PowerPoint Template

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Executive Compensation in Venture Stage Companies
Current issues and trends
Tracy Bean, KPMG LLP
Audit Tax Advisory
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Discussion Agenda

• Current trends in executive pay
• Stock Options and Stock Grant Trends
• Change in Control and Severance Programs

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Trends in Executive Pay

• More oversight and accountability by compensation
  committees
• Wider use of performance measures
• New types of equity instruments
• Reduction in equity grants at lower levels

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Executive Pay Trends in Venture Companies

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Executive Pay in Venture Companies

• CEOs at venture-backed companies earned 10 more
  in 2004 after two years of no increase
• Median base was 225, bonus 50K
• Median pay for directors has only risen slightly
• Majority of companies pay exec bonuses (79)
• Median equity allocation for CEO is 4.6
• (source VentureOne exec comp survey

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Equity Compensation Trends

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Equity Compensation Trends

• FASB accounting rules for equity compensation
  will change the landscape
• Effective date
• Public companies Fiscal periods beginning after
  June 15, 2004
• Private companies Effective date to be
  announced

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Current and Future Trends

• New types of instruments are emerging
• Stock settled stock appreciation rights (SSARS)
• Performance shares
• Restricted stock units
• Performance vested options

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Trends in Equity Compensation

• New types of instruments
• Wider use of restricted stock
• Options have more leverage potential in
  high-growth cos
• Use of performance metrics to vest or award
  equity
• Reduction in grants at lower levels
• Use stock instead to reduce dilution?

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Change in Control and Severance Programs

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Change in Control and Severance

• Careful design required for CIC
• Golden parachute excise taxes
• Retention issues after transactions
• Disincentives for liquidity event for buyers
• Inadvertent triggers due to CIC definition
• Severance
• Arrangements under fire in marketplace
• Company should receive valuable consideration
• Red flag when too much time is spent in
  negotiating severance arrangements upon hire?

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Change in Control and Severance Issues

• What triggers a change in control?
• Single vs. Double Triggers
• Definition of a change in control
• Problems in vesting equity
• Single vs. Double Triggers
• Retention Issues

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Dealing with Change in Control Problems

• Double triggers on equity
• Double triggers on payments
• Sale bonuses vs. CIC payments
• Retention bonuses
• Deal with excise tax in agreements
• Excise tax best payment language
• Quantify cost