Because most startups are cash-strapped, founders use equity grants to compensate for salaries that are lower than what more mature companies can afford to pay.
One of the roles you’ll have to eventually fill as a founder is VP of product management. Like every other invaluable member of your startup team, you’ll need to decide how much their equity grant should be.
In case you’re wondering, it should be 0.5% to 3%. In this article, we’ll delve a little bit more into the subject. Here are some other points we’ll cover:
- How much a VP of product management should make
- The key responsibilities of a VP of product management
- Creating a formalized plan to grant equity to your team members
What’s a VP of product management?
A VP of product management ensures that the organization is building, shipping, and supporting the right products. They set the product strategy and keep the customer in mind while ensuring every part of the workflow contributes to making the product as good as possible.
They know that exceptional products are the result of a team effort. Therefore, a VP of product management acts as a cross-functional leader, bringing the entire organization together to meet business objectives. They direct their team to work diligently across all departments to improve the product and the customer experience.
This individual must be an exceptional storyteller. They know that a compelling narrative energizes the team, giving them something to motivate them when things get tough. They utilize their extensive knowledge of the product to predict how users might interact with the product in the future.
The ability to look ahead helps them make decisions, such as which products to shelve and which ones to push further in development. VPs of product management have profound empathy for their customers and leverage this understanding to build a product that’s a perfect reflection of customer needs.
VPs of product management are always looking for ways to improve user engagement. They do this by conducting regular user research, usability tests, and UX audits on their products.
How much does a VP of Product make?
The average VP of Product Management salary in the US is $252,803 as of April 2021. However, the range typically falls between $225,903 and $279,703.
What’s an equity grant?
Equity grants are stocks or stock options given to an employee to incentivize them to remain with a company long term. Equity grants can also help entice high-caliber talent to join your startup team. A formalized equity grant plan can keep your team’s morale up and help you plan for future stock option allocation.
How you structure equity grants with employees can have serious financial repercussions. That's why it's vital to create a startup compensation package that reflects the economic outcomes you want.
Have a plan for how many team members you want to hire in the next 24 months. Also, have a high and low equity range you’d like for each role. This will prevent you from making fly-by-the-seat-of-your-pants decisions as you build out your team.
It’s all too easy to start giving out equity willy-nilly, with no overarching plan. Before you know it, you’ve exhausted the employee option pool, leaving nothing with which to lure in recruits. Before you make this mistake, keep in mind you'll need to hire some C-suite-level executives who'll need significant stock options to entice them to join your team.
To avoid this dilemma, set aside a percentage of stock for your first group of hires. There are widely differing opinions on how much you should allocate, which is why the average equity for startup team members varies so much.
Three questions to ask yourself
Ask yourself these three questions to figure out how much equity to set aside:
- HOW MANY PEOPLE DO YOU WANT TO HIRE? As a rule, the more people you hire, the larger the employee equity pool should be.
- HOW SENIOR ARE YOUR HIRES? The more senior the hire, the more equity they get.
- WHEN IS YOUR NEXT ROUND OF FINANCING? Each time you raise funding, you issue new shares to investors. Every time this happens, you need to increase the size of the employee equity pool for additional hiring after financing.
Increasing the size of your equity pool
Every year, evaluate the remaining size of your pool and see if it needs increasing. Keep in mind that every time you make the pool bigger, you’re going to dilute ownership. That means that everyone in the pool will then own a smaller piece of the ownership pie.
You also cannot increase the size of your pool randomly. Your board must approve the size every time you need to change it. A best practice is to manage your pool like you would a budget. This means setting aside some equity for crucial hires later on down the road.
Research salaries and equity expectations for roles you must hire for. Save money by asking friends who also run startups. Or, do your research at websites with free or low-cost subscription services.
The most commonly used vesting schedule is four years with a one-year cliff. This means that the more a team member contributes to the startup, the more equity they get. An arrangement like this helps ensure that a person is a good fit for your company before they get to own a piece of it. It also incentivizes people to stick around.
A four-year vesting schedule isn't written in stone. Some companies offer five, six, or even 10-year ones.
Exercising stock options
Most early-stage startups grant stock options because they give team members the choice of cashing out when they feel the time is right. If employees are directly granted stock, they don’t get this choice.
They’ll own the stock when it vests, which could result in an enormous tax bill. If the stock cannot be sold because the company didn’t go public yet, paying this bill can put an onerous burden on your employees.
Set an expiration timeline
You’ll have to decide how long after an employee leaves your company will their stock options expire. It’s usually three months after an individual terminates their contract, but that standard is rapidly changing.
Many individuals believe it isn’t exactly fair to force team members to exercise their stock options before they’re prepared to handle the tax burden. A longer expiration timeline gives your employees the chance to exercise when they have more income or when stock becomes liquid after the startup goes public.
While providing more flexibility is fantastic for team members, an extended expiration timeline can create some administrative headaches. Here's what they are:
ISOs and NSOs
The US tax code authorizes two types of stock options: ISOs (incentive stock options) and NSOs (nonqualified stock options). ISOs can only be issued to employees. They have unique tax benefits because they were designed to be employee incentives.
NSOs are for anyone, including employees, independent contractors, and investors. ISOs expire three months after a worker leaves an organization. That's why the standard options expiration timeline is also three months.
If you’d like your team to be able to exercise their options longer than three months after leaving your company, convert their ISOs to NSOs. Then, set a new expiration timeline. Keep in mind that making the switch means more work for your accounting and legal departments.
Decide if your employees can exercise early
One of the decisions you'll have to make as a founder is if you want to give team members the option of exercising early. The benefit to exercising right after receiving a stock option grant is that the employee's exercise price is valued the same as the company's common stock.
This means they're not responsible for any taxes that year. They only have to pay taxes when they sell the stock.
Employees must file an 83(b) election within 30 days of their early exercise date to avoid paying taxes. They’ll also need to file the election with their taxes that year. The 83(b) is a document notifying the IRS that someone has exercised early. The difference between their exercise price and the FMV will be zero, meaning they don’t owe any taxes on the transaction.
How much should an equity grant for a VP of Product be?
0.5% to 3% is typical for an experienced VP of product management after a Series A funding round. However, it also depends on what you’re paying your VP. If you’re giving them a full salary, allocating less equity would be perfectly okay.
Most startups cannot afford to give much salary, so they compensate with equity. Keep in mind that the team member will be taking significant dilution upon funding.
That's why you want their equity to be sufficient to motivate them to stay with your company.
It also comes down to how valuable the employee is. If the person brings a lot of expertise to your startup, then stock options should be higher.
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