CASE STUDY 2
Tech executive in transition
PROFILE
Brad
Age 38
VP, Enterprise Software Sales
Objective
Selecting his next job opportunity, without leaving any money on the table.
Current situation:
Brad started his career in software sales, during which he has risen from SDR up to VP in a relatively short period of time. Since reaching the level of VP, he has begun to attract attention from executive search firms, and he is carefully weighing his next career move.
With two children and a home purchase on the horizon, he’ll have a good use for the proceeds from his next successful exit, but high cash compensation upon hitting his sales targets is equally important.
He is confident in his ability to vet senior leadership and the strategy of the new firm where he is considering working, but he’s struggled to understand the stock options he’s being offered.
The job market in tech is really hot, and while that means there are many opportunities and he’ll have some negotiating leverage, he won’t have long to make a decision.
BRAD IS DECIDING BETWEEN:
Regional Vice President, Series D-funded startup
This opportunity draws upon his experience in technical sales, and he’ll be reporting to a VP slightly more senior than himself. Compensation is $450K (OTE), split evenly between salary and bonus, with an attractive accelerator but no ramp in initial commissions.
He is offered 40,000 incentive stock options (ISOs), with an exercise price of $2 per share, and 4-year vesting with 1-year cliff. The founding CEO is the majority shareholder, and has a clear focus on maximizing the value of a successful exit through IPO (not M&A), which he insists is 18-24 months away. The firm is valued at over $1B, and at its current rate of growth, it will require new funding this year.
Head of Sales, Private Equity-funded startup
In this role, Brad will be directly involved in closing larger deals in addition to leading the sales organization, and will report directly to the CEO. This business has seen consistently strong growth, and the CEO was recently installed after the firm was sold from one private equity firm to another. There is a clear line of sight to becoming Chief Revenue Officer, and additional stock grants upon promotion.
Compensation is $425K (OTE), and while the upside to cash compensation isn’t as high, the product is proven and he sees opportunities to greatly improve the sales process. He is offered 150,000 non-qualified stock options (NSOs), spread across two grants (half vesting by time over 4 years, and the other half based upon exit valuation). Selling the company for 2x or 3x what the PE-firm paid would produce $1.5-3M in proceeds to Brad, with a 3-5 year time horizon.
While it’s impossible to know the future value of stock options, he needs to understand if the stated path to exit for each company is realistic, and if his stock has the potential to produce a sizeable windfall as each company insists.
How Paceline can help:
One of the greatest challenges that executives face when deciding among different opportunities is that the value of the largest component of their potential compensation (stock options) is unknown at the time they decide to join that firm.
Working at a venture-backed startup can have the most potential upside, but larger, earlier investors tend to focus on maximizing upside with what can feel like an indefinite time horizon to employees.
Private equity-backed startups tend to follow a time horizon to exit of 3-5 years, but the flip side is that the cost to exercise options can be prohibitively high if the executive decided to leave prior to exit, and vesting tied to an exit multiple is not uncommon. Upon M&A, a stock windfall earned by certain key employees may be contingent upon continued employment with the acquirer.
Offers tend to be high on aspirations, and light on details, but by asking the right questions executives can gather the information they need to truly understand if what they’re being offered has the potential to be highly lucrative (or not).
Carefully evaluating an offer includes reading stock grant and shareholder plan documents, understanding assumptions baked into company financial projections, and identifying intermediate milestones of the company upfront so you know once you’ve joined whether the firm is on track.
With a trained investor on your side, you’ll be equipped to gather the information you need to make the best decision, and sidestep opportunities where the path to exit (or personal upside) just isn’t there.