Finding cofounders

How much equity to give to bring CTO/ ? (Have Fortune 500 paying customers & funded/selected by TechStars)

Arnav Anand

July 19th, 2013

Dear Folks, 

Wished to get your thoughts on equity offering to bring a CTO to our company ? Now, I have been working on my start-up (www.resolutiontube.com) for an year and a half but have recently have been getting some solid traction. We closed paying fortune 500 customers, selected/funded by TechStars, excellent results from pilots in the field, got some press and few other successful entrepreneurs backing us.  

Currently, we are a team of well rounded four engineers (who does everything) and are looking to add a member with software architecture experience as CTO on our team. I am also willing to pay near to market rate salary along with substantial equity. 

One of the technical person who I am considering has an excellent education background, good architecture experience and some good start-up experience. He would be an excellent addition to our team and stabilize our product. How much equity should I offer to give to bring CTO ?

Sincere thanks for sharing your insights,

Arnav


Jonathan Vanasco

July 19th, 2013

Speaking as a former CTO--

At your stage (post financing, traction), equity compensation isn't typically done by % of the company, it's by a dollar amount based on the company's valuation.  There are a handful of blogs and quora questions that talk about this.  Here's one from Union Square Ventures' Fred Wilson -- http://www.avc.com/a_vc/2010/11/employee-equity-how-much.html  ; I've also seen situations where hires are planned out of pre-allocated option pools too ( http://venturehacks.com/articles/option-pool-shuffle#market ). 

Here are 2 takes on the Paul Graham concept that may help you think through -- http://venturehacks.com/articles/equity-equation , http://myventurepad.com/akarrer/80807/equity-early-employees-early-stage-startups )

Equity is also given for a few reasons, the top two are :
- offset scaled salary
- signing/retention bonus

If anyone is getting a market-rate salary, their equity comp goes down dramatically.  Someone getting 250k a year should not be awarded with 5% of the company.  If they took a salary cut down to 50k a year -- then maybe.  

With a market-rate salary, I don't think they should expect anything more than 3%.   You give someone 10-20% if they're a partner/co-founder. This is an employee.

Mohammad Forouzani CEO at Forecast.net

July 19th, 2013

It really depends on how much risk is still involved in the business. If you are really offering near market rates, then you shouldn't have to give up much equity - maybe up to 5%.

I suggest you have a look around angel list and see what the rates are both in terms of pay and equity numbers from other companies looking for a CTO.

It also depends on how much funding you have, if you only have only raised a couple hundred thousand - an experienced CTO wont join for 5%. Another aspect is the negotiation skills of the CTO, he may want more, and if you feel he is the ideal candidate, then you may have to give up more to make sure he joins.

First step is to ask him/her what equity amount they want - you may be surprised at a low number, or if its a high number, understand that even if you convince them to join at significantly lower equity - they will not be happy about it. It's never good to have an executive team member who is not happy because they feel are not being fairly rewarded, sooner or later they will leave.

Robert Clegg

July 19th, 2013

Make sure you have a vesting schedule! Your company will change drastically in 1,2 and 3 years especially if you are taking on new investors. Your company will go through innovation and growth phases which have different challenges. You can't afford to have someone walk away fully vested after a year.

I'd also encourage a little patience in the negotiation. Everyone here says 30% is a RED FLAG! But are you expecting your CTO to be a seasoned startup entrepreneur who knows valuations, option pools, and negotiation tactics? You yourself are asking the question here. I would instead use this as an opportunity to engage the person in a negotiation and see how he reacts and interacts with you. "How did you come to that number?" might be an interesting question. Have you worked in startups before and what equity percentage did you have there? is another. This guy may just have no clue about stock and options but may be a very valuable resource. It will test your ability to communicate to him what the right percentage is. You will face this hurdle many times as your company grows.

Note: I'm not saying 30% is the right number, not by a long shot. I'm just saying this person may not understand what he's asking for and that isn't really his job requirement.

ps - I'm starting to really hate reading HR blogs about "mistakes" in interviews where if the person doesn't pass this or that question they are X-ed immediately. I read one recently where the ideal candidate made it all the way through the interview until the end when the HR person asked if they had any questions. The ideal candidate said "no". The HR person took offense thinking the person hadn't researched the company and wasn't eager. I push back, - ask why not and engage a dialogue. That doesn't show good communication or negotiation skills. And trust me, you are going to face dissonance down the road no matter whom you hire. So practice now... whether you hire this person or not. You may gain some insight.

Anonymous

July 19th, 2013

If he seriously asked for 30% + market salary, that would a red flag for me.

I agree with Jean and Jonathan that in the situation you describe (validated product, paid customers, dev team, seed money...), he really shouldn't ask for more than 5% on a 4-year/1-year cliff vesting schedule, unless he brings some unique experience to the table (as Jean points out).

I found this very interesting blog post by Jason Cohen (aka asmartbear.com), which confirms the 3-5% range in a "common" situation (of course, there's no such thing as a common situation ;-) ): http://blog.asmartbear.com/cash-equity-compensation.html 

Vadim Oss Co-founder at Rentini

July 19th, 2013

If you are willing to pay near market salary ($150K-$250K really?) I do not see how equity compensation could be more than 5%. Make sure there is a cliff on his/her vesting schedule, normally 1 year. Many things could go wrong with this engagement and you don't want this person to bail out a few months down the road with a piece of your company without putting enough time and sweat.  

Keep in mind that you will make an employee pool in round A post money. This will require 15%-20% equity allocation for all employees. Think about it, you need to allocate some for CEO (in case you don't run the company or VC puts their CEO), CMO, and everybody else. Also you can always give more equity to the same person anytime later if you see it's really working out well. 

Hopefully this article could help:

http://www.avc.com/a_vc/2010/11/employee-equity-how-much.html

I am curious what your TechStars mentors suggest. 




Monique Barbanson CEO and Founder at 3PM Revolution

July 31st, 2013

Arnav, just checked your site. It looks like you are a B2B company. If you and your current partners have built the product, I'm curious why you're not considering growing one of you guys into the CTO/Head of Product role. You should be able to find plenty of mentorship help and it would guarantee that the CTO would see the product as his baby, because he actually helped build it from the start.



Rob G

August 5th, 2013

30% is HUGE chunk for someone who currently has no skin in the game and, with market-rate salary, won't have much if any in the future.  You want your C-level hires to have a significant financial interest in the success of the company and the financial incentives to cause them to do super-human things to get to and across the goal line with also compromising their ethics.  "rule of thumb" (such as it is in this game) says 5-10% for your professional CEO. Unless the CTO is also a founder then their compensation should be lower than the CEO.  Not to second guess your game plan, but based on your cursory overview of the company, i'm curious as to why you are not focusing more on rounding out your team with CMO/CRO/etc. rather than more technical? Good luck. 

Jean Barmash Engineering Program Manager at Tradeshift

July 19th, 2013

I am also a CTO-type. 

Agree with Jonathan, if they are making market salary, then the equity should be pretty small, especially in light of the traction you are seeing.   I think the range of where you are is typically 3-8%, and your situation sounds like it should be the lower end of that range, arguably even lower if you already have four engineers working for you. 

Some of it depends what he brings to the table and how senior he is. Like if you need a lot of machine learning, and he has PhD in the field, AND a lot of experience in the space, that's obviously different since it's very specialized skill.  If he is more general architecture / management person, then that's a bit less rare.  

Michael Barnathan

July 19th, 2013

15-20% without a market salary, 5% with, at your stage. Your situation is a little unique because you have a team of developers already. Look for someone who can manage them and has the ability to come up with a technical strategy. Having an "architect" alone might not necessarily result in a better product. It's better to find a dev team that also knows the "big picture" of how the software is organized.

Arnav Anand

July 19th, 2013

Mohammad - Valuable Insights!  

You are right, in my case I was thrown back by the high number - 30%!