How much equity do you give your CTO?

Andrea H Special Projects Director

March 16th, 2015

I was wondering what the appropriate amount of equity is to give a CTO.

I am in the early stages of launching This Dog's Life (.co), a discovery platform highlighting up-and-coming brands while providing dog lovers original local and national content along with curated stories from across the web.

Currently, I oversee five freelance writers and two photographers but need someone to oversee and manage the technical aspect (while I focus on the content/marketing).

I did meet someone that is extremely interested and seems like he would be a great fit. In terms of equity, he is asking for 15-20%, which seems high (read it should be around 3-5%).

That said, he is starting on the ground floor and it would be a standard 4-year vesting schedule. He would help with other aspects (strategy, development, etc.), but it would not be a co-founder role.

Is this reasonable?

Andrea

Roger Smith

March 16th, 2015

I think his ask is fair if you see this as a technology play and having a CTO with some street cred will help you in raising money or moving this venture forward. So instead of asking how much you think is fair or not ask yourself what you think the value of this role is within your company.

Tim Kilroy Analytics - LTV - Boosting Profits - Digital Marketing

March 16th, 2015

Hey Andrea - The amount of equity that you give him depends on him & you. How much do you value him? How much can he do that you can't without him. You state that this isn't a "co-founder" role, but it is "ground floor". I think you want to share equity generously with the "ground floor" team (and I am not sure what a "co-founder role is, honestly, once you have "founded" a company, you and everybody else are on the same team - I think we fetishize the role of "founder" and "co-founder" a little too much - a great team member can bring MUCH more value than a founder (and honestly, they often do).

Pay your CTO what you think they are worth...if they make your company 3x as successful as it would be without them, what would that be worth to you? 10x? 100X? Are they taking equity in lieu of pay? Think of the cash and equity as levers that you can pull - more cash means less equity, more equity means less cash - but you have to respect that people need to live. This CTO may be worth more to you than he might be to someone else - does he feel like a partner who should receive recompense in the event of your success? Is he a partner who will work for the company's best interest (even when different than his own?). The amount of equity that you share is related to his worth to your organization - when it comes down to early stage team, there is no market comp - there is a market of 1 - one company one candidate - the rest goes out the window. Answer this question - do you believe that your company will be significantly more successful with him than without him? If so, it is your job (as CEO) to do the right thing for the company (even if it dilutes your equity stake - as CEO, you are a servant of the company...). My take is this: If he is the right person, then make the deal with whatever tools you have available - just be sure to add a 6 month or 12 month cliff in their vesting schedule....

Karl Schulmeisters Founder ExStreamVR

March 16th, 2015

15%-20% when all he gets is a $500 stipend is not at all out of line. Remember that even if you get funding you only have about a 1:10 shot of having any of the equity pay out. So essentially you are asking him to lead your technology effort for $6,000 yr. and 90% chance of nothing more.

Sure you can find some junior guys offshore for $25/hr. but assuming you have say 6 man months of development work That's gonna bye 4x as much as you are paying your CTO. and the quality will be much much much lower

Lane Campbell Lifelong Entrepreneur

March 16th, 2015

@samie the most important thing is the execution of an idea. Everything else is secondary.

Jim Rand

March 16th, 2015

Responses above are all pretty good. Two things that weren't mentioned much: 1) How much money have you spent to date. 2) How many hours have you spent to date. Consider # 2 in the context of a four year vesting schedule... after 4 years, you may have spent 1.5x as long as him, meaning you would deserve a share 1.5 times as high as his based on this alone (valuing your time equally). You would obviously start somewhat more vested than him. Now consider how much cash you've invested personally, and how much time that represents. Frankly, I think cold hard cash investment should be the biggest reason for a difference. If you've invested say, 80K, you might offset that against at least 2000 of his hours, for example. And it also depends whether he WILL be paid a salary in the future. You probably want to play around in Excel to test some numbers, that's the fairest way, but takes some financial skills.

Full-time vs. part time is also important. If he's pledging to work full time and foregoing a real salary, he deserves more risk compensation than someone who is working part time (not just based on the rate at which they contribute hours, but from the risk perspective). One alternative that you might consider is equity plus deferred debt. Like, 10% + $X per hour accrued in debt that is payable upon revenue or financing in excess of $Y dollars. That would allow him to monetize a bit of his stake before selling the company (or going public, or getting paid dividends).

All in all, from what I gathered above, his ask is not unreasonable at all unless he's going to get real salary within the year. (Think about it, if he contributes a whole year's salary... for easy numbers let's say that was worth $100K, at 15% you're saying your company is worth $667K right now. And that neglects any work beyond his first year. While $667K is not a high valuation, I submit that if you don't have any real traction in terms of users/revenue/prior investors, your value is likely no more than that, especially without intellectual property rights).

Michael Barnathan Adaptable, efficient, and motivated

March 16th, 2015

If it's a pre-revenue tech play, then this person will presumably be singlehandedly designing your product until you receive funding. In that case, 15% is actually low for this role, since that's pretty vital to the near-term (and continued) survival of the business. 100% of zero, as they say...

It also isn't competitive with the market unless you anticipate (and can back up) a high valuation. A senior CTO-type can pull in $200k/year IN CASH. Given a 10% stake, is your business going to be worth $8m by the time that equity vests? Given that 90% of startups fail, will it be worth $80m? Given that it's usually diluted to roughly 25% of the starting stake, will it be worth $320m? You get the idea.

To change the calculus, convince the candidate that (a) your valuation will be big or (b) you're more likely than the average startup to achieve it, or (c) be prepared to give up more equity.

Others have suggested a cheap dev team. You could go that route too, but make sure you read up on the pitfalls - and if you're a tech company, you will have to bring your tech back in house at some point (and possibly rewrite it).

Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

March 16th, 2015

Are you kidding me? I wear both hats (I have my own product and am a developer for others). But as a developer, If you are asking me to spend 6 to 8 months of my time as CTO (which, really, at this stage probably means just "create the product") at no pay - you better give me at least 20%. More, really.

You are just asking me to invest. If a CTO makes 200K a year average, then 100K of my time (time is money) I am investing in the company.

So, how much have you invested? Is it a great idea? Do you have access to more funds or people?

But really, the company pre-reveune tends to be worth... um ... nada (as Michael said above, at least 90% fail). So yes, id you can get someone to build your product pre-revenue for 20% or even 25%, JUMP on it.

Of course there are other factors - if your name is Mark Zuckerberg or Bill Gates, I probably would grab the chance for a lot less equity... So really there is no one right answer.

Aleksandra Czajka Freelance Senior Software Engineer, Developer, Web Developer, Programmer - Full Stack

March 16th, 2015

Andrea,

Great question. Can you give a bit more detail as to other compensation for the CTO? Is he going to be getting paid a salary? If not, then 15-20-50% is definitely fair to ask for. If he is going to get a salary as well, then that's another story.

With that said, whatever someone asks for, it all depends on what they bring. If it seems high for you, perhaps you're saying to yourself they are not worth the percentage. If you think they are worth it, then it's simply an agreement between two people. How much are you willing to give to keep him? How much will he bring to the company.

Hope that helps.

Aleks

MaxBlox/Founder Institute Director, Chennai Area at The Founder Institute

March 16th, 2015

The CTO ask of 15-20% for a pre-funding pre-product company seems more than fair, particularly since there is no real compensation. At this point, it would actually be a co-founder role. I think they may even deserve more.

if seed-funding has been acquired, then it would be more in the 3-5% Plus salary. After series A funding with product and market traction it would be 1-3%, plus salary.

Other than yourself, this person is going to be the most critical person in realizing the company's idea. So a very strong relationship is going to be critical with this person.

Make sure that the person has high-level management ability as well as low-level coding ability. They are going to have to span a large area of expertise in the beginning stages.
Create a very strong trusted working relationship with a lot of give-and-take so that you can get the best out of the person. They are going to have a lot of control over what exactly gets done at the end of the day.

Anonymous

March 24th, 2015

A great CTO is worth his weight in gold. If you are the only founder, 50 % for you, 30 % for him and 20 % for your option pool would be normal. Yes with vesting.

The reason you want to give him stock instead of money, is that he has to think about the end outcome, what his technology means for the business. He needs to take ownership, responsibility. Both your incentives need to be aligned, otherwise he will write beautiful code that does not serve the business.

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