Rachel and Wayne have done it. Out of the ashes of the Indoor Playground, they have found a space and announced that they are opening Camaraderie. This is fantastic news for Toronto startups, freelancers, independents and others that need shared office space in the downtown core. It’s located at  102 Adelaide St E, 2nd Floor [Maps: Bing, Google]. The space has a free preview from February 15-28, 2010. And then memberships details are as follows:

• memberships will be $300/mo for unlimited use during business hours
• we’ll work out keys later, but for now the space will be open 9:00am-6:00pm (or later)
• free wifi, coffee, tea, and hot chocolate every day

Pictures

Full details about the space and the neighbourhood.

Congratulations Rachel and Wayne. We’re looking forward to Toronto rejoining the likes of Montreal and Vancouver with a real coworking space again.

“As a founder, set your pay to mirror what the company can afford. It is not about what you need, what you want, what is market, what is fair, etc.  It is about the company. 

Don’t work for nothing, don’t give away your equity and do the right thing for the company are the three pillars that you should based the discussions around.”  – Rick Segal

Dharmesh argues that founder compensation is usually part of 1 of 2 schools of thought:

1. Founders get no pay. (“Salaries, we can’t afford no stinkin’ salaries…”)
2. Founders get paid close to fair market value. (“We raised outside capital so we could reduce our risk, might as well pay ourselves…”)

He provides a great summary of why it is important to pay founders and early employees. And that there are a number of factors that influence how much these critical employees should be paid. Cash flow and the ability to pay salaries is a critical first step, whether this is through founder loans, early customers, or outside investment. Without money in the bank, it is all deferred compensation. Other critical factors include:

• available cash,
• tax optimization (within the law)
• fair market value (FMV)

But it still doesn’t answer the question of what should I pay myself, my co-founders or my developers?

“All of this distracts from the core question of paying value for value. It doesn’t matter what somebody made at their last job.  It doesn’t matter what their expectation is now.  What matters is the value a firm places on the productive capability of an employee.” – Bradford Cross On Wages

I’ve talked about founders and early employees and their equity stakes in the past. I like the model that Paul Graham provides a model for calculating the amount of equity that can be used for equity grants for key hires (early employees, executives, etc.). The model calculates the value of company with the new employee.

n = (i – 1)/i where
n = percentage of the company
i = average percentage increase in startup value

The example provided states, that if you add a hacker to the company and you feel they will increase the value of the company by 20%, then you will break even offering them approximately 16.67% of the company. n = 16.7% =  (1.2-1)/1.2. However, this calculation does not include salary and overhead costs. There is some discussion about converting salary and overhead into stock, but the number used is 1.5. The formula uses the Net Present Value of the company, plus the proposed salary, and the expected impact the potential employee will have on value. In the examples provided, Graham uses a recent post money valuation of $2M and a cash compensation of $60,000, and builds in a 50% profit on employee activities in favor of the company. The logic behind the calculation is, if an employee will add 20% value to the company the maximum amount of equity you should provide is 16.67%. However, this number is discounted n = ((1.2-1)/1.2)/(1+0.5)) = 11.13% against the employer generating 50% profit on the efforts of the employee. And is again further discounted against the cash compensation (FMV) and overhead costs (50% of cash compensation), calculated against their equity percentage using the NPV at time of hire, ($60,000*1.5)/$2.000,000 =  4.5%. The total compensation is a mix of cash and equity, i.e., a total compensation of 11.13% of the NPV of the company split into 6.63% equity plus $60,000 in salary.

• n = percentage equity
• i = average percentage increase in corporate value of new employee
• p = profit percentage
• NPV = Net Present Value of the company
• FMV = Fair Market Value of employee compensation
• EOC = Employee Overhead Costs

n = ((i-1)/(i+p)) - (FMV*(1+EOC)/NPV)

Yikes, this is getting complicated. The good news is that we can fix some of the parameters.

• i = 20% (if every employee adds 20% value to the company, you’re should see fantastic growth, adjust this as necessary)
• p = 50% (assuming you want to make approximately 50% profit on the efforts of every employee)
• EOC = 50% (approximately 50% overhead on salary costs)

Hopefully as the early founders, you can figure out NPV but this can be difficult for companies that haven’t closed funding rounds. We’ll assume that this data is available or that the funding round was recently.

Fair Market Value

The open parameter is Fair Market Value. How much should you pay a developer? a designer? a senior executive?

Monster.ca and Salary.com have put together the Salary Wizard. It includes job descriptions and salary ranges based on local geographies. The data is a great starting point for assembling an overview of the fair market value for salaries and cash compensation. Here is a spreadsheet of Toronto Developer salaries (no bonuses). I’ve included job descriptions ranging from entry level programmers to CIOs.

Plugging in the 5oth percentile salary for a entry-level program into our equation above we get:

n = ((i-1)/(i+p)) - (FMV*EOC/NPV) = (1.2-1)/(1.2 + 0.5)-((49,830+24,915)/(2,000,000)) = ~8%

This should not be considered gospel, but it’s a good starting point for figuring out either the rough compensation for early employees including both equity and salary. It also provides a model for helping employees understand why it is so important to take as much of their compensation as equity, i.e., not cash. This provides a starting model for understanding potential compensation discussions. Both Rick & Dharmesh suggest that FMV for early employees may not be the right compensation metric, and that “creating value in ownership” is a much more important number. At HubSpot early employees salaries are 25-50% FMV based on cashflows and the rest is deferred. There are very real taxation issues with deferred comnpensation, and I am not an expert.

Before you decide on a compensation plan, it’s best to talk to your accountant, your lawyer and your board.  

Resources

• The Equity Equation by Paul Graham
• Founder Compensation – The Good, The Bad, and The Irrelevant by Dharmesh Shah
• On Wages by Bradford Cross
• Founder Pay (or Welcome to Raw Nerve City) by Rick Segal
• Salary Wizard by Monster.ca
• Spreadsheet of Toronto Developer/Engineering jobs
• What Am I Worth by
• What are typical compensation numbers by Brad Feld

It wasn’t something I was thinking about when scheduling Founders & Funders in Toronto. Attendance requests have been very positive. But there has been a theme that we should consider rescheduling to be considerate of those with families (hey that’s me!). I’m working with the venue to find an alternative date for Founders & Funders in Toronto. I’m leaning towards March 1, 2010 as the alternative date. I’d like to get everyone connected before we head out to SxSW, Mix and other conferences and events in March.

Frequently Asked Questions

1. I heard you’re not doing Founders & Funders, is that true?
   A: We are still doing Founders & Funders. Details will be announced later this week. The first round of attendees have been selected, and as soon as the venue confirms the new date tickets will be made available.
2. When is the next Founders & Funders Toronto?
   A: It is To Be Determined but this
3. How do I attend the next event?
   A:  You need to apply for a spot. Space is limited (approximately 80 available spaces). And we are trying to ensure a great balance between the number of founders, funders and service providers.
4. How much does it cost?
   Ticket pricing is: Founders – $125; Funders – $250; & Service Providers – $500. Tickets include appetizers, dinner (3 course meal), and wine with dinner.

I hope to have final details and invitations available by Feb 8, 2010. My apologies for the last minute changes.  

Cheers,
David

With a major pilot customer signed on and patent-pending privacy architecture, Bering Media has now secured Series A financing from Tech Capital, GrowthWorks Commercialization Fund, and the Ontario Emerging Technologies Fund.

Congratulations to the Bering Media team on the raise as well as Tech Capital for successfully bringing in the OETF on this deal, the first co-investment from the $250M fund.

So here’s my list of what’s going on in the Canadian tech startup scene in no particular order (and I know I’ve a few things like cloud with enomaly and vm6). I probably need to do a little more analysis to get this down to a regional analysis, i.e., Toronto, Montreal, Ottawa, Waterloo, Calgary, Vancouver.

What else did I miss?

10. The Changing Funding environment

• Quebec moneys begin to flow, I’m looking at your Roger Chabra at Rho Ventures and Chris Arsenault at iNovia and others
• New entrant: Rogers Ventures
• New class of angels with @wmediaventures and Boris Wertz and Jordan Banks at Thunder Road Capital
• Emerging incubators/accelerators: Flow Ventures, Basecamp Partners, Extreme Ventures, Bootup Labs, Montreal Startup

9. Existing Players aka the Big Guys

• FreshBooks
• Idee
• Dayforce
• Rypple
• Well.ca
• RedFlagDeals

8. Open Data

• City of Vancouver
• City of Toronto
• City of Edmonton
• David Eaves
• Mark Kuznicki

7. Social Analytics

• Kontagent
• Sysomos
• Radian6
• PostRank
• KeenKong
• HootSuite
• SWIX
• Peerset

6. Social Gaming

• SocialDeck
• TallTree Games
• Uken Games
• HitGrab
• Social Game Universe
• Pug Pharm
• GameON Finance

5. Social Media Channels and Advertising Networks

• ShinyAds
• AdParlor
• Deqq
• Glassbox.TV

4. Real-time data and analysis

• Thoora
• Eqentia
• ScribbleLive
• CoverItLive
• Metranome

3. Mobile

• PolarMobile
• FixMo
• Viigo
• Zoompass
• PhoneGap

2. Blogs

• StartupNorth
• TechVibes
• Bootup Labs
• Rick Segal
• StartupCFO (thanks Geoff, can’t believe I left Mark off the list)
• Ben Yoskovitz’s Instigator Blog
• StartupOttawa
• Mondoville
• The Mark News

1. Social Places

• Centre for Social Innovation, Toronto
• Bootup Labs, Vancouver
• The Code Factory, Ottawa
• Communitech & Velocity, Waterloo

Similar services have both thrived and suffered in the United States in the last 2 years. They have been occasionally targeted by regulators. Prosper.com for example is currently in a “quiet period“,

CommunityLend has taken a much different tact here in Canada however, and they chose to work with regulators rather than taking a litigious approach. In the end the hope is that this will mean a more stable and compliant environment for peer-to-peer lending in Canada.