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

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... 

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.  

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.


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.

Ryo Hang Do More

November 12th, 2013

share risk, share responsibility, share the success.

Shahab Kaviani

December 17th, 2016

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

David Joerg President, GGTracker

November 12th, 2013

Best essay I've seen on the topic: http://paulgraham.com/equity.html

As you'll see, it depends on a big list of things.  If your product is truly technologically advanced, then the CTO is more core to your value.

How long would it take you to find another CTO you like as much as this one?  If you don't hire this CTO, you're going to be going that much longer without one.  How much is that time worth?

Anonymous

November 12th, 2013

Wendy As an early stage startup with "only" 500K in funding, this CTO seems to be asking for the moon. A market rate plus equity is really, really very generous. 2% equity is WAY too much for an early stage employee being paid market rate at a C level tech position, in my opinion. I would offer either close to market with 0.05% equity (a taste), or a significant discount on market salary with 1-2% equity. Best, Cynthia

Fahad Siddiqui

November 12th, 2013

This one's hard to just give a blanket answer to. 

You want the person to be committed to the success of the company for the long term, so obviously, you need to give enough equity that he cares.

At the same time, you need to be fair to yourself, keeping in mind that you will be diluted in the future, and the math needs to make sense for you eventually.

I'd say somewhere between 5 - 10%, but I'd probably try to trade some salary for equity. Not with the intention of being unfair, but to align interests. 

Market salary deserves market equity, which would be around 1-2% for a company at seed stage. But, for a senior position, that low amount for equity does not bode well for the long term.