By Shawn Cole, President Cowen Partners CFO Executive Search
A Chief Financial Officer (CFO) is often a key employee for companies, whether at startup or later-stage pre-IPO firms. With their expertise in strategic management and financial accounting, they imbue companies with financial confidence, making them a safer bet for investors.
However, there’s fierce competition for senior-level finance execs due to a hot market for top CFO talent. So, many companies, especially in the tech and sciences industries:
CEOs and executive search committees will be keen to clarify what constitutes a competitive CFO equity grant as they build out their talent acquisition strategy for this role.
Equity grants are one of the most widely used compensation tools in startups. They offer participation in the company’s ownership as a way to lure senior-level talent. The tool is often effective because it gives two distinct advantages:
CFO equity grants have mainly come to the fore as a competitive tool in senior finance hires. That means that:
Since the equity grant tool became predominant, companies began to formalize the process in an equity grant scheme approved by the board and investors. The scheme establishes an employee share pool, the nature of allowable grants, and more. A formal plan:
That said, what are the most common figures that a CFO might expect as a competitive equity grant from a company?
Typically, CFOs might expect to receive between .1% and 3% of a company’s value. In some cases, it may be much more, depending on the stage at which the CFO joins the executive leadership or founders.
According to Comparably, public companies or those with more than ten thousand employees generally offer the least equity since their compensation is weighted more towards salary. They note that in companies that have raised more than $30 million in funding, CFO salary and compensation includes 0 to $250,000+ a year in shares. In a survey of current CFO equity compensation by money raised, Comparably found that:
AON finds similarly in CFO stock grants for companies at or close to IPO stage. An analysis of 39 tech companies and 38 life sciences companies that became public between 2013 and 2014 showed that:
Despite what the data suggests, there’s often no hard and fast rule to determining CFO grant sizes. Companies will likely adopt a strategy that considers the going market rate and the peculiar advantages that the proposed hire brings and how that translates into value for the firm.
Although seniority, experience, market averages, and distinct notions of value are major guiding factors in CFO equity grants, timing might be the most significant factor. CFOs joining a company at a very early stage might take much more in equity than later hires, and this makes sense. The earlier a CFO commits to the startup, the more risk they face should the venture go bust.
Therefore, coming on board early makes the CFO a significant early hire and a vital part of the early strategic team. For instance, if the CFO were to join a two-person team, they might well stand as a co-founder and collect 10% equity or more.
Compare this to the average amongst executives hired at a later stage or just before IPO, and the difference is staggering. It might be described as a decaying exponential – the earlier people receive more and equity rates gradually decline from there.
An equity grant might give too much away by letting the employee take lucrative stock without a commitment to stay and realize the value of the venture. To protect against this outcome, companies use vesting restrictions and other mechanisms to preserve and extract the value of their investment in the hire.
A typical restriction is a vesting schedule that delays the exercise of the stock grant and only vests the entire grant in increments. For instance, the schedule might provide for a one-year cliff, after which the stock will begin to vest in increments over a set period of years. Four years is the most common vesting period.
Some companies may:
Back-loaded vesting gives out smaller portions of the total grant within the initial years of the schedule and the bulk in later years.
Ultimately, CFO equity grants can be a powerful tool to attract top-level hires and interest candidates that might not get their heads turned otherwise. However, CEOs and search committees must be careful not to give away the store – draw up a thorough plan for equity grants and follow it strictly.
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