Equity · Finding cofounders

How much equity should I give to my first hires?

Joe Thomas Founder/CEO:UPDTR

August 13th, 2016

So here's the situation. I hired freelancers to make demo's of the product I hope to build out. I then tested the market by showing 100 people my demo.

20 Young American Adults
20 Senior Citizens
20 Immigrants
20 Internationals( Europeans)
20 Business Owners

95% of those surveyed said they wanted us to come to market because their needs are not being met currently. 90% of the business owners interviewed said they would be willing to pay a premium of $299 monthly if we made premium features for them beyond our free model. I'm not a business major or a programmer, however I created 5 small businesses out of my home to pay my way through life and college and was one of the top salesman in the U.S for retail. People are my passion and Im constantly thinking about the user experience. Im a design oriented CEO that has taken many entrepreneurship courses but im still weak in that area compared to season veterans. Before I go in for investing I wanted to make two key hires for operations and technical so that when it came time for pitching,we would be well versed in whatever they asked us. I dont have any money to pay anyone currently but will do so once we get funding. As a reward of joining in early,I wanted to give them some equity since I need their help to get funding. So upon starting I would give them slightly smaller than market value salary as well as equity. What's a fair amount to give to someone in terms of equity and salary for a CTO/COO roles?
Keep in mind,up to this point I done all the work and all they will be doing is refining the business plan and coming to meetings. When we start though, they will need to be very active.


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Pieter Iperen Entrepreneur and CTO

August 13th, 2016

So, there are a lot of calculators and methods like slicing pie, but they neglect what is at the core of the situation, the awkward phase you are at.

If your were funded and hiring in a core team who were taking minor pay cuts, you split them like a really good advisor, 1-3% a little more long term.

If you were pre revenue and early idea phase and you needed a technical co-founder, or some other specialist bringing them in somewhere between 10-20% is likely more normal.

But you are somewhere between idea and funding, but still pre-rev.

I would suggest this to protect the max equity and get the right people.

First, don't ask anyone to leave any job yet. Make that contigent on revenue or funding.

Second offer 1% now to vest with a close of funding or hitting x in revenue (traction). Then offer 2-3% at 1% per year after with a competitive salary.

Now if you can't get one person to commit to both sides of the model, you still have options. You could bring in a consultant C-level or hands on advisor pre funding/revenue and have some one ready to dive as part of the team afterward for salary and equity.

Feel free to reach out. Trying to apply methods meant for other phases now can be treacherous. Best of luck.


Alf Poor Chief Operating Officer at Global Data Sentinel

August 13th, 2016

There's a mountain of blog posts by entrepreneurs and VCs on this subject that I'll distill for you into a couple of sentences. If they are not founders, but key members of the founding team, 1.5% - 2.5% is the industry staple for C-level. To go outside of that range, they'd need to demonstrate some significant near-term advantage other than experience in their role.

Mike Moyer

August 14th, 2016

Joe,

One of the other answers misrepresented Slicing Pie. There are no other models or calculators or methods like Slicing Pie. And, Slicing Pie is specifically designed to address the awkward phase you are in.

There are other equity calculators in the world but they, like most equity models and methods, are based on estimations and guesses. Only Slicing Pie is based on actual events.

1-3% for a CTO/COO means you are keeping 94% for yourself. This means you estimate that your value to the firm is over 15 times their value combined.

To put this in perspective, if you paid them each $100,000 per year you would be paying yourself $1,550,000 per year.

I'm sure you are a wonderful business person, but if your fair market salary is $1,550,000 you wouldn't be strapped for cash. 

Of course, if you immediately got funded and started paying these guys 1-3% may work. But you can't control the funding process. As time goes by the lopsided split will become obvious and they will come asking for more. I've seen it over and over and over and over again. 

Also, please don't give an investor 25% unless this is a substantial Series A round. If not, it means you are planning to put a price on a pre-revenue angel round. This will most certainly backfire. Instead, use a convertible note or SAFE . For more information on why this is a bad idea pick up this book by a Silicon Valley attorney named Roger Royse.

I've published a retrofit/forecast guide that can help you forecast equity using Slicing Pie. 

Again, I'd be happy to share the Slicing Pie book with you. Just contact me!

-Mike

Marcia Allen Founder and COO BioTech Solutions Enterprise Group, Ltd, LLC

August 16th, 2016

Don't give any equity for just taking the position.  They have to earn it, no matter what.  It's a conundrum to bring good people to your team in leadership roles and to pay them, when you're just getting started.  You need to find people in the early stages who are like you, passionate about the opportunity.  I can't tell you what to pay them, but do not give up any equity until they have earned it.  Get a good corporate attorney.  They will protect you. They will advise about who earns what. Perhaps a vesting schedule of 5 years with some stock vesting each year.  But you need to also decide how much.  The best advice I can give is that virtually every person I picked in the early days ( and now my company is 13 years old), did not have the same passion I had to weather the storm and get through 2008 9 and 10.  I had a 7 year vesting schedule.  I also had a cofounder.  My cofounder earned a million while I took nothing and invested my money.  Because they had to earn money and it was so lopsided, my attorney absolutely would not allow me to give out any stock. In the end they ended up just being an employee or really just looked at it as a job. When it came to hard times and I needed them to step up and do more they didn't. My attorney protected me.  It took a long time but I found the right partner with the same goals and passion.

Greg Milbank Sales & Business Development Leader | Big Data (Hadoop) | Innovation | Rapid Growth | Strategic Alliances | Cloud, SaaS

August 14th, 2016

Depending on experience you can expect anyone that's  come early to the start up game to understand there's no glamour to being early to defining scalable repeatable processes in an early start up.  I don't know the numbers off the top of my head but I have personally witnessed more failures of new hire CEOs than I have successes.   The right person will have a good financial foundation from past success, allowing you to go high on equity and hold on to your early cash flow.  CEO-5-7%, CFO/COO 5% but with earn outs.  From my own experience, I would suggest you hire a COO/CFO first to take control of  the day to day operations ASAP.  A good CFO will also know when outside legal council is needed (or not) and someone that's reasonably affordable.  From what you've disclosed, sounds like you can continue to wear the CEO/CMO hats if you get the right person in to take care of helping you scale the company.  Next would be  to outsource the CMO role until your cash flow and obvious project and campaign demands justify a full time person.  I'm happy to make an introduction to a CMO for Hire, who formally ran AT&T Wireless, Thomspon Reuters and Dunn & Bradstreets Marketing Deptments.

Mike Moyer

August 13th, 2016

Most of the answers you will get to this question will be based on some form of guessing about future valuations and doling out equity in fixed chunks. Please ignore these answers. They are wrong. These answers will base equity on what people say their going to do, not what they actually do.

The right answer is to use the Slicing Pie model. Slicing Pie is a simple formula that bases the equity split on the fair market value of each person's contributions of time, money, ideas, relationships, facilities, supplies, etc. It is the only way to get the split right. ALL other models lead to conflict.

Think of your startup as a game of Blackjack. You and a partner want to play together and split the winnings 50/50. You each bet $1 on the same hand.

The dealer deals two Aces. Hmmm... you didn't expect this, but you want to take advantage of the hand and split the Aces and double down. Your partner is broke so you bet $2 more. 

Does 50/50 still sound fair?

Of course not, you deserve 75% and he deserves 25%. No matter what you agreed to, it's logical that your share of the winnings should reflect  your share of the bets. 

Startups are the same thing.

When you contribute, you are betting the fair market value of your contribution.

You have already bet a lot. Your freelancers have not, but they have bet a little. They have bet whatever part of their compensation you didn't pay them.

Just keep track of the bets and apply the Slicing Pie formula. When you raise money or reach breakeven the formula will show you the right split.

I've written a book on the subject and you may have a copy if you contact me.

Perfect-Equity-Splits-for-Startups-Slicing-Pie.jpg

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

August 16th, 2016

Zero. Sell equity to investors. Hire the best people to get the job done.  Employees or sub-contractors can be fired. Partners can come with problems, one which that no one wants to talk about is sub-standard work.  "I don't have any money to pay anyone" is a problem that you need to solve. If your product is everything that you say then investors should be willing to invest. (personally, I would have asked at least 1000 people). Many small businesses started with loans or investments from family and friends. You need money to build out your product and get it to market. Set a budget. Some of the smartest business people I know get their coding done in India. Approach people who already know you for money and get it done.  The idea that employees need to be shareholders is grossly over-rated.

Thomas Buchan Freelance Cinematographer

August 13th, 2016

We've done 7.5 to CTO and COO vested for 4 years plus a small salary. 

Armand Sepulveda Co-Founder & CEO at Dycap Media Solutions, Inc

August 14th, 2016

It definitely depends on how much you need the individuals. If they're not great for the long term and you have no money to pay them, perhaps profit sharing for the first year of sales (giving them a small percentage)?

If you're bringing on a solid co-founder I would easily say give them over 20% if you're not paying them.

Angel List has an extremely great breakdown of salary and equity, depending on where you are: https://angel.co/salaries

Highly recommend you check this out.

Alf Poor Chief Operating Officer at Global Data Sentinel

August 16th, 2016

I like Marcia's perspective, but it could prove too conservative for a software start-up in an area such as NYC or San Francisco, where the c-level come in with their hand out, same as the dev talent expectations. There's a shortage of good people, and they know it and it reflects in the negotiations. To Marcia's point, build in some security via a good start-up-savvy attorney. He'll likely have you put a 1-yr cliff on the vesting, so no one can come in and vest a chunk of stock without proving themselves. You'll know well before a year if you need to jetison someone, and they won't leave with your valuable equity.