Looking to become a CTO, I’ve had quite a few early stage companies offer to bring me on as a founder in exchange for equity and no salary for a certain period of time. Some are asking me to forgo salary for a few months. Others are saying they won’t give me a salary for an entire year but say that the equity stake from day one and 2nd year salary will be worth it.
I know this question depends somewhat on a person’s financial situation, but what are the best practices to follow when forgoing a salary? I think I’m willing to do it if the idea and actual work is fulfilling, but I don’t want to be taken advantage of. I need to know what to know going into these negotiations, as well as what to look out for.
There's no hard and fast rule, but generally it would be just as long as the other Chief-level executive officers go without being paid. At my last startup, we the five cofounders paid ourselves minimum wage until ALL of our other employees were on the payroll (around 10 people). Then we finally started paying ourselves modest, but reasonable, salaries.
The CEO's number one job is to find funding, so that he can pay the people on his team. Asking these people to work for free, is not a solution, because if you pay peanuts, you will get monkeys. Instead of working on the startup, they will be too worried about how to pay their bills. The approach is utterly unsustainable. If the CEO cannot find funding, he should do something else instead of his startup.
It depends on the funding. Investors do not want your salary to surprise them so they will want it allocated in the financials. Once you are funded, you should be paid like any of the leadership team. Equity as the total compensation should be temporary not long term.
The equity better be REAL GOOD. You are taking a huge risk by working for no salary on a project that, if you go by averages alone, will most probably fail. Take a salary you would earn during that period of time at a company that gave you no equity and then do the math to see how much you are risking.
Also make sure you receive fully vested shares as you go, you do not want to work for free and then have a vesting schedule to any equity you do receive.
Knowing nothing about the company that offered you the position, I'd personally not consider something that offered me less than double digits percentage in equity per year of free work (extrapolated if necessary). But that's just me.
The only exception I can think of to what I write above is if this would be your first official CTO gig at a startup: You might want to take a less than stellar equity deal in exchange for having a CTO title under your belt.
But just be careful with the terms, and be prepared to not be devastated if the startup goes under for one of the many reasons startups do, and you end up with worthless equity and no money earned for several months.
You must know the project in details (business and technical) and the other founders/investors, or it is really hard to say what is fair and reasonable. This is also true to the other founders, unless they know you well as a person and your skills/capability, they will not be able to offer you a fair equity. The result will be: they offer you less than reasonable/exciting to hedge against their lack of info of you, and you expect higher than reasonable/fair as your hedge.
My recommendation: pick one startup you like the most, do a small project for free. Learn the business and understand the technical requirements, try to know the founders well (are they honest people, are they fair-minded, are they complementary to you skill-set wise, etc). At the same time, show the founders what you can do and your ability to get things done (I have seen so many smart/skillful people who do not know what "commitments" are, and don't know how to tough things out). If you are happy to what you saw after the project and want to dive, negotiate.
My point is: you must to have information of the project and the founders in order to know what is a reasonable/good deal. Founders must know you and your skills in order to offer a reasonable/good deal. Therefore, make an effort to establish these with some investment, i.e. do a small thing for free. Of course, if you can do it profitably, it would be better.
Hope it helps and best luck to you.
Never. Don't take equity (common stock) either. Get a startup lawyer - he will likely recommend you take convertible notes until they get funded.
Any company that is going to succeed long term must be able to raise money. If this takes longer than a few months, then they will likely fail anyway.
Nothing wrong with keeping your real job until they do get funding.
Even if they get funding, you should get a large amount of option (5% undiluted) for taking the risk of working for a startup.