During a moment in recruiting history when most executive search professionals are suffering, our practice in for-profit education has been thriving. Part of the reason is what I call ” board fatigue”–PE or VC partners and other board members who’ve grown impatient with the CEO of a portfolio company. In some cases their dissatisfaction is known to the CEO; in others, for various reasons (such as accreditation issues in the postsecondary education market), the board has chosen to conceal its desire for change, even from the sitting CEO.
The call to me typically begins, “We’re thinking of replacing a CEO. But we need this to be done in confidence. Can you do it and still be effective?” The answer, of course, is, “Yes, but first give me one good reason why you don’t sit down with your CEO and discuss why the change is needed.”
Answers vary, but the most common is, “We don’t want to lose momentum or cause uncertainly within the company,” i.e., “We’re afraid that news the CEO is being replaced might affect morale and revenues.”
This may be true, of course, but before embarking on a sub rosa search for a replacement, consider these issues–
• Are you sure the situation cannot be resolved without the CEO being deposed? Have you tried everything to turn him/her around? Is the problem focused on a few concerns–work ethic, slow decision making, failure to address a single overriding market challenge, etc.–or is it overall leadership?
• Are there intermediate steps you might take to at least put the CEO on notice? “Probation”? Come to Jesus? Sabbatical? Revisiting compensation?
• Could the problem be resolved by bringing in the right support, e.g., a COO or new CFO?
• Could the CEO be moved into a different to position, allowing you to bring someone in above him/her? Would your CEO accept demotion to President and COO, for example? Could the CEO be moved into a Chairman role?
• How can you present the decision to replace in such a way that the CEO sees the wisdom in your decision? Obviously the CEO has a financial stake in the company’s success. Might it be that he or she will be relieved? See this as a win-win?
• How valuable could the CEO be in the process to find the replacement? Do you want him/her to play an active role, and would s/he be effective in this role, if properly motivated?
• What are the risks if word gets back that a search is being conducted for a new CEO?
• What are the risks that a disgruntled CEO could sabotage the search process? Agree to participate in interviewing, then blow candidates out of the water?
• What effect will conducting the search in confidence have on the overall quantity and quality of candidates? On your ability to secure the best among these?
• How and when do you expect to inform the CEO what’s going on?
• What role will the departed CEO have in the transition process once the new CEO is named?
PharmaJet, Inc. (http://www.pharmajet.com) offers jet injection technology to deliver vaccines and drugs through skin. The company offers PharmaJet, a needle-free system that delivers liquid medications at high speed creating a ‘liquid jet’ that penetrates the skin and delivers the medicine through the skin in less than 1/3 of a second. It serves individual patients, as well as public health needs internationally. The company is based in Golden, Colorado with operations in
With approximately 23 employees currently, PharmaJet was founded in 2007 and is currently headquartered in Golden, Colorado with other offices in San Francisco and Baltimore.
As a privately held medical device design company, PharmaJet has developed an FDA 510 (k) cleared needle free jet injection technology. It can be used to inject any liquid medicine into the body (human and animal), for fixed dosages ranging from 0.1cc to 0.5cc, into intra-dermal, subcutaneous, and intra-muscular tissue depths. It is most appropriate for vaccine delivery, which is a standard 0.5 cc dose for nearly all human vaccines. Since starting its first scientific collaboration 22 months ago, active pre-clinical and clinical testing of PharmaJet’s device is underway in 9 countries, with 18 partners for more than 25 vaccines and therapeutic medicines.
Market Opportunity
History & Genesis
PharmaJet’s technology was developed to address a need for safe and clean delivery of liquid vaccines, without a needle, in view of the massive infection rates caused from within the healthcare system of hepatitis B, hepatitis C, and HIV (and an additional 17 other blood borne diseases) due to syringe needle reuse and needle stick injury during vaccination (estimated at 22 million injuries per year world-wide). With the World Health Organization’s (WHO) guidelines in mind, the Founders created a needle-free injection technology that is simple, robust, and inexpensive. Besides getting rid of needles, however, there are a host of other sustainable competitive advantages and attractive features making it a value added device that can improve the lives of people, reduce the cost of healthcare, all the while generating profitability for PharmaJet and its partners.
Product Potential
PharmaJet’s features help address the developing world problem of re-use (as much as 40-70% in some countries) which contributes to growth in disease and epidemic. Further, the intra-dermal application (0.1 – 0.2cc volume) may contribute to stretching vaccine supply (reduced dosage, but similar immune response to standard 0.5cc dosage) where there is shortage so that the health net can be spread among a larger population, ultimately benefiting their group welfare and economy. At the same time, it is perfectly appropriate for the sophisticated healthcare market, and eliminates needle-stick injury which is prevalent everywhere. As a technology platform, there are a variety of additional product extensions that allow it to be useful in other injection segments, user groups, and processes.
Initial Markets
Human vaccine market: >1.75 billion needle-syringes being used annually for injection of vaccines, for children and adult populations.
Animal vaccine market: Even larger by volume than the human vaccine market, PharmaJet’s device has been used successfully in a range of species (mice, rabbits, guinea pigs, dogs, cats, goats, sheep, horses, cattle), making it suitable for:
For pre-clinical research and antibody production
To keep companion animals from spreading disease to their owners (i.e. rabies), and;
To keep animals productive, so that populations do not starve (developing world), industries are not financially devastated (i.e. culling for foot & mouth disease), and producers maintain efficiency (i.e. dairy).
The Position
As PharmaJet, Inc. seeks to substantially expand it’s product user base, exposure and revenues in 2010, the PharmaJet Regional Business Development position plays a vital role in product introduction, demonstration and sales within several key market segments. Leveraging their industry experience, this sales and business development leader will systematically identify and develop key new market opportunities and represent product sales to all public and private healthcare providers currently utilizing needle injection delivery of vaccines and select drugs to patients and the general public. Based upon a pre-defined region, such product introduction will use a team approach for product adoption and use support, in conjunction with PharmaJet Certified Trainers and Technical Support. This position will thus serve as the overall regional business manager of these services. The role will be focused on integrating PharmaJet’s product capabilities into all relevant regional public health networks, private clinics, and hospitals, thereby participating in all key mass vaccination events at the city, county and regional levels. Such efforts shall include attendance and representation at all relevant user’s groups and regional conferences of professional healthcare providers
PharmaJet Candidate Competencies Venn Diagram
Financial Backing
PharmaJet has raised a Series A and B equity financing from angels and strategic investors, and is well capitalized to enter their next phase of commercialization.
Compensation
Compensation is competitive with the position’s requirements. In a performance-based environment, this will include base salary, incentive bonus structure based on both quantitative revenue goals and qualitative MBOs, and a potential stakeholder position in the company.
Second Wind’s (http://www.secondwind.com/) mission is to advance the use of wind data to make wind energy profitable for the businesses and investors who create wind energy plants, painless for the operators who work with wind energy equipment and practical for the businesses, consumers and utilities that benefit from wind energy as a low-cost and environmentally desirable source of power.
Second Wind prides itself on technology innovation with its in-house hardware development and software engineering talent. The company continues to develop ground breaking products related to wind data.
Thirty four employees staff Second Wind’s headquarters and manufacturing facility. The company has an industry-wide reputation for innovative, reliable technology and excellent customer support. Inc. magazine recently ranked Second Wind on its first-ever Inc. 5,000 list of the fastest-growing private companies in the country. The company’s ranking was based on its 27% revenue growth from 2003-2006 and was the only business-to-business wind organization in the energy industry category. In December 2007, Second Wind secured $4 million in second round financing from Good Energies, a leading global investor in the renewable energy and energy efficiency industry.
Second Wind has been growing steadily, with annual sales of about $7M in 2008. Their clients include the largest developers and operators in an industry with a 30% annual growth rate.
History
Second Wind was founded in 1980 by Walter Sass and Kenneth Cohn. Engineers who have been friends since grade school, they decided the emerging field of wind energy provided an opportunity to leverage their engineering skills to benefit the environment. They recognized that, to succeed, the industry needed more than wind turbines. Wind developers also needed software and hardware to measure wind accurately at prospective sites and to monitor turbine performance at established wind farms. The company’s first headquarters was the spare bedroom in Sass’s home.
Second Wind established a presence in wind resource assessment in 1981 by introducing the first data logger designed specifically for wind energy prospecting. In 1985, the company introduced their first wind farm monitoring system. In 2007, Second Wind launched the TritonTM sonic wind profiler, designed to re-invent sodar for wind profiling.
Market Opportunity
Wind energy is growing at 20-30% annually. The market is global, with 17 countries having attained over 1,000 MW via wind. Of the $37B invested in wind energy in 2007, 2% was for wind resource assessment instrumentation and services, or $735MM. 8,000 met towers were installed for prospecting, power performance and operations. Target markets for wind assessment include large, medium and small developers as well as services firms.
The pressing need for viable alternative energy sources that do more than just supplement coal fired power-stations is driving advances in the development of wind energy. A major hurdle in establishing successful wind farms is the difficulty of attaining accurate site evaluation data. The Triton Sonic Wind Profiler addresses this challenge. Designed to measure wind-speed at heights of up to 200m without the need for erecting costly and less effective masts, the wind profiler utilizes a technique known as Sodar (sound detection and ranging) that measures sound wave echoes in the atmosphere. The technique is not dissimilar to Sonar detection used by submarines underwater.
In evaluating a suitable site to establish a wind farm, measurements need to be taken over a period of at least a year. This has been achieved, until now, by using a meteorological mast or met mast – a tower equipped with anemometers and other weather instruments. These masts are limited to a height restriction of 60m; any taller tower requires aircraft warning lights, which complicates assessment of a site for a turbine 75-80m high. Another complicating issue is the masts’ high visibility, which can raise public concerns before the site has been properly evaluated.
Relying on precise measurements of frequency and time delay from sound pulses that are bounced back to the transmission unit by wind turbulence, Sodar technology provides a virtually invisible tool which measures wind speed and direction at heights up to 200 meters. The Triton system also overcomes some of the problems associated with existing Sodar technology by remaining effective even in poor weather and delivering easy to interpret wind data without an on-site presence.
Triton also boasts innovations such as a hexagonal transducer array and a tri-lobed acoustic enclosure that increase accuracy by improving signal-to-noise ratios and beam focus, rugged construction making the unit effective in all weather conditions and able to correct measurements when used on uneven ground.
The Products and Customers
TritonTM Sonic Wind Profiler re-invents sodar technology for wind assessment. It captures accurate wind data from any height, in any weather, at any location, without being attended. Readings look like anemometry results, with no expert analysis required.
SODAR (SOnic Detection And Ranging http://en.wikipedia.org/wiki/Sodar ), or sodar, is a meteorological instrument which measures the scattering of sound waves by atmospheric turbulence. SODAR systems are used to measure wind speed at various heights above the ground, and the thermodynamic structure of the lower layer of the atmosphere.
Sodar systems are like radar (radio detection and ranging) systems except that sound waves rather than radio waves are used for detection.
Sodar sends an audible “chirp” up through the air, and wind turbulence sends a portion of the sound back toward the ground. By precisely measuring the frequency and time delay of the chirp’s echo, the sodar device measures the wind speed and direction at various heights.
Sodar technology is commonly used for “site profiling” at the end of the prospecting process for potential wind farm locations. It measures above the 60-meter height of most meteorological masts, assessing wind at actual turbine heights. In addition, sodar is more portable than masts and can be moved to determine ideal turbine placement.
Current sodar products have multiple limitations for wind profiling. They require on-site support to
operate, and deliver wind data in formats that require expert interpretation. Readings must be carefully analyzed to filter out “side lobes,” or sound artifacts from nearby trees and buildings that can produce inaccurate results. Most current sodar products also must be covered in rain or snow to avoid damage to the sensitive microphones and speakers.
Benefits of the Triton Sonic Wind Profiler
Numerous Triton innovations address the shortcomings of existing sodar products for wind profi
•More accurate data. A hexagonal speaker array (patent applied for) focuses sound beams more
effectively than previous designs, which improves signal-to-noise ratio accuracy and decreases
disruption. The array is housed in a tri-lobed acoustic enclosure, which reduces the chance of
sound artifacts disrupting data.
•Unattended use in any location. A solar array and battery can provide adequate power for the
Triton unit to operate for prolonged periods of time, depending on available sunlight and amount
of use. Bundled with new Skyserve satellite wind data service, the Triton profiler delivers
accurate wind data to any computer from any location in North America.
•Ready-to-read data. Unlike other sodar products, the Second Wind sodar delivers easy-to-read
data that is similar to data read outs from conventional meteorological towers.
•Works in any weather. The unit is made of rugged plastic with stainless steel components and
sound absorbing material that functions when wet, unlike foam. Internal temperature sensors and
a propane heater also allow Triton to operate in icy conditions.
•More portable and less obtrusive. At six feet tall, Triton can easily be towed by a pick-up truck.
The unit has internal controls to compensate for uneven ground, and a built-in GPS and compass
identify the time and location of data as it’s captured. Because of better acoustics, it is also less noisy than other sodar products.
The Position
Reporting to the VP Global Sales Peter Gibson, the Director Eastern European Sales will be responsible for the planning and execution of sales activities for Second Wind in Eastern and Central Europe. The Sales Director be focused on direct sales of the company’s Triton SODAR device and services.
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
Dedham, MA- Tobii ATIis pleased to announce that John Stamatopoulos has joined the company as Vice President, Sales.
“We’re very excited to have John on board. Tobii is poised for significant growth in 2010, and John will be instrumental in our success in the coming year,” said Tara Rudnicki, Tobii-ATI’s U.S. President.
“I’m extremely excited about joining the team, and feel a real missionary passion to help bring Tobii’s assistive technologies product line deeper into the markets we serve,” stated Mr. Stamatopoulos.
John’s background prior to joining Tobii included Global Director of Sales, Medical Device, Manufacturing, Pharmaceuticals, Capital Equipment, & medical Instrumentation for Fiberoptic Components, a contract manufacturer serving the medical devices and industrial manufacturing industries. While there, John was focused on developing an international medical marketplace for custom Fiberoptic applications including hand instruments, sensors, and analytical instrumentation. Partner with OEM’s and contract manufacturers. Before this role, John was responsible for sales leadership at IDEX Health & Science where he was recruited to direct sales for newly launched medical arm of $135M Health and Science division. Other sales roles John played previously included Account Sales Manager at Hill-Rom, a fortune 1000 global provider of healthcare solutions and sales executive at AstraZeneca Pharmaceuticals where he was #1 in district for total Rx market share and recipient of “Best in ‘03″ and “Best of the Best” for professionalism 2004, including national contest winner for market share growth. John started his career in the medical industry at Schering-Plough Pharmaceuticals, and has received industry-focused certificates at Loyola University of Chicago and Worcester Polytechnic Institute. John received his BSBA from Northeastern University in Marketing and Management Information Systems.
Tobii-ATI (http://www.tobiiati.com ) is the founding pioneer in the field of assistive technology. Tobii ATI has released a range of new alternative and augmentative communication (AAC) solutions that help individuals with speech impairments communicate. Tobii-ATI develops both communication hardware and software solutions for people with physical, cognitive, and speech disabilities. Tobii Assistive Technology, Inc. was formerly known as Assistive Technology, Inc. Tobii Assistive Technology, Inc. is a wholly owned subsidiary of its venture-backed Swedish parent, Tobii Technology AB.
A weekday morning in late November. A brownstone residence on Beacon Hill in the shadow of the State House. A dozen of the foremost experts in technology transfer and intellectual property in the Boston innovation cluster. And a representative from the Department of Energy. We at BSG Team Ventures had the recent opportunity to host a salon-style meeting in a home of a friend of the firm during Clean Energy Week here in the Commonwealth (for more on Clean Energy week, see http://greenovationconference.com/conference-info/cew.html).
The purpose? Bringing the best minds in the Boston venture, entrepreneurship and innovation community together for a brainstorming session with the Department of Energy around best practices in technology transfer out of our national laboratories. Attending the meeting were Alan Gordon from Harvard University Technology Licensing Office, Chris Noble from MIT’s TLO, head of the Mintz Levin cleantech practice Tom Burton, Peter Rothstein from the New England Clean Energy Council, Director of the Massachusetts Technology Transfer Center Abi Barrow, Director of Partners CIMIT John Collins, General Partner at Flagship Ventures Jim Matheson, and CEOs Chris Hobson and Peter Vandermeulen each running cleantech start ups with technology licensed out of several of the national labs themselves.
The challenge the current Obama Administration is taking on under Secretary of Energy Chu is how to better mine the metaphorical gold created inside the U.S. Department of Energy-funded national laboratory network of some 15 that are spread across the country. Some of these labs are household names–Los Alamos and Sandia (New Mexico), and Lawrence Livermore (California). Others are less well known-Argonne (Illinois), Brookhaven (NY), and Ames (Iowa). Even the National Renewable energy Lab (Colorado, known more often as NREL), are not as well known as one would hope. The history of these national labs springs from energy research spurred by World War II. What the layperson may remember is that many of these labs were where secretive nuclear energy research was conducted. However, much of the mandate for these labs some 60 years later is focused on discoveries that will broadly contribute to advancing the United States’ understanding of energy, renewable energy, energy conservation, and all the various scientific disciplines that can contribute-physics, materials engineering, chemistry, and more. These labs are panning for a 21st century gold-energy discoveries and breakthroughs that will create new batteries using renewable resources, wean the U.S. dependence on oil and coal as primary energy sources, and break new barriers in energy efficiency.
However, the problem has been that these labs have explored a lot, and engaged in extensive primary research, but have punched below their weight class in bringing innovation from discovery through to successful commercialization. The DOE budget in FY 2009 topped $25 billion. The national labs budget made up approximately $10 billion of that. And with the Obama administration’s stimulus package, these numbers only look to be increasing. One example brought up in the conversation to punctuate the problem from one of the Boston-based attendees was that fact that Argonne National Laboratory in the last decade has created less than a dozen successful out licensing/royalty events that generated meaningful returns. Logic holds that in terms of return-on-investment, there remains much room for added improvement.
So, two hours later, what were the issues that were brought up by the braintrust, and potential solutions that were tendered to improve the return on investment the DOE makes in the national laboratory’s innovation mission?
Some of the key issues with the current structure that came out of the dialogue:
• Risk aversion of national labs researchers to leave the security of the lab to spearhead a risk-laden venture
• Innate interest of lab researchers is more geared toward research and “discovery” versus market-matching and commercialization
• Low/no financial incentive to take a discovery beyond research phase
• No business ecosystem or business-savvy catalysts to help focus lab research talent on “known problems,” or the sifting through lab breakthroughs to match-make with existing business problems
Suggestions for improvement focused around the three ingredients that are key to metaphorical “combustion” of the innovation commercialization engine: More…
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%.
I had the opportunity to be out in Denver for the 22nd Annual National Renewable Energy Lab’s (NREL) Growth Forum. As many know, the U.S. has more than half a dozen national labs, some of the best known being Los Alamos and Lawrence Livermore, and Sandia. These labs are scattered across the U.S., and each often has a specific focus (nuclear research for instance is what has kept the National Labs in the public eye most often).
Given the Obama Administration’s commitment to renewable energy and innovation, it was an upbeat gathering. The attendee list was well-balanced between entrepreneurs, venture capitalists, and academics. Geographically, the majority of attendees either hailed from the Colorado area (with Boulder as the epicenter for cleantech in CO despite the NREL lab being located in Golden, CO), the West Coast (Silicon Valley entrepreneurs and venture investors), and New England (Boston-skewed).
What was surprising is how small the renewable energy community truly is. It’s still a very close knit group. And the community tends to shift from one location to another to pursue the next opportunity to contribute to the national cleantech ecosystem. Two notable examples are Tod Perry, who now is the Program Manager of the Clean Energy Entrepreneurship Center for NREL. Tod had originally started as a cleantech entrepreneur 5 years ago in Boston, pioneering a water purification technology, and a contestant in the first Ignite Clean Energy Competition in 2005. Another Bostonian who’s moved out to Colorado recently is Trent Yang, formerly a principal at Globespan Venture Partners, now Director, Entrepreneurship and Business Development at RASEI in Boulder (Renewable and Sustainable energy institute), part of the University of Colorado commitment to innovation in the renewable energy sector in the Rocky Mountain region. Other notable Bostonians sited at the conference included Peter Rothstein of New England Clean Energy Council, Bob Metcalfe of Polaris, and Chris Hobson, CEO of BandGap Engineering.
While out there, stopped by the Finals for the Cleantech Open’s Rocky Mountain Finals. New Sky Energy, Rivertop Renewables, and SunTrac Solar were the winners, now headed to the Cleantech Open Finals for all 3 regions up in Silicon Valley.
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.
I had Tuesday to Monday eve in mid-September in a race across the planet to take advantage of British Airways’ generous offer to fly a batch of entrepreneurs wherever they wanted to go in an effort to further each’s fast-growing businesses… at no cost.
My itinerary? Starting from home base of Boston, then to New York’s JFK, through London, with the ultimate destination– Singapore. Total air time one way? 18 hours. Total air and waiting in airport time one way? 24 hours.
What earned me the opportunity? First, membership in the Entrepreneurs’ Organization (“EO,” www.eonetwork.org, formerly known as YEO, or Young Entrepreneurs’ Organization ) a global membership organization that is nearing 10,000 members across more than a 100 chapters. EO is one of a group of leadership organizations, including YPO, WPO, CEO, and several others. Qualifications for EO membership include annual revenues of $1 million or more, and either founder or majority ownership status in your business.
Hailing from the Boston chapter of 100 or so EO members made up of computer software and hardware entrepreneurs, legal and staffing professional services business owners, and a host of other small business founders including franchising, travel, consulting, real estate, and medical devices, I was made aware of the strategic partnership between British Airways and the EO organization. The following paragraph, detailing what a face-to-face opportunity would mean to the growth and expansion of our boutique retained executive search firm, BSG Team Ventures, was what I jotted down–
We have a presence in Boston, New York, Silicon Valley, and London. These are key global innovation centers. However, there is clearly a fifth and/or sixth location to round out our client value proposition of “on the ground coverage in the key innovation centers in the world”– and those are India and Asia. Although there is a term sometimes used that combines the two (“Chindia”), we feel that there is perhaps a need to be able to service our growth-stage clients in each. One alternative is a meaningful position in a location like Singapore, which is equidistant from both these key innovation markets.
The ability to set up a series of meetings with potential partners, and then bring pre-meeting calls and video conferences to an in-person, face-to-face setting, would be extremely meaningful in taking our business from EU-American only, to truly global, capable of better servicing the needs of our clients who continue to demand the need to themselves expand globally.
I had been to Singapore and Hong Kong in 2008 on business, and knew that another trip there would allow us to cement some developing relationships “face-to-face.” In 2008, we completed a VP Worldwide Sales search based out of Singapore, and are now working on another General Manager search based out of Tokyo for a leading global technology innovator. And with the recession of 2008-2009 projected to recover in west-bound fashion this time (Asia first, Europe second, and the U.S. last), China, Japan, and the rest of the Asia-Pacific corridor is important to every business, both large or small like ours.
Having won the right to cash in the BA offer, a plane load of entrepreneurs amassed down at JFK airport in New York. BA was everything they’ve built their reputation on-service-oriented and courteous, only as the British can be-with a send off in the first-class lounge that was rich in food, spirit(s), networking with other entrepreneurs, and a few humor-filled greetings speeches by both British Airways officials and the British government. Example of the power-networking in the BA lounge? I met up with Morgen Newman, co-founder of IdeaPaint, another Boston-based start-up that was a BA travel recipient, with a company out of Babson (my alma mater so plugging here) that has formulated a special paint that can be applied on any work surface that then functions as a “whiteboard,” completely erasable when using dry-erase markers. IdeaPaint is a tool for entrepreneurs that simply brilliant. Most entrepreneurs are visual thinkers, and this now allows us to scribble on every surface…. (“Beware office cleaners-these walls aren’t “dirty”…. DO NOT ERASE!”)
My itinerary and goals for the trip looked like the following: More…
