Equity

CTO compensation

Wendy Grad Digital Practice Manager at Bain & Company

November 12th, 2013

Our start up is about to make our first offer to a CTO and we'd like to get input on salary & equity that would be appropriate.  Here is our situation:

2 full time founders (1 product person, 1 marketing) - we are taking no salary and have been self funding the company
We recently raised a seed/angel round (~$500k)
We have a great offshore development team and the product will be ready to launch in the next couple months
We need to bring on a strong technical person to get us ready to launch and beyond

We've found an excellent CTO candidate and are making an offer.  Here is the question...
1. He needs/requires a salary and is asking for something in the range of "market" so not really a huge discount to market
2. What is the right level of equity that we should offer?  We have heard anything from 2% to 20% and are really seeking input on this point.

Any advice would be greatly appreciated.

Wendy

Andy Terrel Fashion Metric CTO , NumFOCUS President

November 12th, 2013

I have to agree with Travis.  I've looked at this thread and thought, "Man, never working with these people!"  If you are building a tech company with all offshored work, you are in for a world of pain when the product launches and you have glitches.  A competent CTO will add way more than you ever think (or notice).

Also you have to gauge what "market rate" means (CTO market rate is much higher than programmer market rate).  The Paul Graham essay mentioned above[0] seems the most fair to me.  Start with stock and work out a salary that counts 1.5X its price towards equity.  If you are hiring someone that only gives 4% benefit to your startup (see Graham's calculus for dilution) then they aren't CTO material.

[0] http://paulgraham.com/equity.html

Travis Brodeen Technical Marketing Expert, Business Coach, Founder and CTO at ENVOKEN

November 12th, 2013

I think you all should give your CTO's a little more credit.  

Michael Barnathan

November 12th, 2013

Market salary or equity (15% - 25% is common - remember, this person is building the product that the company is going to sell, and it is going to be very hard to impossible to sell a bad product) or somewhere in between on each is best.

My advice is also to get the CTO to do a review of the contracted code before assuming it's ready to launch. Maybe it's good, maybe it's bad. But if the code is really unmaintainable, it will be smarter to delay the launch and rewrite it rather than try to iteratively maintain it when you have customers knocking down the doors - particularly when fixing one thing causes another to break.

Bill Kelley

November 12th, 2013

2% max with 3-year vesting if you have to pay "market rate." 

I question whether you want someone with so little skin in the game. OTOH, we all have different financial situations... just proceed with caution. You will burn through your initial funding fast paying a market rate and your CTO may end up being the largest consumer of that initial money. Are you prepared to risk it all? Because if your CTO candidate isn't the one that will help close a first round, you could find yourself in a tight spot.

This is a longer discussion, of course, and highly dependent on the personality, skill and commitment level of your candidate. But I wanted to throw out a couple things to ponder... 

Shahab Kaviani

December 17th, 2016

Checkout Slicing Pie, they have some very common sense formulas for calculating fair equity splits.

Anonymous

November 12th, 2013

Man if you guys are doing fine with development and are pre launch, I would not hire someone who needs a salary.  

There is a bunch of talk (seen bens blog) about hiring for who you need right now not who you need in 6 month or a year. 

So I would suggest not hiring the person.  Keep working with off shore, launch the product, see if it gets traction then revisit the hiring.    If you need to pivot post launch having a fully salary Dev can really hurt your business.


Alan Peters VP Product and Technology at BusinessBlocks

November 12th, 2013

There's no right answer. Except that the later you come in, and the lower your risk, the less equity you can command for your street value. I think no-salary is overrated as a hard requirement. It ignores what actually motivates people. Have a conversation about what she needs - situations vary. Returns on investment in technical capability can be asymmetric if the person is good. Rhetorical question: would you rather have a rock star who's (for example) a single parent, or a typical technologist who has a safety net. I have seen startups run out of money being stingy on cofounders. I have seen startups hamstring themselves by with an anchor to a bad cto and a fear of divorce. People who give you a simple answer to this question: I suggest you qualify their answers by asking how many CTOs they've hired, how many times they've been hired as a CTO, or how many companies they've funded.

Ryo Hang Do More

November 12th, 2013

share risk, share responsibility, share the success.

Mitchell Geere Founder at Daybear

November 12th, 2013

I totally agree with Joe. Right now you are simply trying to see what works, you will not have scale issues right now and if you do you can raise more money (i.e. you have a valid product and market fit) and hire at market rate. 

If and when that happens I work with a sliding scale. On the left I have full market salary and the right I have full market equity. Each side means you take one without the other. The more salary the CTO takes the less equity, the more equity the less salary. 

I found that someone who is fully into the business and not a founder would set you back about $120k per year with a 1-2% option with a four year vesting (1 year cliff). Keep in mind $120k is pretty low especially for today's market in San Francisco and New York particularly elsewhere $120k is very reasonable and probably at the high point. 

Your biggest challenge right now is to make sure you are getting your product built as quickly as possible to get validated as soon as possible. A CTO outside of this core vision may add additional overhead beyond the salary and equity. The guy you found could start slow for pure equity but part-time (I have done that before too) in a try before you buy type situation.

Jake Carlson Software Development Manager at Oracle

November 12th, 2013

I would start him off with a low % equity and no (or modest) salary but retain him in a limited capacity as simply managing the off-shore development team. If you are already doing this yourself, it is not a full-time job. What you need is his expertise, not necessarily a lot of his time.

Giving him a bit of equity for his minimal time commitment is more than fair and allows you both a 'trial period' without making a huge commitment financially. When management of the product becomes more complex and requires a larger time commitment, hopefully either he will believe in the business enough to trade some salary for equity, or you will be in a better position to afford to pay him his market salary.

I agree with what people have been saying about treating each situation individually. In my case, I would not work as a CTO for equity only simply because I am not in a position financially to do so. That doesn't mean I am any less committed to my work, it just means I have a family to support / other obligations.

Just remember, it's not a 'all or nothing' proposition.