Advice for negotiating better terms for a possible CEO/President offer.

Leena MBA Content & Publication Manager at NetApp

November 16th, 2014

Hi Founders,

I am in talks for a possible offer to run a company that is pre-revenue, and therefore cannot offer base pay. The company used to be hot in 2012/2013 in terms of being buzzy in TechCrunch type of circles, but has lately stagnated in their growth (company valuation -- I know this is useless, but I'll put it here anyway -- is estimated to be $3.5 mm, 2 years in. I know, not much).My feeling is that maybe it hasn't been managed as well because the current leader is busy working a full time, high-level day job elsewhere, for a rapidly growing, well-known startup. So, he wants me to take over his company, while he will act as my advisor.

My challenge is to lead several developers and interns who are distributed (no common place of work yet), and help jumpstart their growth. The offer so far is 10-15% equity vested over four years. I think this is a poor offer, considering it's pre-revenue, there's no pay, and the company is currently worth nothing except for a very low estimate on paper. I'd like to go full time for him for 25-30% over a 2 year cliff. Can someone who has actual experience dealing with this, or negotiating in this space, please advise me? You can write here or message me privately, either way. With private messaging I can give you fuller details, but, as this is still a discreet negotiation that is taking place, I cannot reveal the company or any specific names.

Any words of wisdom would be greatly appreciated.

Thank you.

Michael Brill Technology startup exec focused on AI-driven products

November 17th, 2014

(I've been on the hiring side of CEOs for troubled companies). Just a few thoughts...

At this point I would basically ignore everything re compensation... to have this level of discussion on an email thread without meeting (or even Skyping!) seems *really* premature.

Tons of questions: Why is the current leader working a full-time job elsewhere? What is their cash/burn situation? Have they raised money? What are the current investor(s) thoughts about the company? What is the composition of the Board (the people who will make this decision)? Why do you think the employees and consultants will stay with the change? Are they being compensated? What does pre-revenue have to do with you taking a salary or not? And what does "stagnated growth" mean in the context of no revenue... growth of what? What about the market? The product? Why hasn't it been successful?

IMHO, a compensation discussion right now is just about neck-and-neck with a discussion about what type of shoes to wear on your first day.

Michael Brill Technology startup exec focused on AI-driven products

November 17th, 2014

It's a bit hard here without much context, and you may already have this info, but I'd definitely spend a ton of time on product/market fit questions. At this size company, most of the time this is the root of the problem. Whatever you do, go back to first principles re product/market fit and make sure you feel good that there is a path to that. If not, then you're probably just inheriting an unresolvable mess.

I think you ask this in question #10, but I'd explode that into a number of questions about customers, problem domain, product design, etc. ... and try to talk to some customers/users.

I'd agree that vesting on day one makes sense.

Reuven Granot Corporate Strategic and Scientific Officer at Perlis Ltd

November 17th, 2014

Leena,

I was in a similar situation, just the other side of the table. We offered the CEO 20% with one year vesting. The main task was to raise seed capital. The CEO did a very nice job, but was not successful in the capital raise and left after only one year leaving all the equity. The reason was the non realistic expectations to successfully raise a too large amount of capital to enable paying salaries to the whole team.

If you are offered for such a long period, means in my experience that the founders do not seriously believe in running a successful business. I would run away except I would believe that I am the right leader to change this unsuccessful start-up to a success.

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

November 17th, 2014

Reuven - as others have said, if equity vests after only a year and the main focus is simply raising cash, then by all means sign me up as well!

Leena - I agree, if a startup is only worth $10M after 5 years, IMHO, not much of an opportunity. Once you factor in the probability of a successful exit, which in most cases does not happen, it may not make sense for you personally. As you said, the experience of performing that role would be a great opportunity for someone looking for just that...the experience.

Financially I don't see it, unless you see a way to move the company to a much higher valuation much sooner. Of course, if there is opportunity to create sellable/licensable IP it might be worth a second look, but even then the terms are insufficient. Just my opinion though..

Chris

Rob G

November 17th, 2014

Leena; you have a lot of ground to cover and i think you are on the right path. No hard and fast rules, but if someone i'm considering hiring doesn't start grilling the s@*t out of me fairly early in the process then flags start to go up, especially if this is key position like a CEO. I want to know how you think and how you think is best reflected not in what you say, but in the questions you ask and how you listen. Your history is also paramount. One very key character trait one needs in a CEO is negotiation skills. Whether you are negotiating an offer to a key hire or negotiating the terms of a sales agreement or negotiating financing terms i want to experience how you negotiate. I second Michael B's focus on product / market fit. Do they have a finished product? why is it not yet generating revenue? Consumer or B2B? You mention the "current leader", but you i didn't catch if s/he is a founder or a hired gun - i assume founder. If that's the case, the fact that he's got a full time gig at another startup raises giant red flags for me. it tells me that the person with the most tribal knowledge of and passion for the business has lost interest. Now it could be that he's in over his head and running/growing the business isn't his forte and he was lured away to leverage his real skills - that's the only scenario i can think of that would somewhat lower the flags. That being said this reinforces the fact that there's a ton of heavy lifting to do and the new leader is taking big risks and with big risks come big rewards. from the hip i'd say 30% is a pretty reasonable figure. Investors are going to want to see that you still have skin in the vesting game out into their future so even if you and the current "leader" agree to a 2 year vesting schedule, don't be surprised if investors want to change that before they write checks. If i'm wearing the founder's shoes (i'm assuming the person you are dealing with is the founder) i'm thinking that with no ability to pay a salary to you or anyone else (it's an assumption on my part that no one is getting paid) and i'm 100% committed to another company that 70% of something is worth a lot more than 85-90% of nothing. I'm thinking that 30% over 4 years with monthly vesting and a 30-90 day cliff is where i expect to end up and i want to see how you convince me of that. I'd play it as if he wants you to convince him to double his offer (easy for me to say :- ). i would also focus closely on his future involvement and what his expectations are and how you can manager that (for better and for worse). If he continues as majority share holder you want some clear ground rules on decision making, etc. What does the board look like currently? Presumably he is the current board. You should have a board seat and there should be a third independent director you two agree on to help break ties. Loads of other questions, but product / market fit, decision making and compensation are good places to start. I would put these ahead of all your other questions except #26: clearly this company is NOT his #1 priority - why is that? that's question #1.

PS: i see you're a UW grad... go dawgs!!

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

November 16th, 2014

Leena-

I have gone through something similar. Without disclosing final terms my goal was to end up, realistically, with between 5% and 10% of the company, knowing there would be several rounds of capital raises with dilution happening each round.

In this case the company was an app company with a pretty narrowly defined target product and the preliminary diligence showed it would not take development of any proprietary software, i.e., so all components were OTS. In addition, backend and other functions were all available as services so no huge infrastructure cost either. Adequate marketing funds, based on reasonable and realistic customer churn, were included in the cash flow so while a chance that customer metrics would be worse than planned, the likelihood was low.

That being said, I started with 20%, and assuming the current and final raise is successful, then I will likely end up on the lower end of my equity target range. Vesting was done in 5% increments with 10% after two years and the remaining 10% vesting monthly years 3-5.

I had wanted a shorter vesting time but I accepted because I knew the people involved.

FYI - I had checked with several local VC connections on this and they were comfortable that the deal was "fair" to both sides. Another reason I accepted the longer vesting term.

Chris

Alon Gamliel

November 17th, 2014

@Reuven Regarding the developer that left with 3% of the company. Maybe now it's too late for this, but have you thought about buying his part when you raise the money? Do you think this option should be written in the contract in first place?

Leena MBA Content & Publication Manager at NetApp

November 17th, 2014

Michael et al, here are the questions I am posing (Michael yours will be added I am just listing my own to see if anyone has any ideas piggybacking off of these). Turns out there are more than 23!

1) When did growth start stagnating.

2) Why did that happen?

3) What is the reason it continues to happen?

4) Do you have a plan to turn that around? Have you implemented any so far? What are they? Results? Followup efforts on these results?

5) Why do you have so many "employees" and "interns" pre-revenue? Why aren't you operating lean?

6) What will happen to all of these people when you raise financing? You can't justify paying all of them full time.

7) What has happened in the first 2 years of the company? I need to see a timeline of milestones and events, and what your benchmarks were -- and if those were met.

8) Why hasn't financing been raised so far?

9) What is the chief complaint or caveat of would-be investors?

10) Why aren't people using this app?

11) Who is managing social media and what is their strategy and roadmap?

12) Are you otherwise actively marketing? What traditional or non-traditional strategies are you using outside of social media?

13) What high-level connections do you have, does your team collectively have, that have or have not been leveraged?

14) Partnerships? With whom? For what? Who's in charge of partnerships? Who are they reaching out to?

15) Have you thought of bringing any good growth hackers on board?

16) When do you want to exit, and to whom do you want to sell?

17) Why is your ask so low? Are you basing it off of your current valuation?

23) Is there a transition process? What is it?

24) Do you want a firebrand or a yes man/woman?

25) What is your advisory style?

26) What is my assurance that you'll always be available to me and that this company is your #1 priority?

27) So, comps sold for XXmm apiece or so...were those early exits or Y5/6 exits?

28) I want to meet with your folks in the trenches before meeting execs. I want to know what they're doing, how their working conditions can be improved, and if they feel like they're working in silos since the team is distributed. I want to know what they think our direction should be. Then, same with execs. Finally, meet with the entire team. Is everyone on the same page? That's what I want to find out.

ANY MORE QUESTIONS??!! FEEL FREE TO ADD! THANKS TO EVERYONE.

Michael Brill Technology startup exec focused on AI-driven products

November 18th, 2014

Re product/market fit... Start with a simple positioning statement. You need to be able to read that and say "This is fucking awesome." Really, just a basic statement like this: http://thebuzzfactoree.com/how-to-write-a-kick-butt-brand-positioning-statement/. If you look at that and shrug then you probably have a lot of work to do.

If you like that statement, then you need to go out and test it with customers. Does it matter? Is their usage consistent with that positioning? If so, do you have a viable monetization model? If so, then do you have a viable sales model? If so, then you're likely in a great situation assuming all of the other stuff (like whether you have a functioning organization) pans out.

Also, these days your ability to raise money is going to be driven by product and product/market fit. That's why I think it's sooooo important.

Leena MBA Content & Publication Manager at NetApp

November 17th, 2014

Hi Chris and thank you. I guess I need to face the unpleasant fact that I will continue to dilute along with the company as we go through raises. Thankfully, I'm a hard negotiator when it comes to raising (or spending) money, so maybe I'll be able to navigate this ship so that everyone involved can retain as much as possible in the end. However, no matter what my percentage is, if the company is only "worth" 3.5 mil now, and, say, is worth only $10mm at Year 5 (as pro formas have conservatively predicted), I'm not really going to cash out with much (for the risk I take and the time I give). In my 20s I would have jumped at this, but I'm in my mid 30s with a huge ass b-school loan to pay off. I could easily be making $160k now at a real job and would maybe end up with as much money as one of these "CEO offers" 5 years from now....

Right?

I could use your wisdom on this...

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