Entrepreneurship · Small business

Appropriate equity arrangement for joining year-old small biz as either adviser or full time CEO?

Daniel CFA Fixed Income Associate at Beutel, Goodman & Company Ltd.

December 2nd, 2014

I'm sure the answer is "it depends", but I'm curious to hear opinions out there. (note: I am not the founder or consultant)

Background:
- 9 month old business selling personlized gifts online
- Annualized sales ~200k, 15k/mth early on to 20k/mth now. 99% of customers located in one specific geographic area (read: growth opportunity)
- 1 founder who has done everything, including initial investment 40k. First business endeavor. Lots of experience in the specific industry, knows the product, process, customer segment. Needs help with biz plans, biz models, finances, capital raising, marketing and how to grow the biz
- First employee hired 2 months ago to help with everything (admin, production, shipping, social media, etc)
- Marketing - website and Facebook page (10k followers in 9 months). No twitter, Instagram, Pintrest
- Consultant and founder have known each other for 10+ years and trust each other
- Last two months, consultant has volunteered to help with broad strategy, production process, ordering process/website design, supplier choices. Consultant drove outsourcing of a previously internal design process to save time and $$
- Consultant wrote up entry for a national small business contest. Business was chosen as a top 10 finalist; founder instrumental in driving enough votes to be declared the grand prize winner (25k in marketing consultation service)
- To grow quickly, founder needs help, cannot do it on their own

2 scenarios -

a) Consultant joins as Advisor/Board member
There to answer any questions, advise on overall strategy of the business, help in capital raising (if necessary), etc

b) Consultant joins full time as CEO or COO/CFO
Work on the business full time, cleans up ordering and production process, formulates marketing plan, drives overall strategy, wears many hats

Any estimates on what a ballpark arrangement may be in each scenario? There is not (yet) enough free cash to pay salaries (founder not taking salary). Not just equity numbers but how it may be structured; would a dynamic approach be feasible?

Thank you!

Keith Blakely Chairman & CEO of The InVentures Group, Inc.

December 2nd, 2014

Can I be a smart-aleck and say "it depends"? The reality is that a company of that size will struggle to generate enough cash to make a "full time" position feasible if the consultant needs a paycheck. However, given the kind of expansion opportunities you've described, I would say that the consultant might want to consider accruing a significant portion of the cash element, agreeing that it would only be paid upon certain milestones being met (such milestones presumably generating either investment or cash flow that justifies said payment). That structure is one we have used as a corporation assisting early stage companies who are cash-strapped. Of course, equity is also an element of our packages. In some cases, we purchase equity with cash and some of that cash is used to pay for our services. I can envision a similar arrangement possible here, again depending on the circumstances of the consultant. As to the general level, advisors are typically offered low single digit percentages for their services and even then, the equity vests over time usually 2 3 years of service. Employees, particularly C-level, should be offered 5 10% in the form of options that vest over time again depending on the circumstances of the company and the expectations the parties both have for growth. Hope that helps. Keith Blakely CEO, The InVentures Group, Inc. 716-253-1484 716-818-5500 (cell) www.theinventuresgroup.com The information transmitted (including attachments) is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521, is intended only for the person(s) or entity/entities to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient(s) is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Jesal Sangani Founder of Zenya, Real-time Customer Feedback in non-digital world!

December 2nd, 2014

Daniel,

Ping me at sjesal@yahoo.com and i can send you the split formula which we used.

I did not built it and got it from another partner.

At a high level, I believe it will be around 80-20 to 65-35% split but it all depends on the value of consultant in  the founder eye..

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

December 2nd, 2014

I will give my two cents having done option b) for a startup...

First, if you join full time and really devote yourself to doing 110% in hopes of seeing equity turn to something of value, there is no guarantee it will. In fact, odds are it won't. The risk is real. In my case the jury is still out...

Second, if you keep it on a consultant basis the thought may be that such an arrangement will allow you to take on other clients to minimize the risk by keeping alternative revenue streams alive. Fact is that it is very likely you won't have time to do both, and the client will get nervous if they don't see you responding as if you are an employee, despite the fact they understood fully that you are a consultant and therefore maintain control over your hours, tools, and methodologies. Delivering over and above for them will likely squelch this concern but again, it ends up being a full time plus job to get a company really running on all four cylinders.

Third, at least in my case, I decided it was too risky to just do it for equity alone. I negotiated a base salary plus milestone incentives plus equity. The base was much, much less than what I had been making but it paid the bills, and the incentives made up for some of the disparity. 

I am leaving end of December with all my equity fully vested, a suitcase full of "lessons learned", and hoping the new CEO can make it all work out. Would not trade the experience and looking for more like it. Good luck!

Chris

Chuck Solomon Seeking help with B2B sales @LineHire.

December 2nd, 2014

Are you familiar with Mike Moyer and his http://www.slicingpie.com concepts for fairly figuring out equity in early stage companies ?  You may want to explore this.

SWR

December 2nd, 2014

What is this?

Michael O'Hara Chief Executive Officer at TechnologyAdvice @michaeljohara

December 2nd, 2014

Daniel: My 2 cents having been there a number of times. If the value proposition is unique enough to expect an exit in 3 to 7 years, I might opt for b. If the value proposition is weak or that there is not enough of an asset for outside investors to come in, take option a and cut your risks. Good luck. Michael _______________ // _______________ Michael J. O'Hara michaelohara@comcast.net Mobile - 609.915.2953 Land - 609.512.1886 Skype - michaeljohara www.linkedin.com/in/michaeljohara/ Join the Movement and support the MO www.mobro.co/michaelohara

Mary Kopczynski J.D./Ph.D. Law and Global Affairs | CEO & Founder of Eight of Nine Consulting, LLC

December 6th, 2014

What is the other person willing to take and what are you willing to offer. I always tell people I will part with equity for 2 things and 2 thing only: capital or performance. But that's because I was in the position to pay them with company revenue. It was (and still is) important to me that preserve as much equity as possible to ensure I have something to sell to investors. I did carve out a good employee stock option pool though. Mary Kopczynski, J.D./Ph.D. CEO, Eight of Nine Consulting, LLC 1115 Broadway, 12th Floor New York, NY 10010 551.208.5248 maryk@8of9consulting.com www.8of9consulting.com **Sent from my iPhone**

David Woodbury CEO @CampNative

December 2nd, 2014

Simple way to do it: $2M valuation based on revenue - that will be lower if it's not SaaS. CEO - $175k/yr He can't pay until funding at which point seed will not fully fund that salary either. Basically you take series A level salary and work backwards. So let's say it takes 6 months to fund and pay a salary. You're out $97.5k in salary and convert it to equity based on your agreed valuation. Next you land your seed round which let's say pays you $80k for 12 months. Now you convert another $95k to equity but based on the new (higher) valuation. If everything goes well you do your A round in 18 months and you own 7-10% of the company before dilutions. Plan on dilutions of 50% to investors and 15%-25% to ESOP.