies also fair better in many ways to large tech, with Boston Scientific, ThermoFisher, and Perkin Elmer.  In technology hardware and software, beyond EMC, there are precious few large technology companies left in Massachusetts. ]

Details on the Gala?  This year’s Green Tie Gala was held at the JFK Memorial Library in Boston (last year was held at the Museum of Science).    There are many organizations in the innovation sector here in Massachusetts that have done a good job at galvanizing a broad cross section of constituents, including the Mass Biotech Council, as well as MITX (formerly MIMC), and the Massachusetts Technology Leadership Council, or TiE Boston (Indus Entrepreneurs).  However, we’ve had yet to participate in a gathering of any that approaches that of the cleantech cluster here in New England.

Senator Markey gave the opening address to punctuate the cocktail hour.  To a person it seemed, everyone knew everyone.  Yes there were a few outsiders (a small contingent from the UK had come over as part of a trade mission coordinated with Clean Energy Week in Massachusetts because of its target rich calendar), yet all of these were welcomed by the larger fold, and the gathering seemed to virtually breathe together as some sort of larger unified body, a cluster with so few degrees of separation that walking from group to group or table to table was akin to going back to your high school reunion…. You knew at least half those sitting at every table.  For those who have experienced the annual Nantucket Conference, it is this atmosphere if intimacy and familiarity that presides.

To cap the night off, venture capitalist Chuck McDermott of Rockport Capital led his band in an after-hours session that continued the beat of familiarity both given its leader as well as in its musical selection (Chuck stating that the band only plays “songs popularized before 1960″).

Chuck McDermott, leading cleantech venture capitalist at Rockport, moonlighting as 50's music band leader

Scott Kirsner recently penned an article in the Boston Globe on interviewing tips, what not to do.  Great compendium (our contributions excepted perhaps but for you to judge in the article sidebar on page 2) of what some might think intuitively as “faux pas”, but many simply may not think of at all, and are at risk of committing.

http://www.boston.com/business/articles/2010/01/10/you_have_your_foot_in_the_door_how_to_keep_it_there_1263010162/?page=1

Periodically, we make an effort to pull together executive compensation trends and analysis focusing on venture capital backed companies in the United States.  The last executive compensation report we put out was in September 2009 (see prior blog post http://www.bostonsearchgroup.com/blog/ceo-compensation-analysis-west-east-founder/), and focused on C-level compensation, with a further contrasting of founder versus non-founder CEO compensation, both West Coast and East Coast.

This report is similarly focuses on West Coast and East Coast differences in executive compensation, however this time looking at the VP level across the functional organizational structure.  For purposes of this report, only companies who broadly fit the definition of “information technology” were used in the analysis, not including biotech, medical device/medical technology, or cleantech.

The titles looked at include the following–

Vice President Business Development

Vice President Engineering

Vice President  Marketing

Vice President Sales

Vice President Sales & Marketing

VP Software Development

VP Product Management

Note that below we’ve only included the analysis of the executive compensation data, in other words the deltas. If you’d like more detail and the information on which we based the analysis, please email damador@bsgtv.com with your name, title, company and business email address, and we can provide you with the baseline full report.

Do keep in mind that this is only one set of data. To draw the best comparables, it’s important to do all three data-grabs listed above. Also, this is a “blended” sample set of multiple venture-backed industry sub-sectors in the information technology category. Some industry sub-segments may pay more or less than others with further parsing.

West Coast Early vs. Later-stage Venture Capital-backed Companies

Cash compensation is almost always higher in later stage companies, and this is reflected in all 3 quartiles of data analyzed.  For West Coast venture-backed companies, the differences are $15,000 to $50,000 in most roles, with an average different of about $25,000.  The only exception is for the VP Sales/Sales Marketing role, where cash was significantly higher in later stage companies for these roles, ranging between $75,000 to more than $125,000 in the top quartile companies.

Conversely, equity is almost always higher in early-stage companies to offset the lower salaries referred to above.  For these West Coast companies, regardless of quartile, earlier-stage companies received on average ¼% to ½% more equity, with the biggest jump in VP Sales/Marketing, and lowest in the VP Engineering function.

East Coast, Early vs. Later-stage

East Coast compensation tells a different story from their West Coast counterparts.  Although cash compensation was similarly lower in early versus later-stage companies, East Coast executives of venture-backed companies didn’t see the “make-up” effect in equity.  In fact, equity appears lower in many of the quartiles compared, by as much as ½% comparing East Coast early versus East Coast later-stage.

East Coast vs. West Coast, Early-stage

Cash compensation, East versus West, shows that West Coast executives of early-stage companies more often than not earn more in base .  West Coast Engineering is $10,000-20,000 more in base, VP Marketing is up West over East by $10,000 to $50,000. VP Sales/Sales & Marketing is actually the one notably lower cash category where East Coasters are better off than West in the higher quartiles (but not the lowest).  As noted above, West Coast early-stage executives are compensated more favorably when it comes to equity than their East Coast brethren virtually across the board.

East Coast vs. West Coast, later-stage Venture Capital-backed Companies

As for cash compensation for later-stage companies East vs. West, a similar pattern existed being mostly lower than their West Coast counterparts, than its West Coast peers.  However, when looking at equity stakes in later stage companies East vs. West, the East Coast did better, often by ¼% to as much as ½%.

We’re often asked how to establish fair market compensation when it comes to CEOs of privately held companies, often with venture capital or private equity backing.

Below is one method that can be employed as a jumping off point for this calculus:

1)     “De-risked,” how much is a CEO worth?  Is  $500 -$1M a year too much?  For our purposes here, we’re talking about a talented CEO.  Not someone below average, but above the average, one that a retained executive search firm, venture or private equity investor, or board of directors would be proud to put in the role.   Rather than pick some arbitrary number, this should be  ”market set,” by looking at what someone working for any global 2000 company (i.e. General Electric or other similar) earns annually.  From our executive search experience and database of compensation comparables in these companies, base salary is usually between 250K and 400K, depending upon how big the divisional P&L responsibility is, there is usually a bonus that is between 50-100% of base, and an LTIP (long term incentive plan) that-once partial vesting begins-can generate from 100K up to 250K or more a year in cash.

2)     So, the cash component of a comparable, including average base, annual average bonus, and yearly LTIP pay-out looks something like this:

Base ~ 300K

Bonus ~250K

LTIP (cash only) ~ 200K

TOTAL: 750K

* This does not include any meaningful RSUs (restricted stock units) that are usually also part of that package, which could add another 200K or more per year in value to a general manager’s package with true P&L responsibility for their division, group, or sector/segment.

* This is also not indexed to geography/cost of living.  If the position is in New York City tri-state area (New York, northern New Jersey, southern Connecticut), San Francisco, Boston, London, Singapore, Hong Kong, or Tokyo, a multiplier factor needs to be used to level-set for cost of living increase required for those metropolitan areas.

3)      Now, back out the cash portion of a CEO’s compensation for the company that they’re stepping into (say 250K a year in cash in smaller companies as all base, or combination of base + cash bonus).  So you’re left with say 500K that needs to be made up in equity, on a per anum basis.

4)      Over how many years is the liquidity horizon (and/or vesting rate, 3, 4 ,5 years)? Let’s say it’s 4 years, at net 500K, equals ~$2 million

5)      Now, this is with ZERO beta risk factor.  Add back the beta risk of an earlier stage company.  Let’s assume a global 200 company equals “1.”  A CEO role in a privately held, externally backed company is not “1″.  It’s probably a multiplier of 1.5, or 2.  For a pre-revenue, VC-backed company with high burn rate, it could be as much as in the 3 to 5 range.  Note that any illiquid company is inherently risky in terms of cashing in any equity at a reasonable price.  Let’s pick a beta risk multiplier of 2.5 times riskier than “average.” So, 2M * 2.5 = 5M.  Note that when there are preferences for the investors that create an exit hurdle rate before any common shareholders get paid, beta risk goes up accordingly unless the CEO participates in any exit event via cash carve out or other instrument.   As mentioned above, a recent IPO that represents a reasonable market comparable netted a CEO who joined the company 4 years ago $20M.  Using this number, the CEO’s compensation was $5M a year, or a beta multiplier of approximately 5.

6)     Then, are there any combat pay provisions you need to add in (warts that a CEO or executive team member is required to overcome and vanquish in their role that are above and beyond the normal call of duty)-reconstituting the executive team, or raising an outside round of capital because existing investors are tapped out, or starting up an Asia manufacturing capability that will require the CEO to take a dozen 15-hour flights one-way to get up and running.

7)      Finally, you have to look at what likely dilution there is going to be to an initial options grant for the CEO.  If you start with a 6% stake in an early stage company in a Series A funding, and you then raise a series B and C, depending upon valuation for those rounds, the CEO will likely end up below 3% as a “fully diluted” stakeholder.  There is an argument to be made that any of the management team critical to the success of the company will be “topped off” at later funding events in order to keep them motivated.  However, there is no guarantee that this happens.  It’s only good business sense to do it.  For the CEO, it is more important what s/he ends up with, not how much with which they start.

8)     Add water, and stir…

Notes & disclaimers:

• * This is not intended to be biased in any direction, to any party, neither CEO candidate, nor company and/or investor.
• * This is only one way of calculating compensation, indeed there are many others.
• * There is no way an earl- stage emerging/growth company will be able to compensate a CEO in all cash, nor truly be able to offset the risks inherent in this stage of venture.  The CEO either accepts this, or is not truly capable of working successfully in this milieu.
• * Other than the impact of cost of living  adjustments to base compensation, each CEO candidate comes with what we refer to as their own subjective “keep the lights on” cash needs.  We calculate this simply as the amount of cash required on a yearly basis to cover their living/family obligations without having to write checks out of savings to cover it.  Some CEO candidates may have 3 children in private school or college, while others may have no children and no mortgage.  Cash needs therefore may range widely, and need to be adjusted for using equity as a “leveler” (less cash-needy, higher the equity, and vice versa)
• * Alternatives to paying bonuses in cash might be to pay bonuses in equity, upon achievement of key milestones for the company
• * This same calculus can be applied to the Vice President level as well, subject to appropriate adjustments downward in cash and equity
• * In a circumstance where there is a “turn-around” required, equity may not be enough of a certainly to attract a competent CEO for the challenge ahead.  In these circumstances, a cash carve-out may be warranted in addition and/or in substitution for a stakeholder role.  The cash carve-out may be just for the CEO, or for the key management team required to achieve the turn-around.  Often, the cash-carve out structure is a percentage of total sale price over a certain amount, with the possibility for an accelerator depending upon exit/liquidity circumstances/outcome.
• * Often the question of anti-dilution comes up in an effort to assure a CEO of a certain percentage of equity upon liquidity.  Granting 5% equity to a CEO at a Series A financing with anti-dilution would ensure that the CEO retained his or her stake across the growth and additional funding needs of the company.  However, this is rarely a good mechanism, as the CEO becomes less interested in new company valuations at subsequent funding events, and becomes misaligned with the company’s investors.

On September 24, 2009, BSG Team Ventures hosted the 3rd annual Charity tennis tournament at Longwood Cricket Club in Chestnut Hill, MA.  The format is a la Davis Cup, with venture capitals pitted against entrepreneurs.

We’ve been graced with great weather all three years, and this Thursday was nothing different, with a touch of Indian Summer in the air.

Although the teams were a bit smaller in number this year, many remarked (including the blogger) that there has never been a higher quality of play, or sense of competition.

The beneficiary of the charity tournament all three years has been Tenacity, the brainchild of Ned Eames, who founded it a decade ago this year to use tennis as a tool to help build discipline and academic achievement in inner-city at risk youth.   Their 10 year Gala is coming up in the next week or two, so be sure to visit www.tenacity.org to learn more and register.  It too will be held at Longwood, and is guaranteed to be a memorable evening with hundreds of supporters sharing food, tennis, and a shared mission together.  Ned Eames is pictured below, with one of the Tenacity students, addressing this year’s tournament and conveying his story as to the value Tenacity has brought to his life and his family’s.

This year’s winners of the Longwood Charity Cup 2009 were the entrepreneurs, both the entire team, as well as the play-off match-up of best VC team and best entrepreneur team.

Per Suneby and Doug Denny-Brown played in the finals for the entrepreneurs, against the best VC team from the day’s play, represented by Will Peppo of Revolution Partners and Dan Waintrup.  In a fiercely fought super-tie-breaker format, the entrepreneurs brought the Cup home for the year (above pictured winners Per and Doug).

Given the competitive nature of participants, several asked for statistics from the team score cards reported.  The format dictated that each doubles team played together for the entire afternoon, and there were a total of 5 teams each, VC and entrepreneur.

The mean total game score for entrepreneurs?  22.6 games per team.

Mean total game score per team for VCs? 16.5 games.

Grumblings from both sides sounded very similar, with a refrain echoed that “[VCs/entrepreneurs] certainly had more time to practice this summer than we did….”

A special thanks to our sponsors, Silicon Valley Bank and Xconomy without who’s support the event would never have happened.  Jim Maynard was much missed from SVB, but Jim’s bank colleague, Mike Quinn, held his own, and will clearly be coming back next year with Jim to present a fearsome twosome.

And this year we honor our first female competitor, Lynn Calkins, playing for the Xconomy team, and racking up a total game score with her partner than came in a close second in total team game scores.  Thanks Lynn for coming out, and Xconomy for once again blazing the path of innovation in building their corporate team.

Per Suneby and Doug Denny-Brown, winner of 2009 Tournament

Finally, no reflection on the day would be complete without a total two-team photo of all who contributed their time and energy.  Note that only one player dared play barefoot.  Next year, we’re going to mandate that the last two games of the tournament will both be played shoeless by all teams.  It’s an experience that needs to be added to everyone’s “bucket list”….