In process of offering positions to C-Suite employees and had a question on issuing equity. As we are ramping up to raise our Seed round, would we issue the equity prior to the raise (ie give employee 2.5% of company which at Note conversion values company at $3.5MM , and upon Seed round closing that stake would become diluted) OR would the expectation be that the equity should be given at Seed round and it's valuation, so hypothetically 2.5% of $25MM valuation).
These are not simple questions. Here are a couple things I assume are going on and you should be careful about. My guess is that you have title inflation, giving C-level titles to the first employees without them really having the background to have earned C-level titles. Being the owner does not make you a CEO, it makes you the owner. C-level titles mean something specific, especially when you're talking to investors. Don't hand out top titles because then you won't be able to title the right people when you actually need someone in the top role. At the earliest stage of a company, try titles like Marketing Lead, Sales Lead, Operations Lead, and don't choose director, vice president, or chief anything until someone has earned the credential.
The next thing I am assuming is that you using equity as compensation for a lower salary. That too is a mistake. Figure out the difference between what you're paying today and what you should be paying (when you have the funds). Set out a plan where equity is EARNED, not given. This way it will not be tied to a percentage, but will be tied to performance. At the point when equity vests, the number of shares should replace the deferred salary in value. But, the equity should be vesting based on specific performance goals tied to things you can measure about the contribution of a specific employee.
You typically have to give your first round of investors the same deal/valuation that you give yourself or your employees. You likely can't have a different deal. And you need to spell out in advance what will happen when you seek additional funds as to which shares have priority, who will be diluted, etc. I assume there's a belief that a certain amount of equity needs to be maintained for control. That's not necessarily true. It's likely your operating agreement can specify who is in control of decisions no matter how many shares are assigned.
I also assume that no one outside your home office is going to agree with your valuation.
Do you have any idea in terms of when do you expect to be cash flow positive or at least have enough revenue to cover operating expenses and how much funding you will need till then. You should probably consider these in your equity versus salary compensation calculation as well. I have no personal experience with IPO type event, but shares don't need to be diluted unless you are issuing new shares at each round.
Typically, the expectation is that it is done at the current valuation of 3.5M unless you already have term sheets for 25M. The one issue I see is that 2.5% for pre-seed C-suites is really low whereas 2.5% for post-seed is nearly right. If I were advising your C-suites, I'd tell them to turn down your offer.