CompStudy Report in Technology 21 Dec. 2009

A SERVICE FROM
J. ROBERT SCOTT
Compensation & Entrepreneurship Report
2009
T E C H N O L O G Y
Special Access Code
Visit www.compstudy.com and register to receive full access
Data in this report produced in collaboration with Professor Noam Wasserman of Harvard Business School
J. Robert Scott and Ernst & Young are pleased to bring you the 2009
CompStudy Report in Technology. We are excited to have the most
robust data to date for our tenth anniversary edition, and within this
brochure you will find a summary of the results the survey generated.
Also included are interviews with Aaron Ain, CEO of Kronos
Incorporated, and Todd Dagres, General Partner at Spark Capital.
Participants in this year’s survey are

provided free access to the detailed
position-by-position analysis, which for the
first time is available as part of our new,
interactive online platform. To gain
temporary access, use the special access
code on the front of this book to register at
www.compstudy.com. Once you complete
the survey, you will be granted permanent
access to the complete results.
Letter to the Industry TABLE OF CONTENTS
Welcome to the 2009 edition of our annual Compensation and Entrepreneurship Report Demographics 4
in Technology. This report—our tenth annual and largest to date—includes summaries Summary 7
and analysis of compensation data collected from executives at 489 private companies
Interviews 14
from across the country in software, hardware, content, cleantech and other industries.
Sponsors 26
The survey data were collected between April and July of 2009.
This survey responds to our clients’ continuing need for better access to reliable,
comparable compensation data to assist them in the critical decisions involved in
attracting, motivating and retaining key executives at private companies. We are able to
present correlations between executive compensation and a number of variables,
including: financing stage, company size both in terms of product stage and headcount,
founder/non-founder status, industry segment and geography. We also provide a
number of analytics on Board of Directors compensation and make-up, company equity
plans, and a look at how organizations develop as they raise additional financing. For
the most in-depth data available, please visit www.compstudy.com.
Our survey has evolved over the years based on input received directly from the industry,
and our hope is to continually improve the data so that we can best serve the needs of
our clients in the Technology industry. We encourage readers of this publication to
submit comments and suggestions to help us most efficiently and accurately present the
compensation dynamics of the market. Suggestions and comments should be directed
to info@compstudy.com.
Lastly, we would like to express our gratitude to Professor Noam Wasserman of the
Harvard Business School who, in addition to utilizing the data for his own research
(more at http://founderresearch.blogspot.com), continues to contribute greatly to
our publication.
2009 Compensation & Entrepreneurship Report in Technology
Demograph ics
Demographics of Respondent Population
• This survey of executive compensation in privately held technology companies was conducted
between April and July of 2009. The questionnaire resulted in 489 companies participating with
data from over 2,000 executives in a wide cross section of industry sectors, geographies and
stages of development. This represents a 54% increase in participation over 2008’s survey.
• The CompStudy website provides aggregated results of the data as well as a deeper
examination of the population by a number of perspectives, including: financing stage, founder
status, geography, headcount and company revenue.
Founder Status
Founder Non-Founder
% respondents in this range
98
89 87.5 89.5
86.7
84.2
78.3
70.3
61.8
59.4
50.4
49.6
40.6
38.2
29.7
21.7
15.8
13.3 12.5
11 10.5
CEO COO Head of Head of Head of Head of Sales Head of Head of Head of Human Head of General Counsel
Finance/CFO Technology/CTO Engineering Marketing Business Resources Professional
Development/CBO Services
• 34% of the executive population this year were founders of • CEOs and CTOs were the most frequent founders of their
their company, up slightly from 31% of the population in our companies, at 62% and 59% respectively. Heads of HR and
2008 edition. General Counsels were the least likely to be founders, at 2%
and 11% respectively.
4 www.compstudy.com | ey.com | j-robert-scott.com

Demo graphics
Geography
33.3
23.7
13.5 13.9
9.6
California
California New England Mid-Atlantic Midwest West South New England
Mid-Atlantic
• California and New England dominate the population of Midwest

companies, closely mirroring venture capital funding trends West
and similar to our previous editions. South
Business Segment Headcount by Number of Full-Time Employees


50.8
49.1 Software
4.3 Communications
Hardware/Semi
10.1
IT Services/Consulting
19.4
Content/Information 15.5
14.4
CleanTech
12.8
Other
6.2
3.7
1-20 21-40 41-75 76+
13.8
• Companies with 20 or fewer FTEs make up approximately

• Software companies again were the most common segment
one-half of the population. This year’s survey saw a decrease
comprising nearly half of the respondents. Computer
in the number of mid-size companies in the 41-75 FTE range
Hardware, Semiconductor, Electronics companies were next
— 15.2% of the population, compared to 26.6% in the prior
largest with 13.7% of the responses. CleanTech companies
year.
comprised 10.1% of the responding population, a significant
increase compared to the 6% figure in the prior year.
www.compstudy.com | ey.com | j-robert-scott.com 5

Demograph ics
Company Age and Financing Information

• Two-thirds of the companies in this year’s study were six years old or younger, compared to just
half the companies in 2008.
• In 2009, mid-stage companies, those with 2-4 rounds of financing, raised capital faster than
did companies in the prior year’s study. Gross proceeds for each round declined by an average
of 4%, with the exception of fourth round gross proceeds, which increased by 10%.
Company Age (Years) Financing Rounds Information

Money Raised Per Avg Time from Founding
Round ($Million) to Round (Years)
10.2
48.9 9.1 9.1
7.3 7.0
5.1
24.0 4.3 4.1
18.0 2.6
9.1 1.3
0-1 2-6 7-10 10+ Round 1 Round 2 Round 3 Round 4 Round 5+
Financing Rounds Revenue

% respondents in this range % respondents in this range
24.9 41.3
21.6
17.8 30.7
11.8 12.2 11.6
12.7
7.4 8
0 1 2 3 4 5 or more Pre-Revenue Up to $5M $5-10M $10-20M $20M+
• Companies are divided between those that have not received • There were more companies at every stage of revenue in this
institutional financing, and those that have. Among those year’s survey; however respondents leaned slightly more
companies that have received institutional financing, we towards early stage revenue companies than in previous
break them out into five groups—one, two, three, four, and years, with 72% generating less than $5 million, compared
five or more rounds. Compared to prior years, there were to 65% in 2008.
more companies in each group; however the most dramatic
increase was among respondent companies at the early
stages of development.

Summar y
Cash Compensation – 2008 and 2009
This data compares 2009 compensation data with compensation data for 2008 non-founding
executives. 2008 figures are represented with both actual bonus received and total
unachieved target bonus for the year. 2009 bonus figures indicate at-plan target amounts.
Total Cash Compensation

2008 Base 2008 Bonus 2008 Unachieved 2009 Base 2009 Target
Salary Received Bonus Salary Bonus
Figures in 1,000s of USD

34 93
61 43 102
23 57
37
58
230 231 23 45 24 47 63 18 40 17 42
35 10 33 43 18
181 186 24 23 22 26
22 28 24
161 164 161 162 158 162 165 160 159 162 159 24 160
158 7 153 154 151
14
115 117
• Average base salary across all positions was up 0.8% in 2009, • Within prior year bonus figures, we have distinguished
compared to a 4.7% increase in 2008. This represents the between actual received and target amounts. Breaking the
lowest year-to-year increase in the history of the CompStudy. bonus apart in this way shows that on average, executives
earned approximately 58% of their target cash bonus
• Nearly all executives’ base salary was flat or slightly up
compensation in 2008, compared to 67% in 2007.
compared to the prior year. Heads of Business Development
and Heads of Marketing saw a slight decrease in base salary, • Overall bonus targets as a percentage of base salary did not
whereas every other position was flat or slightly up. change materially from 2008 to 2009.

Summar y
Executives Eligible for Bonus

2008 Bonus Eligibility 2009 Bonus Eligibility
% eligible for a bonus
94.2
85.7 87
83.3
80.5 82.1 80.0 80
75.7 77.8 76.2 76.3
74.9 75.6
71.4 69.8 71.6 70.5 70.6
69.2
65.3
61.7
Bonus as a Percentage of Base Salary

2008 Bonus Received 2008 Unachieved Bonus 2009 Target Bonus
% of base salary
25.8
60.9
14.2 22.9
38.3 36.6
38.6
12.2 29.9 13.7 11.1
14.8 27.7
25.9 26.9
11.4 24.4 10.8 24.3
25.4 6.4 19.9 20.7
6.3
18.8 18.4
15.8
14.5 13.8 13.6 14 14
12.2

Summar y
Equity at Time of Hire

2009 Median 2009 Mean
% equity owned, fully diluted
6.1
5.9
2.9
2 2.1
1.8 1.9
1.5 1.5 1.6
1 1.3
0.9 1 1 1 0.9
0.8 0.9
0.5
0.1 0.3
• At the average, the non-founding CEO receives a 5.9% grant accounting for 45% of the aggregate equity granted. 56% of
to join the company, as expected, the highest of the respondent companies rely on stock options as the sole
positions surveyed. equity vehicle. This figure is approximately the same as the
result from our 2008 report, where 58% of companies used
• Incentive Stock Options continue to be the most common
only options.
form of equity granted in the companies surveyed,
Equity Holdings
5.9
5.1
3.3
2
1.6 1.7
1.4
1.1 1.2
1 1 1 1 1 0.9 1 0.9
0.7
0.4 0.5
0.1 0.4
• Median equity holdings for CFOs, CTOs, Heads of • CEOs’ median equity holdings increased slightly this year to
Engineering, Sales, Marketing, and Business Development 5.9% from 5.1% in 2008.
are all approximately 1%, which is unchanged from 2008.

Summar y
Severance Packages
• 58% of non-founder CEOs have a severance package, down slightly from 64% in our previous survey. Between
approximately one-fifth and one-quarter of the remaining management team has a severance package.
Severance
Months of severance
6.8
6.6
6 6
4.5 4.3
4.1 4 4.1 3.9 4
3.6
3 3 3 3 3 3 3 3 3
2/8
Organizational Structure by Financing Round

Founder Non-Founder
100%
90% 46%
56%
80% 10%
70% 78%
69%
60%
62%
22%
50% 52% 32% 42% 48% 48%
53%
45%
40% 15%
38% 34%
30% 35%
14% 22% 29% 20%
11% 19%
20% 17% 24%
14%
16%
10% 15% 13%
8% 9% 2%
8% 6% 7% 7% 7% 8% 5%
0% 4% 3%
1 or 2-3 4 or 1 or 2-3 4 or 1 or 2-3 4 or 1 or 2-3 4 or 1 or 2-3 4 or 1 or 2-3 4 or 1 or 2-3 4 or
fewer more fewer more fewer more fewer more fewer more fewer more fewer more
CEO COO Head of Head of Head of Head of Sales Head of

Finance/CFO Technology/CTO Engineering Marketing

Summar y
• The median CEO and COO severance package is 6 months. The rest of the non-founding positions surveyed have a
median severance package of 3 months.
Severance Eligibility
2009 Severance Eligibility
% eligible for severance
58.7
30.9
24.6 24.8 24.3
19.6
17.9 19.1 20
17.6
10.2
% of companies reporting this position
• 96% of companies surveyed from the earliest stage of

financing reported having a CEO, with 79% of those
CEOs being founders of their companies. This is a
slight increase from last year’s edition where 92% of
companies in the earliest stage of financing were led
by a CEO and two-thirds were founders.
• For just 33% of those companies in the latest financing
30% stages, the founding CEO remains in control.
21%
• The CFO is the most frequent addition as a company
9% 16% 6% 13%
17% moves from one or fewer rounds raised to two to three
3%
8% 8% 8%
5%
1%
11%
2% 2% 2% 1% 4% 4%
rounds. Just 30% of companies at the earliest stage
1 or 2-3 4 or 1 or 2-3 4 or 1 or 2-3 4 or 1 or 2-3 4 or have a CFO, jumping to 66% at companies with 2-3
fewer more fewer more fewer more fewer more
rounds raised.
Head of Head of Human Head of General Counsel
Business Resources Professional

Summar y
Equity by Financing Round Founder CEO – Equity by Financing Round
• In companies having raised one or fewer rounds 20 38 70

the average founding CEO holds 44% of the
company’s fully diluted equity, which is up from ≤1
approximately 33% in 2008, likely due to the 43.9
increased participation by pre-institutional
8.9 13 23.2
financing companies. Founding CEOs of companies
with two or more rounds of financing held an
2-3
average of 17.2%, down slightly from 18% last year.
18.6
• Founding CTOs see a dramatic dilution of equity as
6 10.5 16
their companies receive additional financing. Their
average equity holdings drop from 20.7% for 4+
companies with one or fewer rounds of funding to
7.9% for those with two or more rounds. 13.8
Founder President/COO – Equity by Financing Round Founder CTO – Equity by Financing Round
13 21.5 32.8 10 18 30
≤1 ≤1
27.5 20.7
6.8 10.5 19.6 2.9 6 11
2-3 2-3
13.6 8.9
3.7 4 7.1 2 3.9 8.4
4+ 4+
5.7 5.3
Equity Vehicles Used

2009 11.9 14 Only Incentive Stock Options
Only Incentive Stock Options
2008
Only Non-Qualified Stock Options
8.1 Only Non-Qualified Stock Options
7
Only Restricted Stock
1.6 Only Restricted Stock 1
3 Only Common Stock
3.6
Only Common Stock Both Options
Both Options 13 Both Stock
12.1 None/Other
Both Stock 47
7 Stock and Options
8
None/Other
45.2
10.3
Stock and Options
7.2

Summar y
Founder Equity
28
17.8
15.7
12.8
11 10.5 10.6 10.9
9 8.8
8.2
7.4
6.5 6.2 6.3 6.3
5 4.5 5
4
N/A N/A
Founder Cash Compensation

2008 Base 2008 Bonus 2008 Unachieved 2009 Base 2009 Target
Salary Received Bonus Salary Bonus
Figures in 1,000s of USD
100
45 43
74 87
35 250
61 28 55
17 47 8 225
52 22 48
43 53 41
31 29
17 40 40
39 27
172 172 169 24
164 11 158 157 162
27 156 155 153 149 150 155
148 152 149 25 25
135
126
90 90
Founder Equity Holdings Founder Total Cash

• Not surprisingly, founders hold considerably more equity • Average base salaries increased by just under 0.5% from
than non-founders at the same position, on the average, 2008 to 2009, a substantially smaller increase than years
with founder CEOs holding an average of 13.2% more equity past. However, CFOs and Heads of Engineering saw 7% and
than non-founder CEOs. 5% increases in their base salaries, respectively.

Inter views
Aron J. Ain Aaron Lapat

Chief Executive Officer, Kronos Managing Director, J. Robert Scott
Since he joined Kronos in 1979, Aron Ain has played a role in Aaron has been with J. Robert Scott since 1993 and built the
nearly every functional department at the organization, helping firm’s high tech practice. He leads senior level search assign-
to build what is today a $715 million enterprise software power- ments across a range of industry segments, including Software,
house. Ain was the company’s first service person in 1979 and Communications, Solid State Electronics, Specialty Materials
first sales person in 1980. He served as vice president of world- and CleanTech. His practice emphasizes recruiting CEOs and
wide sales and service in the 1990s, and became chief functional leaders for private equity and venture-backed compa-
operating officer in 2002. In October 2005, Ain was named chief nies.
executive officer and a member of the Kronos Board of
Additionally, Aaron oversees the production of the annual
Directors.
Compensation and Entrepreneurship Report in Information
Ain’s interactive and engaging leadership style is credited with Technology at www.compstudy.com.
creating an energized corporate culture at Kronos. He believes
Prior to joining J. Robert Scott, Aaron spent four years with a
that employee retention inevitably leads to loyal and satisfied
retainer-based executive search firm that serviced the high
customers. According to Ain, “Employees who feel valued stay
technology industry.
longer and develop a deeper understanding of and stronger
relationship with our customers. It is their experience and Aaron holds a B.A. in Anthropology as well as an M.B.A. from
knowledge that allows Kronos to deliver the best products and Boston University. He serves on the Board of Advisors of Stax,
customer service.” Ain’s focus on customer service never Inc., a privately-held management consulting and market
waivers and is the reason that a customer-centric orientation is research firm. Aaron and his wife Lauren have two children,
a core value intricately woven into the fabric of the company. Sophie and Sammy. In his spare time, Aaron plays tennis, runs
and listens to music. On the off days, he can be found stoking
In 2007, Ain played the leading role in negotiating the sale of
the embers of his VW-sized Texas BBQ, mixing up a homemade
Kronos to private equity firm Hellman & Friedman for $1.8 bil-
hot sauce, or trying to create the perfect play-list from his ever-
lion. A leading authority on the subject of managing a global
expanding record (mp3) collection.
workforce, Ain has been a driving force in expanding Kronos
footprint to meet the workforce management needs of its multi-
national customers. Ain has travelled extensively to meet with
customers, prospects, and industry influencers in countries
such as Australia, Belgium, China, France, India, and the UK.
In addition to a bachelor’s degree in economics and government

from Hamilton College, Ain has participated in a series of execu-
tive education programs, including the AEA/Stanford Executive
Institute at Stanford University.

In ter views
INTERVIEW WITH ARON AIN rules and prepare the hours for entry into a payroll system,
which then would do the gross to net, calculate the taxes and
various other deductions and come up with net pay.
Aaron Lapat: Can you give an overview of your professional life
before Kronos? AL: What were the main challenges in the early days of the
Aron Ain: That’s easy. I basically had no professional life before company?
Kronos. I’m one of these strange guys who has had one job AA: The fundamental issues in the beginning were developing a
since I graduated from college. At 21 years old I joined Kronos product that really worked. It is one thing to have an idea, but
right out of college and I haven’t worked anywhere else. then you have to make the product work effectively. I remember
one of the early units we made when we were located in
AL: How did that happen? Brighton, Massachusetts. Our building was in a three-story
AA: One of my older brothers, Mark, and his two partners start- walk-up. We had manufacturing, if you could even call it that, on
ed a company. He convinced me that this was a place where I the third floor, no elevator, and on the second floor we had
should work for a little bit to help him get the company started, shipping. We would test the units on the third floor when we
and then I could move on to explore other interests for myself. I would assemble them. If they worked, we would literally carry
came here in 1979 while we were just getting things going. I them down to the second floor and test them one more time
enjoyed working here and one thing led to another, and I’m still before we put them in a box. I remember doing this and one
here 30 years later. unit would not work again after being brought downstairs. One
of the engineers told me that I carried it the wrong way down
AL: Where did the idea for the company come from? the steps. I asked him what we were going to do when we
AA: Mark went to MIT and then got into business. He wasn’t a shipped it! So in the early days we had basic challenges, like
practicing engineer, but he used his skills in that area to help com- making sure that when you carried the system down a flight of
panies decide, through market research, what products might be stairs it would still work.
effective to bring to market. Through that process he decided to
start his own company. He tells a story that he felt he was good at AL: Just small issues like that?
helping other people design products that were successful, so he AA: Little things like that. So, we had technical issues to con-
wanted to do one for himself. So, he and his two partners, who tend with, but we also had application related issues. The
were also both engineers, decided to evaluate a group of different product had to meet the needs of what our customers wanted.
ideas. Mark actually had a list of criteria he had formed through Our value proposition was the ability to fully automate the pay-
his time as a consultant for what made a successful company or roll process. If we did not automate it, and someone had to go
product. He focused on industries where there was a sleeping back and recalculate what we were supposed to be calculating
giant or giants, where you could sell something across multiple through the programmatic aspects of the device, then we were
verticals, that could be differentiated and use technology to auto- not really benefitting them. We got through that pretty quickly.
mate something that was backwards or manual. Those weren’t the We had smart engineers and we had good discussions with
only criteria, but they were some of the more important ones. With potential customers. We understood what the business chal-
this framework, he found that the only part of payroll processing lenges were from a programmatic aspect. The single hardest
that wasn’t automated was the time clock, and he concluded that thing after that was bringing the product to market and building
it was something that met his criteria. This led to deciding to a distribution network. The mechanical time clock back then
invent the first computerized time clock. was a $300 or $400 unit and our product was $5,000 or $6,000
dollars. Some people would tell us we had a $6,000 solution to
AL: Were all time clocks punch card based at the time? a $2,000 problem. So we had to learn how to explain the value
AA: They were mechanical clocks. Even though payroll process- proposition and what the advantages were. We had to build dis-
ing was automated through either in-house systems or service tribution, as well as brand awareness and demand for what we
bureaus, the actual front end of that payroll process, the collect- had. Those were the issues I worked really hard on for the five
ing of the hours worked, was manual. It was time cards in a rack years after we got the product to work. I was out in the market
and time keepers would collect them and manually add up the getting people to accept our product and distribute our product,
hours. They would then calculate against all the various work whether those were direct salespeople or resellers.

Inter views
AL: How was the business funded through the early years? tenure. Typically companies go through evolutionary cycles and
AA: We raised about $9 million dollars of venture funding, so leadership changes in response to those growth cycles. What
really very little capital compared to what is typical today. do you attribute to your ability to transition as the company
has evolved?
AL: How did your role evolve over time? AA: That’s a really good question. I think it starts with a commit-
AA: In the beginning, I did all the sales, marketing and service. ment to learn every day from your environment and keeping
In 1981, I moved to Chicago to become Kronos’ first Regional your ego in check. For example, I am a big believer that we do
Manager. We didn’t have any regional managers, but we knew not have a corner on the market of all the best ideas. It is con-
we had to get out into the field. Specifically what happened with ceivable to me that people out there who we may compete with,
me was I took a look at my paycheck when I got my first raise, who we work with, or who we partner with can teach us ways to
and while it was a very fair raise, it made me think. I thought do what we do more effectively. If we allow our environment to
about what I had to do to make more money and decided that I teach us how to be better, then we will become a better compa-
needed to go out and be actively in front of customers selling ny, and that is what having your ego in check really means. I
and serving and building distribution teams. So, I moved to have always believed deeply in listening and learning from
Chicago when I was 23 by myself and opened an operation those around me and then reacting accordingly. That is one
there. I did that for three years. I built a distribution organiza- thing that has helped us evolve and continue to stay success-
tion, both direct and indirect in 12 states. I helped us get ful—we have changed as we’ve needed to change. We have not
dozens and dozens of customers from none. In 1984, I moved said the way we used to do it is the way we should do it going
back to Massachusetts and took over all of sales and distribu- forward. Also, we have gone through these waves, these evolu-
tion. tions as a business, and have been able to embrace changes in
technology. The result has been having systems and tools and
AL: How big was the company at that point? products that are very modern and meaningful and make a dif-
ference for our customers. We have always had an attitude that
AA: In 1984 we probably were $15 million of revenue if I had to
says if it is not broken, break it. We are always breaking things
guess.
that appear to be working. We don’t break them for the sake of
breaking them; we break them because we think by doing so we
AL: And the IPO was what year?
may find a better way to do it. We take chances, but I am not big
AA: June of ’92, when we were about $60 million in revenue. into keeping score. What I mean by that specifically is if we
decide to do something and it doesn’t work, then we stop doing
AL: By the time of the IPO, what was your role? it and we move on to the next thing. We don’t say, “Oh, Aron
AA: At that point I was Vice President of Worldwide Field didn’t do that right so I’m not giving him another chance, and
Operations and Marketing. That included services, as well as I’m going to put him in the penalty box.” If we all agreed it was
sales and marketing. I had a peer who ran engineering and one a good decision, and we tried it and it didn’t work, we stop
who was the CFO. I became the Chief Operating Officer of the spending money and resources on it and we move on to some-
company in the 2001-2002 timeframe, which meant I took over thing that we think will work. That philosophy has given us the
all aspects of the business. I became the Chief Executive Officer ability to adapt.
in 2005.
AL: Kronos has been highly acquisitive over its history. How do
AL: What triggered your transition into the CEO role? you make those integrations work? I imagine, if not done right,
AA: My brother Mark decided after almost 30 years as CEO that they can be a huge drain on the culture and resources.
it was time for him to hand over the reigns to someone else to AA: We have developed a really good formula. It starts with hav-
take the company to the next level. He was being very effective ing a strong corporate development team that evaluates
in his role; however, he wanted to do other things in his life. opportunities in the area of technology, distribution, market
share, products, or geographies. Then you try to find target
AL: It is highly unusual for an executive team to remain intact companies that may have an interest in merging with Kronos.
for all those years, an executive team or an executive. Your Once you evaluate those, if you are fortunate enough to be able
brother remaining CEO for 30 years is uncommon, as is your to strike a fair arrangement for both Kronos and the company

In ter views
that you are acquiring, then you have to integrate it in. We have AL: Is there good value in the market?
teams of people and processes that allowed us to go in and very AA: I think it matters what side of the fence you’re sitting on. For
quickly decide who we were going to keep and who we were us it looks like good value. For sellers it may look like bad value,
not. We map out how we are going to integrate them into the because despite what I just said, 2009 was a difficult year for
company and who will manage them. We also make sure from many, and it was not as good an indication of the future. So
day one that we treat the people who are going to join the com- what we might think is fair value may not jive with what the
pany very well, which means giving them the tools they need potential sellers think is a fair value. This market can create mis-
and the space they need to do their jobs. matches in value expectations. We are not a company that
focuses on doing deals that are way below what things are
AL: What does a company need to do to become an attractive worth. We try to be fair and reasonable and see that as a big
acquisition target for Kronos? part of how we have done 58 acquisitions.
AA: First of all, they need to have exceptional products. They
have to have good people, and they have to have happy cus- AL: You have seen multiple economic cycles. How has this
tomers. Some combination of those three things would make an down market compared to previous down markets?
organization attractive to us. I don’t think there’s any magic in AA: I’ve lived through the challenges of ’81/’82, ’90/’91, and
that. They don’t have to have all three of those, but the value ’00/’01, and this, by far, is the worst of those. Kronos had 115
gets increased by those combinations. Sophisticated buyers consecutive quarters of revenue growth, and that streak was
like Kronos are going to evaluate all of those components very broken during this period. That means revenue growth defined
carefully, and we will base our value on how we measure and as year-on-year, quarter-on-quarter. We never had one period
rate those areas. when we didn’t grow revenue, and in this period it caught up
with us. That is an indication of how acute it’s been during this
AL: So to maximize value you need all three. current downturn. The good news is I think that 2010/2011 will
AA: I may not want to acquire a great product with unhappy cus- be better. Not just for Kronos, but other companies too. We are
tomers. Then I inherit a mess. Or, maybe you don’t have great already starting to see things coming back, and I think there will
people, which is okay, but it means we will have to create the soon be an opportunity to start growing our company again.
team. Also, we try to reward people based on what they’ve done
up to the point of the acquisition. I am less interested in reward- AL: Did you have to do layoffs through this period?
ing them based on what we are going to do as a result of that AA: We did. We had a reduction of about 8% of our workforce in
acquisition. I see that as our reward for being able to integrate January of 2009.
their business effectively. Their reward is what they have done
up to that point. I scratch my head when people come in and AL: Is this the first time you’ve had to do that as a company?
say, “Well, in the past five years we’ve gone from $1 million to
AA: It’s the first time we did it as formally as we did. In the past,
$3 million to $6 million to $8 million and we are now ready to
we have had reductions because we have always felt it our
sell the company, and next year our projections are $18 million
responsibility to size ourselves to what the opportunity is. So
dollars.” I look at that and say, if you are going to be $18 million
that means there may have been parts of the company where
dollars next year, why are you selling your company to us now?
things didn’t work out the way we expected them to, so we elim-
Sophisticated buyers see right through that and base the near
inated groups or we eliminated projects. That might have
future on the recent past. If the recent past says it’s been grow-
resulted in reductions in those areas, but this is the first time
ing at a certain pace on its own, then that’s what you can expect
that we did it across the company in such a broad way.
in the near future. Perhaps by being part of Kronos we can make
it grow faster, but that’s our reward for making it part of what
AL: I have to imagine that was not easy for you, for your man-
we do.
agement team and certainly for employees, most importantly
the ones that got laid off?
AL: Does the current economic climate represent a buying
opportunity for Kronos? AA: It was a horrible process.
AA: I think it does.

Inter views
AL: How do you manage through that? AL: What’s it like now being a private company, without the
AA: You try to be fair and kind and understanding to the people quarter-to-quarter public scrutiny? Has it changed the way you
who are impacted directly, but the fact is everyone in the com- think about growing the business?
pany is impacted. We tried to over-communicate about what AA: It’s much easier being a private company. First of all, look at
happened; we tried to be extra kind and understanding to the the world we are living in right now. Imagine being a public
people who were impacted, which included making our sever- company in this environment. Even notwithstanding that, being
ance packages more than fair. That included making sure we a public company CEO stopped being fun in the 2000/2001
tried to help the people who were impacted on the day they timeframe with all the regulatory compliance requirements, and
were informed in a way that allowed them to transition in a SOX rules that we had to follow. I understood why they existed
comfortable way, then got everybody together for face-to-face and while Kronos has always been a company that follows the
group discussions and explained what we did and why we did rules, I did not see them adding value to what we were doing. It
it, and answered questions. I believed strongly that while the was not helping us produce better products or deliver better
reduction was very difficult to do, we really felt like this down- service for our customers, and so in some sense it was a dis-
turn was going to be for a prolonged period. It was not a one or traction from our day-to-day operations. In addition, we got off
two quarter phenomenon, so we had to right-size ourselves to the treadmill of chasing quarter-to-quarter guidance and expec-
what the market was dictating. I also think we took a reasonable tations and we understood that if something happens on April 2
approach in that we said that we were going to focus on all versus March 30 it is just as good. It made no sense to go per-
parts of the business and all types of positions. We felt it would form unnatural acts to accelerate activities to meet quarterly
not be fair for this only to impact individual contributors. If deadlines. As a private company, we have been able to focus
teams are smaller, then I need fewer supervisors. If I have fewer more on the long term and move away from the short-term
supervisors, I need fewer managers, less managers means less focus. If there is a meaningful investment to make that would
directors, fewer directors mean less VPs. So we focused on it in require a step back in order to lunge forward in future periods,
that way both because it made sense for the business and the public markets may not reward us for that decision because
because it was an issue of fairness. of how it may affect earnings in the short term. In the private
world, it is much easier to do that. Plus, we have a Board of
AL: What inspired the decision to take the company private in Directors who does their job on a full-time basis. They have
2006? other portfolio companies and they bring a valuable clearing-
AA: I felt really strongly in 2006 that the public markets weren’t house of information to us on how we can run the business
fairly looking after the long term interests of our shareholders. more effectively. That has been a great value as well.
This was a period when software companies in particular were
being rewarded for revenue growth even if there was no prof- AL: Let’s shift gears to compensation. How has your thinking on
itability or cash flow. We were growing revenue, growing compensation evolved over time, particularly vis-à-vis cash ver-
earnings faster than revenue, and we had exceptional cash flow sus equity?
from operations. We were not, however, doubling our revenue AA: I’ve always felt we have to be competitive to attract, moti-
every year. As a result, the money appeared to be chasing those vate, and retain the best talent. That includes from both an
other types of companies. We have a fiduciary responsibility to equity and cash compensation perspective. I feel we have done
our shareholders, many of whom are our employees. As such, that right from when we started as a small, private company, to
we started trying to understand the world of private equity. becoming a public company and today again as a private com-
Once we realized how it worked, we thought it might be a way pany. I think people come to work at a company not just for the
to reward our shareholders, take care of our employees and joy of what they do, but because they want to be fairly rewarded
also have the company continue to march forward as it is, but and that reward system is important. I have never believed in
not as a public organization. That is what led us to go private giving people less cash compensation and more equity. I
and, in fact, we were right. We were correct in terms of being believe in giving them cash compensation that is more than fair,
undervalued. We did get a meaningful multiple on what we were and giving them an equity position that is more than fair. To the
as a public company by going private and just about every sin- extent that you do not have the cash to pay people at what
gle person who wanted to stay with the company, when we might be deemed a reasonable cash compensation, then you
went from public to private, stayed with the company. have to figure out how to bring the total compensation into

In ter views
equilibrium by giving them more equity. But you know, even can get more. They’re giving the same 5% to 500 people, and
equity has a limit. You can’t give 11 people 10% of the equity that’s when it becomes a challenge. It’s the law of the numbers.
each. No matter how much risk somebody wants to take, you For me it is more of a function of the size of a company than it is
have issues of dilution, you have issues of fairness, and you the type of people you’re trying to bring in. To the extent that
have to think about your investors. Finally, at the end of the day, people want to roll the dice and want a lot of equity, they almost
there is only so much equity available to distribute to people. have to find that at a smaller company. It’s not that manage-
So you have to figure out how to properly distribute the equity ment doesn’t understand the benefits of giving equity; it’s just
that’s available. That was a challenge for us when we were that you’re constrained. Sometimes we get into these discus-
small, and it’s a challenge for us now as we’re larger. I sit on sions when we’re trying to recruit people, and they think they’re
Boards of other companies, and it’s a challenge for them too. very sophisticated on this topic, but they often reveal them-
selves not to be. They often don’t understand it in terms of how
AL: For some, more entrepreneurially-oriented people, equity is many shares there are as a percent of the total shares outstand-
a particularly strong motivator, and for others, less so. How ing. If a company only has 2 million total shares outstanding,
does recruiting for this entrepreneurial mindset factor into 20,000 shares is enormous. If the company has 200 million
organization-building issues and how do you address these shares outstanding, then 20,000 shares is nothing. We always
individuals’ desire for larger equity packages? had a low share count because we didn’t do a lot of splits, so
AA: If you have a particular need within your organization people would respond negatively to a low number of shares
and/or if you meet a particular entrepreneurial thoroughbred without understanding the real value.
who you feel could really move the needle in a meaningful way,
and that person is going to be particularly motivated by a strong AL: Do you think Kronos will ever go public again?
equity position, then to the extent you have that equity avail- AA: I think there is a good chance we’ll be a public company
able to offer to that person, absolutely you do that. You have to again. We won’t keep our current ownership model indefinitely.
be flexible. You have to create an environment that gets those That’s not the world of private equity. At some point we will
people to join the company. However, you can’t do that for have to get a return. Just like when Kronos was a private compa-
everybody for all the obvious reasons. ny in the ’80s we needed to find a way to bring liquidity for our
shareholders. The way we did that was by going public. So in
AL: Have there been points in Kronos’ evolution where your the same way, we’re a private company now, and we will have to
overall compensation philosophy skewed toward using more find a way to bring liquidity to our shareholders. We will have to
equity than what might be typical because of the type of peo- make a decision on how we do that, and going public is certain-
ple you were looking to recruit to the organization? ly a very viable option.
AA: That’s a really good question. So the simple answer to your
question is yes, but it has also been a function of what was
available to us. Any company has so much of their total avail-
able equity that they can give out in the form of, say, stock
options. So when your company has 50 people, and you are
dividing that available pool amongst your team, you can give
more to a particular person or group of people. When that same
company grows to 500 people, your equity pool remains the
same. As such, your ability to give a large component of the
equity to any one person or group of people is under tremen-
dous pressure. That is the main reason why it changes over
time. We have never been greedy in terms of giving out equity.
We have always given a healthy proportion of our total equity to
employees. Today, in many instances, companies are, in best
cases, giving out maybe 5% of total shares in a particular year.
Public companies under pressure from shareholders may give
no more than 2%. If you’re giving 5% to 50 people, everyone

Inter views
Todd was named to the Forbes Midas List, which ranks top ven-
ture capitalists who have created the most wealth for their
investors, three times. He was also named to the 2008
Hollywood IT List by AlwaysOn, which features the top entertain-
ment executives and dealmakers in information technology.
Todd was also a Senior Lecturer at the MIT Sloan School of

Management for a number of years, where he taught a course
entitled “New Enterprise.” His entertainment and media
endeavors include establishing two film and television produc-
tion companies (Prospect Pictures and Ealing Studios) that
together have produced over 10 films and TV shows since 2003.
He has also been involved in the production of several films,
including “Pretty Persuasion” (2005 Sundance Film Festival),
Todd Dagres which was released by Samuel Goldwyn and Sony Pictures
General Partner, Spark Capital Entertainment, and “TransSiberian” (2008 Sundance Film
Festival), which was released by First Look Studios.
Todd Dagres is a founder and General Partner of Spark Capital.
He leads the drive to find the home runs, to uncover the 100x In 2004, he established the Face of an Angel Foundation. Face of
opportunities. He has said that his work to bring Akamai from an Angel is a nonprofit, charitable foundation dedicated to edu-
idea to publicly traded company was his doctoral thesis in ven- cation, research and treatment in the area of vascular malforma
ture capital. It is that bedrock of knowledge and the experiences and tumors that cause severe birthmarks and disfigurement in
built upon it that he brings to Spark and our partner companies. 0.2 percent of newborns. He has served on the Board of Fellows
Todd has led Spark’s investments in Veoh Networks, Menara at Trinity College and on the Board of Trustees at Governor’s
Networks, Verivue, Covestor, Kateeva, and Intune Networks. Academy.
Todd was previously a General Partner and Executive Committee Prior to Battery Ventures, Todd was Principal and Senior
Member at Battery Ventures. There he led the Communications Technology Analyst at Montgomery Securities; Senior
Investment practice while focusing on the media, entertainment Technology Analyst and Vice President at Smith Barney/Robinson
and communications industries. Some of his investments at Humphrey; Vice President of Communications at the Yankee
Battery include Akamai Technologies (NASDAQ:AKAM), Qtera Group; and Business Development Manager for Networks and
(acquired by Nortel Networks), XCOM (acquired by Level 3 Communications at Digital Equipment Corporation.
Communications), Redstone (acquired by Siemens), River Delta
Todd Dagres holds an MBA from Boston University and a BS in
Networks (acquired by Motorola), Broadbus Technologies
psychology from Trinity College, Hartford, CT.
(acquired by Motorola), Arbor Networks and Cedar Point
Communications.

In ter views
INTERVIEW WITH TODD DAGRES practices. We have seen venture firms start out small, get big,
get too big, get smaller, and then try to reinvent themselves.
I’ve seen all different kinds of investment behavior and I’ve met
Aaron Lapat: How long have you been in venture? lots of people. This experience forms a collective sense of the
Todd Dagres: I’m entering my fifteenth year. I’ve been with right way to do venture.
Spark four years and at Battery almost 10 years. At Battery I was
principally involved in telecommunications, communications, AL: Which is what? How do you differentiate yourselves?
and Internet investments. When I joined Battery I had come TD: Well, we have a bit of a formula. It’s not scientific, but it starts
from a Wall Street background. I had been a technology analyst with the team. We built a team of people who are knowledgeable
at a couple of investment banks, Montgomery Securities and about the space that we are investing in, who complement each
Smith Barney specifically, and I covered the communications other, get along and are able to provide value to the process. A
and Internet waterfront. While doing that, Battery Ventures major differentiator is related to due diligence. You have to prop-
approached me about becoming a venture capitalist and I erly do your due diligence on your companies so that you know
agreed. That was 15 years ago. what you’re getting into. I think we are very disciplined about
doing our homework on a company. We need to understand the
AL: What is Spark’s origin? market, we need to understand the founders, we need to under-
TD: We started Spark four years ago in July of 2005, so it’s stand the technology, the products, the customers. We work as a
almost exactly four years old. I formed the firm with Santo Politi, team when we do our due diligence. Each deal has a primary per-
with whom I had made some investments while he was at son and at least one other person who’s actively involved in the
Charles River Ventures and I was at Battery Ventures. He and I due diligence, and then our whole team weighs in on the decision
had similar thinking about what was going on in the world rela- to ensure we’re not missing something. We are not in a volume
tive to media, entertainment and technology. We felt that there business here at Spark. One thing I learned is that you don’t want
was a massive movement afoot and that technology would dis- to be on too many boards. Another part of our philosophy is to be
rupt the media and entertainment markets and new businesses very active investors. We spend a lot of time with our companies.
would emerge out of the wreckage. We came together five years We insist on knowing what’s going on. We don’t just show up at
ago and we actually closed our first fund four years ago. Since Board meetings. Because of that, it means that each partner is
then, we’ve invested in companies that are at the intersection of only on five to seven boards. We try to keep it to a manageable
media, entertainment and technology. One example is Twitter. number of investments so that we can spend the time we need to
Twitter is a short form blogging/social networking platform. It is on those companies. It is not the most leveraged model. We do
growing rapidly and represents a new way for people to commu- work as a team, but we are not here to leverage ourselves. What
nicate and share information. That’s one example of the types we’re here to do is to make the best possible decisions because
of companies we invest in. the investment decision is the most important thing. We also take
a team approach to helping our companies once an investment is
AL: How long ago did you get involved with Twitter? made. I may be the lead on a deal, but if one of my partners has a
TD: About a year ago. Twitter’s in our second fund. We closed relationship that would help my company, we make sure that that
the first fund four years ago and our second fund a little less partner helps and brings that relationship to the company. We
than two years ago. The first fund was $260 million and the sec- have a collaborative, team-oriented approach. Everybody at Spark
ond was $360 million. We invested in 19 companies in the first is here in Boston even though we invest across disparate regions.
fund and I believe we’re up to 11 investments in the second We think it’s critical that everybody understands what everybody
fund. We’re about 40% of the way through, including reserves. else is doing and that we communicate well. To best achieve that,
we’re all here buzzing in the hive and we think that is very impor-
AL: In starting a venture firm, how do you instill a culture and tant to our success. Focus is important too. One of the keys to
an investment philosophy that will endure? building a reputation and building awareness and a brand is to
try to limit your focus so that you can go into an area and have an
TD: We leverage our experience. I had almost 10 years of experi-
impact in that area, which is why Spark is focused on digital
ence in venture. Santo Politi, my co-founder, had six years of
media technology. We call it “the conflux,” which is where
venture experience, and our CFO, Paul Conway, had 12 years of
media/entertainment/technology come together. We have man-
venture capital experience. With this we have a sense for best

Inter views
aged to build some awareness and a brand in that area. People some people leaving the VC industry. It’s already happening.
don’t think of us when they think of enterprise software. They This is not a prediction, it is fact. My prediction is that it will
don’t think of us when they think of semiconductors or telecom. continue for a while. I think we are in an environment right now
Yet when it comes to digital media, social networking and the that is going to remain messy. There will not be a strong IPO or
merging of media and technology we are seen as one of the play- M&A market for a few years. We are not going to have a V-
ers in that space. shaped correction. The current administration has attempted to
minimize the depth of the recession. In doing so, they have
AL: So how do all of these elements—your culture, your elongated it. My working assumption is that we are going to
process, your philosophy of running the firm—translate to the have three or four more messy years. The venture capital indus-
entrepreneur? try is very highly correlated with the financial markets,
TD: I think the entrepreneurs view Spark as a real partner. When particularly the NASDAQ and the S&P. So, if the S&P and the
a lot of companies think of their venture firm, they think of their NASDAQ continue to make progress as they are now, I think that
partner, the partner that’s on their Board, and that’s their pri- the venture industry will experience more liquidity and that’s
mary interface into that firm. Unless they go to an annual what drives this business. The funny thing is at the time that the
meeting or they have to go in and present for a follow on invest- liquidity is happening; it’s usually during a time when there is a
ment, they pretty much only know their partner and perhaps an bull market, which is often the worst time to invest. The best
associate. Here, it’s likely that as an entrepreneur you’re going time to invest is several years ahead of a bull market, which is
to spend time with multiple Spark partners. Partners will show why I think right now is a great time to invest. While we don’t try
up with one another at Board meetings and that other partner to time the market, we are mindful that there are correlations
will often times hear something that gives them a sense that you have to be sensitive to. I think the thing I’m most confident
they can help the company, maybe with an introduction to a about is that there will be a gradual recovery. There will be a
customer or a strategic partner. We’ve all built our networks and recovery and there will once again be an IPO market for venture
even though we complement each other and there’s some over- backed companies and there will be liquidity options that are
lap, we all have our own relationships. Also, we all come from significantly better than they are now. I firmly believe that will
different backgrounds and perspectives, which helps when we happen in the next five years. I don’t know if it’s going to be in
look at something. We look at it from different angles, and when two years or five, but it will happen. My best guess is you will
we look collectively that adds value. So when Spark invests in a want to have inventory on the shelves in 2013 going into 2014.
company, the entrepreneur is going to get the full team and is That is when I think the cycle really picks up and we head into a
going to get the access to the full network and is going to have strong market situation. In the meantime, you’re running the
an active investor. We don’t take on an operating role. We don’t sausage factory. You’re making sausages and are grinding it out
try to make operations decisions for our companies. We just try trying to help your companies make progress every day. You
to make sure the company has what it needs in order to reach need to stay capital efficient, try to survive, try to find the niche
the goals that caused us to want to invest. in the market, and try to get their organizations working well.
Right now, growing is less important than surviving. Over the
AL: What is your sense of the current state of the VC market? next few years, companies will need to show growth. Because
growth is where often times the value is.
TD: I would say the VC market right now is fairly messy. There
are still too many VC firms. There are too many portfolio compa-
AL: Are there any key take-aways you learned from the last
nies that have venture money in them. That is starting to correct
boom and bust cycle that serve you well now?
itself. The overhang of the fundraising that occurred over the
last 12 years or so is really starting to diminish. We are going to TD: One thing we learned from the last bust is that there will be
see fewer VC firms and fewer VCs. There will be less money another boom and you need to invest through the down market
being put out by VC firms because less money is going in. There to reap the rewards of the boom. The other thing we learned is
are firms out there that have raised money in the last six at the time of a boom you don’t want to be too aggressive,
months or so that ultimately raised, in some cases, half of what because a boom usually leads to a bust. You have to get in
they intended to raise. That means they have to empty the boat early, make sure you get liquidity and then make sure that you
a little bit. You can’t feed everybody on a fund that’s half the don’t invest in companies that have faulty business models that
size of the fund you had last time, so there are going to be are not going to be able to sustain themselves through a tough

In ter views
time. The cycles have emphasized the need to invest in capital and that one person may not have a sounding board inside the
efficient companies that are solid businesses so that they can company to bounce things off who can serve as a checks and
survive difficult markets. balances mechanism. A single founder can work—Ken Olsen
founded Digital Equipment Corporation. He brought in some
AL: Let’s shift to organizational issues. What are your key con- good people who helped take it all the way to a multibillion dol-
siderations when assessing the existing leadership team and lar company, but, I think that’s an exception.
thinking about team build out?
TD: Well, the team is crucial. We want to make sure that the AL: My experience is that there are few founders who have the
team we’re investing in is going to be able to weather the storm, ability to take a company through multiple phases of growth.
as you need to assume that there is usually going to be a storm As such, how do you plan for those necessary organizational
at some point for every company. You want to make sure that changes as the company expands?
you have a strong nucleus of a team in the company. That does- TD: Of course the best way to know if you have a guy who can
n’t mean you have to have the CEO who can take it public, but it take it from start up to successful exit is if you have somebody
means you have a solid entrepreneurial team that is going to be who’s already done that in the past. For instance, I am investing
able to pursue the market opportunity. You want to make sure in a company called Verivue. One of the founders’ names is Jim
that the team you have is capable of hiring the very best people. Dolce. I know Jim is capable of running a billion dollar company
We have a saying which is, “A’s attract A’s, B’s attract C’s.” So, as he’s already proven that he can do that. So we feel a guy like
you want to start with an A team because people want to work that can scale. A different example would be Akamai. When I
with people who are truly talented. We try to make sure when invested in them, the team consisted of a professor from MIT,
we make an investment that we are investing in talented people his PhD student and another guy from the Sloan School.
who are going to be able to build an organization around them. Combined they had two or three years of business experience.
You never have everybody at the beginning. You might be miss- So in this instance everybody around the table knew two things:
ing a VP of Sales or a VP of Engineering, etc. Oftentimes you are first was that this was a very gifted core team, and second was
missing some major components to the team. Sometimes you that the CEO was not part of the group. In fact, the current CEO
just have a technical founder with another founder who’s a of Akamai, Paul Sagan, I put into the company the same day I
strong business development or product management person invested to ensure that we had somebody who had significant
and that’s actually a very solid kernel. I like to see two founders business experience and commercial seasoning to help guide
who can work well together because I found that two founders the team. The team didn’t need somebody to tell them what to
often times do better than just one founder. do, but they did need guidance to avoid mistakes and pitfalls
because they were going 100 miles an hour at a target, and Paul
AL: Why is that? had to make sure that they didn’t get whacked along the way. I
TD: I just think the partnership that forms with two founders is think more often than not, you are going to have to augment
very valuable. It’s easier for them to make the right decisions if your core team with leadership after it gets through what I
there is somebody else whom they trust, whom they can would call the entrepreneurial phase. The entrepreneurial phase
bounce things off of. Most of our companies have a couple of is defined by starting the company, establishing the key goals,
founders. If you look at the most successful companies, from building a core team, securing initial funding, and building the
Google to Yahoo to Cisco Systems and even to some extent product. As soon as you start offering the product to customers
Microsoft and Apple, they all have this element. Most of the you go from developing the company to having to manage the
best companies that have been created in the last 20 years were company and scale the business, and things become more com-
created by two people. Sometimes more than two, but usually plicated. Nothing complicates a business like a customer. That’s
there are two people. One might be dominant, the other one often times when you have to bring in somebody who has
somewhat subordinate, but they form a partnership and those presided over the successful scaling of an organization. You
people often times have different skills that compliment each need somebody with operational sensibilities and experience to
other. I’ve also found in companies with a single founder there allow you to build. I mean, the DNA of an entrepreneur is differ-
is a tendency for that founder to run the business as a dictator- ent than the DNA of a manager. Most of the time, the guy who
ship with only supporting characters under the founder. That comes up with the idea, passionately pursues that idea, starts
can be a risky situation because you’re relying on one person the company, raises the money and builds the core team is not

Inter views
the person to provide the operational discipline necessary to functionally and pass the baton to somebody who now manages
expand an operation. So you have to bring that person in. the organization as it gets bigger. It’s not easy. I’ve seen many
companies ruined by bringing in the wrong CEO. If you bring in
AL: How do you ensure that the baton passes smoothly? the right guy, it can help you get the company to the next level
TD: Sometimes when you make an investment, the founder and it can be very positive. If you bring in the wrong person it
believes that they can run the company into the future without can be devastating because that wrong person can chew
any timeframe in mind. If that person doesn’t have a successful through cash and cause turnover in the company. I’ve had expe-
track record of running a company, then you’re taking a chance. I riences bringing in the right person, as well as the wrong person.
try to get an agreement up front that at the appropriate time that Sometimes you can bring in the right person for a certain situa-
we will bring somebody in to take the company to the next stage. tion. For example, if you’re building your company in its growth
If the founder pushes back hard on that, then we need to have a phase, you need a particular type of CEO. Sometimes you hire a
discussion as to whether or not we’re going to invest. We have to person you expect to scale and grow the company, but all of a
have an agreement that doing what’s best for the company is sudden you have an economic downturn, like we are experienc-
paramount and that there will be a management transition at ing now, and that same CEO who was the right guy to grow the
some point, whether that transition is around a specific time company is not the right guy to right-size the company, cut
frame or a phase of the company or it may be tied to the devel- expenses and focus the business on a narrower set of objectives.
opment cycle of the product. I do not want to go into an
investment where that is a nebulous issue. Often times you go in AL: I frequently hear from Boards and investors that they wait
and you agree with the team that one of your roles as the ven- too long to act on organizational changes.
ture capital investor is that you’ve got a network and you have TD: I agree. One of the problems I see is that Boards tend to
had experience hiring people, so you’re going to be actively work toward compromised solutions. I think the problem with
involved in bringing in the CEO at the right time. The wrong time compromise is that it means you may not be pursuing the most
to bring in a CEO is after your founding team fails. You bring in effective path. You may not be making the most effective deci-
the CEO to ensure that the founding team succeeds. I’ve had sion. Instead, you tend to make decisions that have been
founders ask me, “How do you know I can’t do it?” They assert watered down in order to get people to agree. Internally here at
that they want to prove that they are capable of scaling as CEO. I Spark we believe that if we’re having a debate about something,
explain to those individuals that I don’t want to be in a situation the worst thing we can do is compromise to get the decision
where they have proven that they can’t take the company to the made. Because in all likelihood, one of the people in the room
next level and damage has been done. So we have to have an has the right idea. One of the people knows the right decision
agreement on the transition. I’ve made investments in compa- to make. The key for the group is to find that person and make
nies where the founding CEO stayed on through the liquidity that right decision, not to regress to the mean and compromise
event—usually an M&A transaction not an IPO. It’s rare that the to a decision that is half right and half wrong.
same guy that started the company can take it through an IPO.
It’s fairly common that the same guy that started the company AL: How do you do that?
can take it through a liquidity event like an M&A transaction, TD: It’s difficult because there’s a dynamic that has to happen.
because that doesn’t necessarily require building a large com- You have to have a group of people who can argue with each
plex company. So some of this depends on what your goals are. other, but not take it personally. You have to have a group of peo-
ple who have egos but will subordinate their ego for the team.
AL: Even well intentioned founders can struggle embracing a The ego is focused on making the best decision, not on your deci-
new CEO from the outside. How do you make that transition sion being the best decision. You have to make sure the process
work in practice? Particularly when the team is accustomed to takes you to that optimal path rather than just a compromise.
going to the founder for direction, vision, guidance, etc.?
TD: The key is that that founding CEO be a part of the process of AL: What are the hardest executive positions to recruit for?
transitioning to the new CEO. If the founder is an engineering TD: Right now, somebody who is strong in what I would call con-
person, hopefully they still perform the engineering job and no sumer demand building. We can find people who are good at
longer have to worry about keeping the paperclips stocked. If building consumer demand in traditional media and traditional
there are a couple of founders, they can still do what they did companies, whether it’s consumer electronics companies or

In ter views
consumer products companies, but finding somebody who AL: Can we wrap with a few questions on what you’re seeing in
knows how to build consumer demand for a digital company is the market around compensation?
much more difficult. It’s also hard to find them in New England TD: Comp has gone down. It hasn’t plummeted, but it has defi-
as this tends to be an area that is much more enterprise nitely gone down. What has gone down even more is the
focused. It dates back to the days of Digital, Prime, and Wang, number of people that you hire. You still hire the very best peo-
which still causes us to have a bit of an enterprise perspective ple and you pay them fairly, but you try to hire fewer people
and mentality here. Plus, you have the Yankee attitudes that these days. So, for example, I have companies now that are
tend to be more risk averse. In the enterprise area, you can go paying very competitive salaries for engineers and for opera-
talk to 20 enterprise customers, find out what they want, build tional people. They did not make these people take big pay
that product and some of them will buy it. In the consumer cuts, but hired fewer people and are asking the people that are
space, determining whether a critical mass of consumers will there to do a little more. In some cases they’re off shoring some
buy something is much harder. So, I would say the biggest chal- of the less vigorous development activity. So, rather than having
lenge is someone who understands how to build a brand and 100 people in Massachusetts, you might have 60 people in
how to generate consumer demand. I would say the CEO posi- Massachusetts and 40 people in China or India. I would say that
tion is the most challenging role to fill. The CEO is challenging, if you look at the average salaries today for technical or opera-
because simply stated, there are just not that many people who tional people versus a year ago, I’d say things are down
are talented at being CEO. The key is to find people who are 10-20%. I don’t know how long this is going to continue. There
strong leaders, who can get the most out of people and are nim- are some segments where things haven’t changed. For example,
ble and flexible because you never know what you are going to software developers that understand digital media salaries
experience. I would say that it is not important that the person haven’t come down very much. Also, CEOs and executives in
necessarily have a deep knowledge of the domain that they’re companies in the social and digital media world have not seen
in, but rather the aptitude to get deep in that domain. You also compensation come down much. As you get into other seg-
need somebody who understands that they need to go out and ments, like enterprise software or communications equipment
talk to customers. They need to get out into the field and or storage, compensation is softer.
immerse themselves in the market.
AL: With liquidity being more challenging, have you seen a
AL: What about Boards? What is the right timing for bringing in change in executives’ valuation of equity in the compensation
outsiders? mix?
TD: I think you bring an outsider in when you need advice and TD: It still needs to be about the equity. A CEO should take a job
counsel from somebody beyond the management team and the for the equity. First of all, it’s a tax advantage, and second of all,
venture investors. I think that sometimes the outside Board you can make a lot more in equity than you can in salary if your
member is brought in to work with and coach the CEO, especial- company’s successful. I want CEOs who are focused on the
ly a first time CEO. With first time CEOs, I like to find a Board equity and not the salary and CEOs who set their salary low so
member who is a successful CEO. It doesn’t even have to be they can set everybody else’s low so they can be capital effi-
someone from the market segment that you are going after. I cient. That way the company does not have to raise loads of
also like to bring an outside Board member in before the com- money to be successful. I think people do still value the equity.
pany really starts to scale. At this point, I like to bring in a Board They don’t value the equity like they did in 1999 and 2000, but
member who has had some success in that market segment in they still value it. They still want to get paid though. You know, it
the past and understands the supply chain, the customers, and is one thing to go home to your spouse and say, “Hi honey, I
the competitors. Hopefully there are people on your manage- just took a job where I own 5% of the company.” It’s another
ment team already who understand all that, but bringing in a thing to go home and say, “Hey, I just took a 25% pay cut so
Board member to look at it from a higher level can be very help- we’re going to have to tighten our belt, but I’ve got this
ful. They can open doors; they can help you avoid mistakes that Monopoly money that someday might be worth something.”
they may have learned in that market. Entrepreneurial activity is about building a company that can be
worth enough that your stock is going to be worth a lot, so the
CEO and the leadership team need to be thinking first and fore-
most about the value of their equity.

Sponso rs
Ernst & Young LLP J. Robert Scott
200 Clarendon Street 260 Franklin Street, Suite 620

Boston, MA 02116 Boston, MA 02110
1.617.266.2000 1.617.563.2770
www.eyonline.ey.com/growth www.j-robert-scott.com
Ernst & Young is a global leader in assurance, tax, transaction J. Robert Scott is a retainer-based executive search firm special-
and advisory services. Worldwide, our 144,000 people are unit- izing in the recruitment and selection of senior managers across
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of Ernst & Young Global Limited, each of which is a separate
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by guarantee, does not provide services to clients. The Ernst & for locating and attracting highly qualified candidates to fill key
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Aaron Lapat
About Ernst & Young’s Strategic Growth Markets Network Managing Director
Ernst & Young’s worldwide Strategic Growth Markets Network 1.617.563.2770
is dedicated to serving the changing needs of rapid-growth aaron.lapat@j-robert-scott.com
companies. For more than 30 years, we’ve helped many of the
world’s most dynamic and ambitious companies grow into
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stantly changing. Ernst & Young’s Global Technology Center
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Venture Capital Advisory Group Industry Leader
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bryan.pearce@ey.com rick.fezell@ey.com

2009
T E C H N O L O G Y
www.compstudy.com

CompStudy Report in Technology 21 Dec. 2009

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A SERVICE FROM

Compensation & Entrepreneurship Report

Special Access Code

Visit www.compstudy.com and register to receive full access

Participants in this year’s survey are

Demographics of Respondent Population

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• California and New England dominate the population of Midwest

Business Segment Headcount by Number of Full-Time Employees

% respondents in this range

• Companies with 20 or fewer FTEs make up approximately

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Company Age and Financing Information

Company Age (Years) Financing Rounds Information

48.9 9.1 9.1

24.0 4.3 4.1

0-1 2-6 7-10 10+ Round 1 Round 2 Round 3 Round 4 Round 5+

Financing Rounds Revenue

11.8 12.2 11.6

0 1 2 3 4 5 or more Pre-Revenue Up to $5M $5-10M $10-20M $20M+

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Cash Compensation – 2008 and 2009

Total Cash Compensation

Figures in 1,000s of USD

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Executives Eligible for Bonus

Bonus as a Percentage of Base Salary

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Equity at Time of Hire

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Organizational Structure by Financing Round

CEO COO Head of Head of Head of Head of Sales Head of

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% of companies reporting this position

• 96% of companies surveyed from the earliest stage of

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Equity by Financing Round Founder CEO – Equity by Financing Round

• In companies having raised one or fewer rounds 20 38 70

6.8 10.5 19.6 2.9 6 11

Equity Vehicles Used

Both Options 13 Both Stock

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Founder Cash Compensation

Figures in 1,000s of USD

Founder Equity Holdings Founder Total Cash

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Aron J. Ain Aaron Lapat

In addition to a bachelor’s degree in economics and government

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AA: I think it does.

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Todd was also a Senior Lecturer at the MIT Sloan School of

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