When it comes to recruiting top executives, Internet startups have a huge advantage over their Old Economy competitors: the lucrative stock option packages that can be worth millions of dollars if and when the company goes public.
Take, for example, Charles Betty, chief executive of EarthLink Network which recently moved from Pasadena to Atlanta after merging with Mindspring Enterprises Inc. In January 1996, when Betty was hired, he received a base salary of $225,000 per year and options to buy 200,000 EarthLink shares for $4.84 per share over a five-year period.
That turned out to be a pretty good deal, given that EarthLink's shares traded as high as $90 last year.
In addition, Betty was awarded another stock option package valued at $23.1 million in 1998, which made him one of the highest paid executives in Los Angeles County.
Stories like Betty's are the reason a growing number of executives are taking off their neckties and trading their secure jobs at traditional companies for the risk and adventure of working at a dot-com.
"Just about everybody who is leaving their job in a traditional industry to work at a startup is getting a sizable options grant," said Rick Ericson, a consultant with management consulting firm Towers Perrin. "It is the centerpiece of any pay package."
Although stock options are not unheard-of in other industries as an incentive for top executives, there are some crucial differences when it comes to Internet startups. In the first place, the appreciation of equity in an Old Economy company is typically dwarfed by that of an Internet startup, as in the case of EarthLink.
Second, in traditional industries, only top management is usually given stock options, whereas at many dot-coms even fairly low-ranking employees are given at least some shares.
"It fits with the more dynamic, entrepreneurial culture at Internet startups," said Ericson. "There is a lot of internal movement, and even low-level employees will make important contributions to the success of the company. Also, these companies need to get to the market as quickly as possible, and stock options are a way to get people in the door and keep them motivated."
The composition of a top executive's stock-options package is contingent on a number of factors, one of which is how close a startup is to going public. In most cases, the further from an IPO a startup is, the higher the risk that it might not ever make it and thus, the more generous the stock options. Of course, with Internet startups, those variables can change very rapidly.
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