CTO · Equity

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 CTO ClearRoadmap

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.

Michael Barnathan

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).

Aleksandra Czajka

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

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

March 16th, 2015

Good idea, good execution. Good execution on a bad idea can still result in a success if you're able to pivot into a good idea (no guarantees of that). Pushing at a bad concept does waste a lot of time, though.

I find that good people are at the root of both.

Steve Simitzis Founder and CEO at Treat

March 16th, 2015

I agree with the others - 20% may be a bargain if they are truly a talented CTO. If they are simply a first dev but they don't have CTO and leadership chops, then reconsider. 

The other question to ask yourself is, how derisked is your startup? If there are still significant open questions about product/market fit, then the early founding team will need equity to reflect the risk of working on something that may never go anywhere. 

A note on this: "read it should be around 3-5%". Often these equity guidelines are given for funded companies, so these percentages would reflect a round or two dilution.

Jessica Alter Entrepreneur & Advisor

March 16th, 2015

@samie - sorry but you could not be more wrong. Read everything in discuss, read anything influencers write about, read this > http://www.paulgraham.com/ideas.html and read this > http://founderdating.com/startups-and-shark-attacks/
I couldn't not comment, because it's not just bad advice, it's something you should really understand. Execution is everything. Google wasn't the first or only first engine, Uber not the only or first ride share service, and dropbox not the first or only file sharing service.  Your idea will almost 100% change in some way shape or form.