2013 ipo executive compensation study 1 21 13 final

Connell & Partners
2013 IPO Executive
Compensation Study
A Look at Executive Compensation Pay Levels
and Practices in Recent IPO’s in Human Capital
Intensive Industries

Connell & Partners 2013 IPO Executive Compensation Study Page 2

Table of Contents

Section Page

Introduction 3
Executive Summary 4
Compensation Levels 7
CEO 8
CFO 9
Head of Sales 10
Share Usage and Dilution 11
Plan Design Features 16
Bonus Plan Design
ESPP (Employee Stock Purchase Plan)
Severance and Change-in-Control
Compensation Committee Checklist for Pre-IPO Companies 17
Best Practices in the Compensation Arena for Companies 19
Preparing for an IPO
Appendix (Companies Included in Study) 21
About Connell & Partners 22
IPO Experience
Bios and Contact Information of Key Team Members 23


Introduction

The 2012 Connell & Partners’ IPO Executive Compensation Study provides
insight into how recent IPOs in the high technology, biotechnology and
alternative energy arenas (all human capital intensive industries) modify the
structure of their executive compensation levels and practices as they transition
to a publically traded company.

We have also included our IPO Compensation Committee Checklist and IPO
Trends and Best Practices lists at the end of this report to help companies think
through and address the executive compensation challenges associated with
becoming a public company.

If you would like to discuss any aspect of this study further, or how we may be
of service to your firm, please contact us at: Contact Us or visit us on the web at
www.dolmatconnell.com.

Best Regards,

Jack Connell
Managing Director


Connell & Partners 2013 Executive Compensation in Recent IPO Study

Executive Summary

The transition from pre-IPO to a publicly traded company is significant in many areas,
including executive compensation levels and practices. Some of the major areas that change
include:

Cash Compensation – Cash compensation levels increase for all executives, particularly for
the CEO and CFO.

Cash compensation levels increase for all Focus of Study
executives, particularly for the CEO and Our study is comprised of 46 companies in the
CFO. This is usually because companies high technology, biotechnology and
try to rebalance their total compensation alternative energy arena (the complete list
offering and shift from a heavier reliance can be found in the Appendix to this study)
that went public in the year 2011 and have
on equity to a balanced approach of since released proxy data for that year. We
short- and long-term incentives. With looked at the compensation levels and
their newly procured cash, there is less of practices in the year prior to their IPO, and in
the need for employees to defer their the year of their IPO to examine the changes.
compensation into equity holdings. We examined the CEO, CFO and Head of Sales
Furthermore, the additional risk, Positions as these were the three most
prevalent positions listed. Other roles did not
exposure, shareholder commitments, and
have enough data points to be statistically
management of Wall Street expectations, significant. We only used incumbents who
is a significant increase in executive were in their roles for the two-year
responsibility, and the pay levels reflect timeframe.
that.

Increase Amounts – Increased amounts are generally in the double digits for key executives
such as the CEO, CFO and Head of Sales.

CEO – The median increase for a CEO’s base salary was 14%, and the mean 21%. The target
bonus opportunity as a percentage of base salary had a median increase of 12%, and a mean
increase of 16%. (Note: This is an increase in the percentage of base salary. For example, an
increase from 25% of base to 75% would be an increase of 200%, not 50%. The math of each is
as follows—the correct calculation is (75-25=50 then (50/25)*100=200% and not just 75-25=50
which is just the delta in the percentages.) The increase in CEO target total cash
compensation was 21% at the median and our group had a mean increase of 36%. This
number reflects the distribution of the change in target total cash among companies that
reported target bonus figures for both the year of IPO and the year prior.


CFO – CFO target total cash compensation increased 16% at the median with a mean of 20%.
Base salaries had median and mean increases of 5% and 9%, respectively, and target bonuses
had increases of 6% and 11% at the median and mean, respectively.

Head of Sales – Head of Sales compensation (actually the #2 most highly paid executive at
the median vs. the typical CFO or COO role in larger public companies) target total cash
compensation increased 9% at the median with a mean of 16%. Base salaries had median and
mean increases of 3% and 6%, respectively, and target bonuses had increases of 8% and 16%
at the median and mean, respectively.

Bonus Targets – Bonus targets increase and bonus plans shift from primarily discretionary
to more formulaic and goal based.

This is because sustained growth in traditional metrics such as revenue and income (and
often earnings per share or EPS) becomes more expected. Public companies also tend to have
greater ability and resources to forecast future performance, thus a more formulaic approach
to compensation becomes a viable option once public.

Share Usage and Dilution – Equity dilution and the annual stock “burn rate” increases as the
IPO approaches.

Equity dilution and the annual stock “burn rate” for executive and employee stock plans,
which were significant early on in pre-IPO firms, temper as the company approaches later
stages prior to the IPO. Burn rate then increases again as the firm approaches and completes
the IPO due to refresh grants to enhance retention for executives and key employees, and
ESPP’s are implemented. Once in a public company environment, dilution and overhang
need to be managed relative to institutional investor expectations. “Evergreen” stock plan
replenishment is often highly recommended, as it will provide the share pool with flexibility
to make on-going grants to new critical employees, and pre-public is the only time a
company can implement such a plan feature. It is critical to ask for a large enough evergreen
(typically 4-5%/year in the industries we studied,) to fund the stock needed per year. This
does not mean you have to use this amount every year as it can be “banked” for future years.

Equity Vehicles – Options continue to remain the primary vehicle of choice for pre-IPO/IPO
firms.

In the first years after IPO (often 2-3 years out), companies begin to shift away from relying
solely on stock options to incorporating other stock based vehicles, such as full-value shares.
Restricted stock awards or restricted stock units help to manage stock dilution, provide
downside protection in the event of moderate to flat growth post-IPO, and provide increased


retention potential. Performance-based awards are still a significant minority of shares used,
or not used at all, as companies often have limited performance history to predict multi-year
performance necessary for implementing these plans.

Security Provisions – Severance and Change-in-Control protection helps to provide added
security for the employee and ensure business continuity for the company due to the
heightened risk of an IPO.

Because of the increased risk of IPO failure and heightened potential for takeover in the first
years of being a public company, companies will often provide enhanced security through
severance and change-in-control (“CIC”) arrangements (although still below those in the
level of more mature public companies). Given the current governance environment, they
usually lack the so-called “egregious” or “problematic” provisions such as single triggers and
golden parachute gross ups (IRC SS. 280(g) AND 4999) that were prevalent many years ago.
There is generally some (most common practice is 100% though a few companies have less)
acceleration of equity vesting upon a double-trigger (CiC and loss of employment) severance.
Severance and CIC levels for freshly public firms are still low when compared to the broader
public company environment of 2-3X for the CEO and 1-2X for his/her direct reports.

Stock Ownership Guidelines – Formal Stock Ownership Guidelines are a minority practice.

Only two of the companies in the sample implemented executive stock ownership guidelines.
This differs greatly from most mature public companies who have implemented them, as
stock ownership guidelines have evolved into a corporate governance best practice.
Companies at such a young stage likely do not feel the need to implement them as most key
executives are holding large quantities of stock and are subject to post-IPO lock ups, typically
delaying insider sales for up to six months post-IPO, and are therefore appropriately aligned
with shareholder interests. Thus, companies typically will wait several years before
implementing formal guidelines. Given some of the poor stock price performance of recent
IPOs, however, we may begin to see more of a focus on ownership guidelines in the future,
as Boards and shareholders look for additional tools to ensure executives remain focused like
owners and are aligned with shareholder interests.


Compensation Levels – CEO and CFO Pay Increases with Additional
Responsibilities.

CEO and CFO compensation changed the most
Why do we Illustrate Multiple
dramatically in the year of IPO, likely in Compensation Changes?
response to the significant changes to their
roles. You will notice that when we talk about
the various changes in compensation, we
Out of all the public company officers, these first present the median and mean
two roles often have the biggest increase in increase in various compensation
elements. It is important to differentiate
risk since they now have to sign off on the
these increases from the differences in
financial statements under Sarbanes-Oxley, the median or the mean summary
and they also have the additional statistics for each year of data. For the
responsibilities of working with Wall Street increase amounts, we took the difference
and the investment community to generate between the two years of data examined
continuing interest in the company. for each individual executive, then
presented the median (50th percentile)
and mean (arithmetic average) of the
Compensation also increases as the companies
data set of those changes.
no longer, in general, have the cash burn
constraints that they had as private, venture- Now, why do we do this? We feel this is
backed organizations, and therefore can take a the best way to illustrate how
more reasonable and balanced approach to compensation philosophies can adjust
total compensation by shifting compensation with an IPO, because this group was
crafted without respect to size of the
into cash instead of relying on mostly equity.
company. On base salary for example,
this methodology helps a firm anticipate
what a typical base salary increase might
look like in the year of IPO.


Chief Executive Officer (CEO) Compensation Changes (Pre- and Post-IPO)

The median change in base salary for a CEO from pre-IPO to the year of IPO the year of IPO
was 14% and the mean was 21%. The median change of our sample went from $307K to
$383K, or an increase of 25%. For companies that reported annual bonus targets in both years,
the median increase in target Total Cash Compensation was 21% and the mean was 36%.
Total Cash Compensation reflects base salary + annual target bonus.

Some of the bigger names in IPOs also had some of the most drastic changes to their CEOs’
pay. LinkedIn doubled their CEO’s cash compensation, with base salary going from $250K to
$480K per year, and target total cash from $400K to $818K. On the other hand, Groupon CEO
Andrew Mason had his base salary shifted, at his request, from $180,000 to $756.62.

Changes in Cash Compensation with IPO
Element of Compensation
25th Percentile 50th Percentile 75th Percentile Mean

Base Salary Change (%) 3% 14% 28% 21%

Target Bonus Change (% points of base) 0% 12% 34% 16%

Target Total Compensation Change ($K) 7% 21% 67% 36%

Notes:
Executives for which target bonus was not available were not figured into target total cash compensation.
Fiscal Year before IPO
25th Percentile 50th Percentile 75th Percentile

Base Salary ($K) $282.2 $307.4 $382.0

Target Bonus (as % of Base) 35% 50% 80%

Target Total Compensation ($K) $404.3 $482.5 $664.2

Notes:
Year of IPO

Base Salary ($K) $318.1 $382.5 $450.0



Notes:
When possible, executive's post-IPO cash compensation is used.


Chief Financial Officer (CFO) Compensation Changes (Pre- and Post-IPO)

The median of the changes in base salary for the CFO was 5% and the mean was 9%, with
increasing base salaries from $250K to $285K, or a change at the median of 12%. Annual
target bonuses had a mean increase of 11% and target total cash compensation had a mean
increase of 20%. Also, there was a slight increase in the premium the CEO receives relative to
the CFO over the time period examined. The average premium for target total cash went
from 54% in the year prior to IPO to 65% in the year of IPO. This is likely due to market
pressures for the CEO role, versus a prior focus of more internal equity between executives
while still private/VC-backed. Also, the CEO might delay an increase in cash compensation
while guiding what is often his or her company towards IPO, while CFOs are often brought
in and expect to be compensated closer to the market rate from the outset.





Notes:

Base Salary ($K) $221.3 $250.0 $290.0



Notes:

Year of IPO

Base Salary ($K) $250.0 $286.0 $309.0



Notes:


Head of Sales (HOS)

The median of the increases in base salary for the HOS was 3% and the mean at 6%. Annual
target bonuses had a mean increase of 16% and target total cash compensation also had a
mean increase of 16%. This is actually the #2 position in terms of total target compensation;
however, it is a small sample size of 12 and is due primarily to the high targeted bonuses of
nearly 100%, showing the importance of meeting revenue targets once a company goes public.
This “targeted compensation” is generally earned in the form of commission, which is paid
only if sales or margin targets are met unlike the “corporate” plans that the CEO and CFO are
likely on.





Notes:

Base Salary ($K) $202.8 $225.5 $235.0



Notes:

Year of IPO

Base Salary ($K) $208.6 $28.0 $249.0



Notes:


Share Usage and Dilution

Companies Refresh or Revamp Equity Incentive Plans Pre-IPO

An important step before completing an IPO is to approve a new stock plan and share
reserve, as previous methods of distributing shares to employees will likely have been
exhausted or close to it. Furthermore, it is much more efficient to get plans with the needed
flexible provisions, such as annual replenishment
features (or Evergreens), approved in a private company Equity Outstanding – The sum
environment than with public shareholder scrutiny. The of stock options outstanding and
graph below illustrates the equity outstanding, shares unvested restricted shares
available for grant, and the total equity overhang outstanding as a percentage of
percentiles for the study group pre-and post-IPO. shares outstanding.

We examined these figures from each company’s Total Overhang – The sum of
prospectus filing and separated out the new equity plans equity outstanding and shares
where possible. Many companies will approve the stock reserved for issuance.
plan before the IPO and wait to implement it
concurrently with the offering. Others will start using it before the offering.

Equity Overhang Pre-IPO
Post-IPO
35% 32.7%
% of Basic Shares Outstanding

29.6%
30%
26.1%22.5%
25% 23.3%
21.6%
16.9%
20% 17.6% 16.6%
15% 13.4% 13.8% 13.0%

9.0% 8.3%
10%
6.2%
5% 3.8%
1.7%
0.7%
0%
PG … PG … PG … PG … PG … PG … PG … PG … PG …

Equity Outstanding Shares Available for Grant Total Overhang

Approval of the new share plan outweighs the incremental dilution caused by the share
offering leading to increases in total overhang. “Evergreen” provisions provide for the
automatic annual replenishment of a stock plan’s share reserve by a set amount of shares, a
percentage of shares outstanding, or more often, the lesser of the two. These have become
increasingly popular, with a vast majority of companies in the study enacting them pre-IPO.


Many companies have implemented Evergreens as a part of their Employee Stock Purchase
Plans (ESPPs) as well.

The following charts display the breakdown of Evergreens for stock plans and ESPPs
according to the percentage of shares outstanding providing for in the plans.

Equity Plan Evergreen Percentages ESPP Evergreen Percentages

2%+
No 7%
5.0%
28% Evergreen 1%
25% 23%

3.0%
5%
No ESPP
4.5% 0.50% 56%
3.5%
7% 2%
4.0% 5%
3.9% ESPP w/o
28% 2% Evergreen
12%

We have long recommended between 4% and 5% of shares outstanding for stock plan
Evergreens, and the data shows this continuing to be the trend. 1% of shares outstanding is
the most popular amount for an ESPP evergreen.

Pre-IPO and IPO Equity Grants Remain a Prevalent Practice, with Options Continuing to
be the Vehicle of Choice

Grants of any type of equity vehicle (stock option, restricted stock award/unit, performance
share) were awarded by approximately 75% of companies in the year prior to IPO and nearly
90% of companies in the year of IPO, indicating that companies are likely “reloading”
executives and key employees prior to the IPO. Many of them are presumably nearly or fully
vested with very low strike prices given the length of time that it is taking companies to go
public these days. Gone are the days of the “initial/new hire” grant prior to IPO and then no
further grants until post-IPO, which was very prevalent in the dot.com boom of the late 90’s.

Approximately 70% of the companies granted stock options in the year prior to IPO and
slightly over 75% in the year of IPO. Stock grants (either restricted stock awards or restricted
stock units (RSUs)) were granted by approximately 15% of companies in the year prior to IPO
and nearly 30% in the year of IPO. Finally, performance awards (either grant or vesting
contingent on performance hurdles being met) comprised less than 10% of companies each
year, likely due to the fact that for companies in this stage of growth, it is very difficult to
predict and forecast multi-year performance.


LTI Design

Vehicles – Stock Options Remain the Most Prevalent Choice of Equity Vehicles

Stock Options are still far and NEO LTI Instrument Usage
away the vehicle of choice for 100%

new IPO’s. In the year of IPO, 90%

76% of the participants in the 80%

survey granted stock options,
70%

while 28% granted RSU’s. This
60%
is not surprising given the
strong alignment between pay 50% Prior Year
IPO Year

and performance and the direct 40%

connection options create 30%

between employees and 20%

shareholders. Moreover, they
10%
are an effective way to reward
employees in a start up 0%
Options Stock Performance Any Instrument

environment for their
significant hard work and sacrifices prior to the IPO. Additionally, as small, early-growth
stage companies they generally have a larger allowable burn-rate by institutional investors,
and/or they adopted an Evergreen element to their plan while still private so they do not
have the burn-rate constraints that many larger public companies have and thus are forced to
use restricted stock units to manage their share pools more conservatively. Additionally,
they often do not have the executive/key employee retention concerns that larger companies
with flat share prices may have; again alleviating the need to deliver RSU’s to increase
retention value. Only one recent public company offered performance-based LTI as most
likely cannot forecast multi-year financials accurately enough to make them a feasible
alternative.

The previous LTI usage chart is for all Top 5 reported officers (not the entire employee
population, which likely differs, as this is not disclosed) in the S-1 filings who were in place
in their respective companies for both years (year of IPO and prior year). This is likely more
illustrative initially than showing a position-by-position look, which we will look at after this
analysis as there are some intriguing differences.


CEO LTI Instrument Usage

This LTI usage chart is for the CEO LTI Instrument Usage
80%
CEO who was in place in their
respective company for both year 70%

of IPO and the year prior to IPO.
60%
46% of the CEOs were granted
stock options in the year prior to 50%

IPO and approximately 65% in the
40% Prior Year

year of IPO. Stock grants (either IPO Year

restricted stock awards or 30%

restricted stock units (RSUs)) were
20%

granted by approximately 15% of
companies in the year prior to IPO 10%

and fell slightly too
0%

approximately 13% of companies Options Stock Performance Any Instrument

in the year of IPO. Finally, performance awards (either grant or vesting contingent on
performance hurdles being met) were granted by 7% and 2% of companies each year,
respectively, likely due to the fact that for companies in this stage of growth, it is very
difficult to predict or forecast multi-year performance. Grants of any type were made by 59%
of companies in the year prior to IPO and 72% in the year of IPO. These figures are all lower
than the Top 5 reported officers, likely because the CEO has the highest total shares held as a
percentage of shares outstanding and thus is least likely to need any “refresher” shares.

CFO LTI Instrument Usage

CFO LTI Instrument Usage
54% of the CEO’s were granted stock 70%

options in the year prior to IPO and in
the year of IPO. Stock grants (either 60%

restricted stock awards or restricted stock
50%
units (RSUs)) were granted by 7% in the
year prior to IPO and rose significantly to 40%

15% in the year of IPO (likely to insure Prior Year
IPO Year
retention of the CFO and to reflect the 30%

significant increase in responsibilities for
20%
this position). Finally, performance
awards (either grant or vesting 10%

contingent on performance hurdles being
met) were granted by 4% of companies 0%
Options Stock Performance Any Instrument

each year, likely due to the fact that for


companies in this stage of growth, it is very difficult to predict multi-year performance.
Grants of any equity type were made by 61% and 60% of companies, respectively, in the year
prior to IPO and in the year of IPO. This is likely low due to the fact that most VC/PE-backed
companies do not hire a CFO to take the company public until a couple of years before the
IPO, thus there is no need to refresh the shares.

Stock Ownership Guidelines – While Equity Grants are Prevalent, Formal Ownership
Guidelines are Not.

Only 2 of the companies in the sample implemented executive stock ownership guidelines.
This differs greatly from most mature public companies who have implemented them, as it
has evolved as a corporate governance best practice. They likely do not feel the need at such
a young stage as most key executives are holding large quantities of stock and are subject to
post IPO lock ups preventing insider sales for up to six months post-IPO. Thus, companies
typically will wait several years before implementing them. Given some of the poor stock
price performance of recent IPOs, however, we may begin to see more of a focus on
ownership guidelines in the future, as Boards and shareholders look for tools to ensure
executives remain focused like owners and aligned with shareholder interests.


Other Plan Design Features

Annual Bonus Plan Design – Most Bonus Plans Remain Discretionary

Of the 46 annual bonus plans, 17 (37%) were formula based, 27 (59%) were discretionary and
2 (4%) had no formal plans. Revenue (in 20% of companies) and profitability (net income,
EBITDA, etc.), used in 16% of companies, were the most prevalent metrics listed in the
Companies’ Compensation Discussion &Analysis (CD&A) sections of the Proxy. This is not
surprising given that these are typically the two biggest drivers of value creation and
expectations by Wall Street of a new public company.

Employee Stock Purchase Plan (ESPP) – ESPPs Remain a Critical Mechanism for
Encouraging Employee Ownership

40% of the recent IPO’s implemented an ESPP upon IPO. Of those that did, roughly 50%
implemented an evergreen feature in the plan with a median replenishment of 1% of shares
outstanding added to the plan every year. All (100%) also had a “look-back” feature, with an
average look-back of 6 months, allowing participants to purchase their company’s stock at a
15% discount, making these plans a very attractive benefit for the broad-based population.
The majority of larger public technology and life science firms have an ESPP, so this is an
area of significant difference between the two types of firms. We suspect that this is due to
the notion that IPO companies typically grant equity more broadly than their more mature
counterparts, and therefore, already have broader ownership levels.

Severance/CIC

65% of companies in the study offered severance benefits for executives without a change-in-
control (CEO and CFO), whereas 82% (CEO and CFO) of companies offered severance
benefits to executives with a change-in-control.

The median cash payment to a CEO upon a separation without a CIC was 6 months of salary,
including non-receiving. The median was 12 months for those receiving. For a separation
with a CIC (all double-trigger), the median was 12 months, including non-receiving and the
mean for those receiving was 12 months. For the CFO, the median without a CIC was 6
months, including 0’s and 12 months for those receiving.


Compensation Committee Checklist for Pre-IPO Companies

The compensation changes outlined in this white paper are only a fraction of what the
Compensation Committee must address as it prepares for an IPO. Here below are additional
topical areas the Compensation Committee should be thinking about as a firm is
contemplating going public in the near future. If companies can address these issues as early
in the run up prior to the IPO as they can, they will be rewarded with more flexibility on
share usage, compensation expense forecasting, disclosure, and potential for increased
performance to help drive the business strategy. They will also have a more strongly written
CD&A, with fewer comments, that need to be responded to, by the SEC.

Overall

 Determine roles and decision rights of employees (HR, Finance) and consultants in
developing executive compensation programs.
 Assess current compensation consultant, including independence and potential
conflicts of interest. If you do no not currently have a consultant, hire one before the
IPO. If you do, assess current consultant and select for next year ensuring the firm is
as strong in a public company environment as it is in a VC-Backed environment.
 Develop an executive compensation philosophy (including program objectives, pay
positioning, mix, types of vehicles, etc).
 Develop a defensible Peer Group of comparable public companies.
 Review competitiveness of executive compensation.
 Set competitive compensation levels (base, target bonus, equity/long-term incentive
awards, perquisites/benefits and total direct compensation).

Short-Term Incentive/Bonus Plans

 Determine overall strategy and framework (e.g., financial goals, milestones,
discretionary, frequency).
 Select financial performance measures and individual / MBO goals.
 Calibrate financial performance targets versus market/street expectations, internal
budget, and Peer Group performance.
 Develop formalized Short-Term Incentive Plan document.


Long-Term Incentive

 Review / develop a long-term incentive strategy including appropriate instrument use
/ mix.
 Develop an LTI award matrix with values and participation rates for all employee
levels.
 Determine if an “Evergreen” provision will be used. If so, determine appropriate
evergreen size.
 Set equity utilization (share run rate) budget for coming fiscal year.
 Determine if any IPO awards will be made to top executives and key employees. This
will be key to do if most or all of current awards are fully vested as the company thus
has little or no retention capability.
 Discuss and potentially implement executive and Board share holding/ownership
requirements.

Employment, Severance, and Change-in-Control (CIC) Arrangements

 Review existing employment, severance, and CIC agreement terms and conditions
and potential payouts.
 Complete a competitive analysis of key terms for employment, severance, and CIC
agreements and set terms going forward based on the market and overall pay
philosophy.
 Ensure all “egregious” pay provisions are removed from any existing agreements or a
commitment is made in the CD&A to grandfather in existing executives but not have
any egregious provisions in any new agreements going forward.

Governance

 Develop or amend (as needed) Compensation Committee charter.
 Draft Compensation Discussion & Analysis (CD&A) and accompanying tables for S-1
and Proxy.
 Compensation risk assessment.
 Review and set Board of Directors compensation for the following year.
 Set equity award approval process, including what authority, if any, will be delegated
to management. Formalize policy regarding award grant timing.


Best Practices for Companies Preparing to IPO

In working with many Compensation Committees for firms that are going to IPO, we
consider these to be “best practices” in the marketplace:
 Compensation Committee selects and has an independent executive compensation
consulting firm work for it -- a firm that does no other work for the management of
the company and whose consultants have no personal (e.g., non-business )
relationships with the Board.
 A named Peer Group of public company comparables (for executive compensation
purposes) exists that is similar in terms of industry, revenues and market
capitalization so the executive compensation decisions are reasonable, appropriate and
defensible (if challenged by institutional investor advocacy groups).
o Ideally 15-20 firms
o Company at or near the median of proposed group of companies in terms of
both revenues and market capitalization.
 Executive compensation levels are within market norms (defined as 25th to 75 th
percentile of the Peer Group and any surveys that are used).
o Longer-term, CEO pay levels need to be supported by company performance,
most notably TSR.
 The company should adopt an “Evergreen” provision in its Equity plan pre-IPO which
will be the only time that this is feasible.
o Ensure evergreen is large enough to support annual ongoing equity grants and
any M&A activity that may occur– typically in the 4-5% range for human
capital intensive firms such as high-technology, biotechnology and alternative
energy firms.
o Having a 4-5% pool become available every year does not mean the firm has to
use all of those shares – they simply become available for grant and may be
“banked” for future use. Implementing too small of an evergreen will cause it
to have to be discarded, as it is seen as an egregious compensation practice for
mature companies by Institutional Shareholder Services (ISS) who would vote
“no” on any stock request with such a provision.
o Market (Peer Group) median annual burn rates and dilution levels will have to
be achieved over time (the numbers fall as the Company gets larger/more
mature).


 Remove any “egregious” executive compensation practices so that they are not “red
flags” to ISS and similar advisory firms providing counsel to Institutional shareholders:
o No gross-up provisions in severance/change-in-control arrangements.
o Double (i.e., CIC and termination/material change in employment relationship)
versus single trigger change-in-control arrangements.
o Excessive executive benefits and perquisites (not typically found in firms that
are going to IPO). Were typical in larger public companies.
 Firm is prepared for a Say-on-Pay vote after being a public company.
 Conduct a compensation risk assessment and include the results in the CD&A.
 Ensure key management and other employees are “locked in” for the foreseeable
future through equity refresh grants prior to/concurrent with the IPO, as the time to
IPO/exit has extended and that may mean that many people are or are near fully
vested upon IPO and therefore there is no retention capability. The best way to look at
this is through a “carried interest” analysis that looks at “in the money” value of
awards not vested under various stock price scenarios.
 Have a succession plan in place for the CEO so management continuity is ensured
should something unfortunate happen to him/her. This is becoming a market
governance best practice, plus it is far cheaper and less dilutive to shareholders to
promote from within that to recruit a new CEO.


Appendix

The companies included in the study are as follow along with summary financial statistics on
their size:

Median revenues (Last 4 quarters before IPO was $75.3M with a 25th percentile of $15M and a
75th percentile of $184M). Market capitalizations upon the market close on the date of IPO
were a median of $513M, a 25th percentile of $268M and a 75th percentile of $1.05B.

ACELRX PHARMACEUTICALS INC RESPONSYS INC.
ACTIVE NETWORK INC RPX Corp.
ANGIE'S LIST INC SAGENT PHARMACEUTICALS
BANKRATE INC SERVICESOURCE INTL.
BG MEDICINE INC SKULLCANDY
BOINGO WIRELESS INC SYNERGY PHARMACEUTICALS
CARBONITE INC TANGOE
CLOVIS ONCOLOGY INC THERMON GROUP HOLDINGS
CORNERSTONE ONDEMAND INC TRANZYME
DEMAND MEDIA INC ZELTIQ AESTETICS
DIGITAL DOMAIN MEDIA GRP INC ZILLOW
ELLIE MAE INC ZIPCAR
ENDOCYTE INC ZYGNA
FLUIDIGM CORP
FREESCALE SEMICONDUCTOR LTD
FRIENDFINDER NETWORKS INC
FUSION-IO INC
GEVO, INC.
GROUPON INC
HOMEAWAY INC
HORIZON PHARMA, INC.
IMPERVA INC
INTERMOLECULAR INC
INVENSENSE INC
JIVE SOFTWARE INC
KIOR INC
KIPS BAY MEDICAL INC
LINKEDIN CORP
MEDGENICS INC
NEOPHOTONICS CORP
NEWLINK GENETICS CORP
PACIRA PHARMACEUTICALS INC
PANDORA MEDIA INC


About Connell & Partners

Connell & Partners is an independently run division of Gallagher Benefits Services which
itself is a division of Arthur. J Gallagher (NYSE:AJG) dedicated to providing independent,
insightful, and innovative advice in all areas of executive compensation and Board of
Directors remuneration. We meet all of the independence requirements required by the SEC
under the Dodd-Frank Act.

At a time of unprecedented scrutiny of executive compensation programs, Connell &
Partners delivers the independent advice required in today’s demanding governance
environment. We have no benefits brokerage, HR outsourcing, insurance, actuarial, or
management consulting conflicts and no cross-selling pressures.

Our consultants draw on their significant consulting and corporate experience to provide
insightful advice to a wide range of clients, including venture-backed start-ups and Fortune
500 companies. Connell & Partners offers expertise that rivals our largest competitors with
the innovative, tailored advice and exceptional client service associated with a dynamic
consulting boutique.

We welcome the opportunity to introduce you to our firm and to discuss how our services
may benefit your organization.

Our IPO Experience

Since we founded the firm in 2005, we have worked on over 100 successful IPOs, including
several of the most successful in the last few years: BroadSoft (BSFT) in 2011, ProtoLabs
(PRLB) in February of 2012 and Millennial Media, which raised its price target from $9-$11 to
$11-$13 and then debuted at $25/share. We also did the work for Kiva Systems, which sold to
Amazon for $775M in cash and several other historically very successful exists, including
EqualLogic (sold to Dell for $1.4B prior to IPO, the highest cash price ever paid for a private
company), Starent Networks (sold to Cisco for $2.9B or a 20% premium over its share price at
the time), PhaseForward (sold to Oracle), BG Medicine, and BladeLogic (sold to BMC) to
name a few. We also worked with EnerNOC, BG Medicine, Actelion, Momenta
Pharmaceuticals, and Acceleron. Our work with all of these firms continued after they were
public until they were acquired. We sold the firm to Arthur J. Gallagher (NYSE:AJG) in 2010
so you still get all of the benefits of an independent boutique with the resources of a much
larger firm behind it.


We also were named by Equilar (the executive compensation research firm) in 2012 as the
executive compensation consulting firm having the 2nd highest rate of 3-year total
shareholder return in its clients for 2011. Clearly, the most successful firms work with
Connell & Partners.

Our Bios and Contact Information

Jack Connell

Jack is Founder and founder and Managing Director of Connell & Partners, Inc., an
independently run division of Gallagher Benefits Services (GBS), itself a division of Arthur J.
Gallagher (NYSE:AJG). Jack is a nationally recognized expert in executive compensation,
incentive plan design (short-term and long-term), linking pay and company performance,
and total reward strategy development. He works with organizations ranging from start-ups
to Fortune 50 companies. He has worked on over 100 IPOs over the course of his consulting
career. He focuses on industries with intensive human capital needs, including high
technology and life sciences. He also has special expertise in mergers and acquisitions, and
turnarounds.

Jack has significant experience at both consulting firms and corporations, and brings both
perspectives to his work when advising clients. His consulting experience includes serving as
Managing Director and National High Technology and Life Science Practice Head for Pearl
Meyer and Partners, Managing Director and East Coast Practice Leader for iQuantic,
Managing Director and National Consulting Practice Leader of The Wilson Group, and
President and Founder of Solutions at Work. His corporate experience includes serving as
Senior Vice President of Global HR for Geac Computer; Senior Director of Compensation,
Benefits, and HRIS at Avid Technology and Stratus Computer; and various HR, and
compensation and benefits roles at Digital Equipment Corporation and Data General
Corporation.

He earned a Bachelor's Degree in Economics from the University of Michigan and an MBA in
Organizational Behavior and Corporate Strategy from the University of Michigan Ross
Graduate School of Business. Jack has also been an adjunct professor at Bentley College and
Babson College, and an instructor for WorldatWork.

Jack has published more than 40 articles and book chapters, including articles in Forbes,
WorldatWork Journal, Chief Legal Executive, Mass High Tech, and Boston Business Journal.
He has been quoted extensively in such publications as The Wall Street Journal, Business
Week, CFO Magazine/CFO.com, Red Herring, USA Today, The San Jose Mercury News,
Corporate Governance News, Employee Benefits News, and Compliance Week. Jack speaks
regularly at many national and regional conferences.


Justin Fossbender

Justin is a Principal Consultant for Connell & Partners. He is responsible for client delivery
and business development for the firm.

Justin brings a balanced perspective to clients, having both significant consulting and in-
house, corporate senior leadership experience. He has been responsible for client service,
delivery and business development on the executive compensation consulting side at Hewitt,
now AonHewitt, Fred Cook & Company, and Watson Wyatt (now Towers Watson). He has
also led significant change management initiatives through his leadership of the
compensation, benefit, talent management and HR technology functions as Vice President of
Total Rewards at Millipore Corporation, a $1.7B leading-edge Life Science Company, until
Millipore’s acquisition by Merck, KGaA and then Senior Director of Total Rewards, HRIS and
Talent Management at VCE, The Virtual Computing Environment Company, a joint venture
between EMC, Cisco Systems and VMware focused on cloud computing.

Through Justin’s consulting and in-house leadership experience, he has provided strategic
advice and counsel to Senior Management and Boards of Directors across all aspects of the
executive compensation area, including compensation strategy and philosophy development,
short- and long-term incentive plan design, M&A, employment arrangements, retention plan
design, communications, and corporate governance.

Justin graduated from Columbia University with a Bachelor of Arts degree. He then
obtained a Juris Doctor degree from New York Law School. He is licensed to practice law in
the state of New York.

David Dreyfus

David is a Managing Consultant for Connell & Partners. He is responsible for day to day
project management and quality control for many of our clients.

David began his career in the Business Analyst program at Capital One Financial Corp. He
worked on the Sales Strategy and Analysis team in the Point of Sale Finance Division in
Framingham, MA. There he designed and implemented the sales compensation plans. He
also worked on the Workforce Planning team at Vistaprint, N.V. in Lexington, MA, a
publically traded e-commerce company.


David graduated from the Olin Business School at Washington University in St. Louis with a
Bachelor of Science in Business Administration. There he double-majored in Finance and
Economics.

Contact Information

Jack Connell Justin Fossbender David Dreyfus
Managing Director Principal Consultant Managing Consultant
781.647.2739 781-496-3406 781.647.2722
jack_connell@ajg.com justin_fossbender@ajg.com david_dreyfus@ajg.com

Visit our website at www.dolmatconnell.com or visit/follow us on social media at:

LinkedIn: http://www.linkedin.com/profile/view?id=2406443&trk=tab_pro
Twitter: https://twitter.com/execcompconsult
Facebook: https://www.facebook.com/ExecCompConsult

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