Salaries for Technical Co-Founders- When to Pay and How Much?

September 16th, 2013

I have been negotiating with a technical co-founder. However, he needs to have a salary to come on board in more than an occasional advisory capacity. How much salaries are others paying to a technical co-founder if they are a seed-stage company (no product yet)? Do you pay the salary for the co-founder only if they are performing the technical work? For example, this person wants to manage other technical staff. So I would need to raise enough funds to pay at least one technical staff or contractorplus the co-founder. (Or skip the co-founder and just hire several lower level technical staff.)

Or do you only make co-founder agreements for equity only and not salary?

If you are paying a technical co-founder prior to having a product/revenue- how did you raise funding?

What would be an upper limit on technical co-founder salary (considering that the founder is not drawing any salary, is currently funding the company, and the company is a year or so out from revenue).

Karl Falconer

September 16th, 2013

Hi Candice,

I think the simplest thing to do is to ask this person what they want. Equity and/or salary. Generally the founders are the lowest paid employees on a company. Maybe 1/3 of market rate for a founder vs employee.

This was a red flag for me:

> For example, this person wants to manage other technical staff.

If this person can not build and ship a product themselves, they are of no use to your business in its current stage. Maybe a better role for this potential CTO is to help you find a contractor who will actually build your product, then if things move in the right direction (revenue, funding, etc.) you can hire them on.

I think one of the worst things a new company can do is to hire someone who's primary role is to manage other people.

Karl

Tim Kilroy Analytics - LTV - Boosting Profits - Digital Marketing

September 16th, 2013

Let's not over-romanticize the "no salary" thing. Generally, foregoing salary is NOT a mandatory exchange for significant equity. But in a pre-revenue/pre-funding startup, this boils down to a more simple equation - can you afford to pay this person what they need to be paid so that they can work for you. In this environment, no one gets paid for the work they do, they get paid so that they can do their work.

So, if your CTO candidate is a plus player who can drive your business to where it needs to go, can assume the leadership and the risk, then pay them a salary and give them the equity necessary to insure their involvement. There is no formula that says if I pay you $100K, then you can only have 13% equity, but if I pay you nothing you get 29%. That isn't a real thing. Focus on what this person brings to your business right now. If they are the right person, then what you pay them is relatively meaningless because they will make your business possible. Think of it this way - what would you do if you don't hire them? How much more would it cost you in time and dollars to find an equal or better replacement. Delay is the real cost.

The real currency of young companies isn't equity or cash - it is opportunity. That is what your team and investors buy into. Delay kills opportunity. If you have the cash to hire the right person, do it. Sure you can fiddle with equity, but the cash is the price you pay to make YOUR equity worth something.

I know that there is a fetish around equity if you are a founder, that you must have it all. That is small thinking. Be generous with equity because it means more people share in your dream (and your currency) of opportunity.

Anonymous

September 16th, 2013

In my opinion, if you're not raising money to pay salaries for founders and initial employees, then you're not raising enough money for your business. How much depends on your circumstances. For example, a young guy, with no family and a killer idea might be able to work for very little, but a seasoned CTO with a strong background might require much more; and he's going to provide the push the company needs, experience you'll lose out on if you can't pay him. I've seen a number of businesses shoot themselves in the foot with the whole "you work only for equity" argument. If the business is worth investing in, it's worth raising the money to pay the principals.

Marc Dewalle

September 16th, 2013

I would not offer both. Either you become a co-founder and get a decent amount of equity, OR you're employed and get paid. The "pay" for a co-founder comes later. If you give pay and equity, the new co-founder is not taking any risk. Can't have the cake and eat it to!

Britt Myers Chief Product Officer at HomerLearning, Inc.

September 16th, 2013

I agree with most said here. However I would consider a significantly reduced equity share in exchange for the needed salary (assuming you can afford it). In this case I would offer 1-5% equity depending on whether the salary is below market rates and how much of a star this person is. It's not a bad thing to save some cash short term and attract valuable talent to show off in your funding pitches. You just need to be smart about it and not give too much away. As most have said here, this person cannot have his/her cake and eat it too.

Anonymous

February 20th, 2018

I am a technical co-founder and I disagree on most of the comments here.

I do not even look at non-salary offers, or equity only deals. Personally I always look for a mix package between salary and equity.

WHY?

Most of the startup rely on technology, either an app/website/or something in between. Product and services are based on technology.

So, for an early co-founder, there is a "huge" amount of work. Long hour working days, nights and even weekends to achieve a MVP.

So basically I'm risking billable hours of work for a small equity, while the other part, is taking most of the equity and risking just an idea...

The risk that a technical co-founder is taking is too much i think. So, either you compensate them or you give same equity as the founder.

This is what I see from the side of a technical co-founder.

Fortunately, I came on board in a great startup, and the offered me a mix, so I'm happy. However, I see so many non-sense offers with zero" cash... I pass them all

Anonymous

September 16th, 2013

A person isn't "technical" unless they are actually building something and creating value.

Managing devs is just something you learn with experience. Spend $1k on 3 different projects with 3 different contractors on odesk and you will be functional in it within a month.

And a cofounder doesn't get paid until you get a salary as well.

I am happy to help advise you for an hour on getting your MVP specked out and ready to build.

Skype id: nReduce

Anonymous

September 16th, 2013

If you are going with the small amount of equity please make sure it is vested with a 1 year cliff.

If in 6 months the person isn't performing you can let them go and they have nothing.

The worst thing that can happen with this is you give them equity, they do nothing and it hurts you in the future when investor look at you, see you gave a person equity for nothing and they think you don't know what you are doing.

If the experienced person tries to talk you out of the cliff, that is a sign that they are not a good fit and it will probably end badly.

If you don't know about vesting and cliffs read this :

http://thestartuptoolkit.com/blog/2013/02/equity-basics-vesting-cliffs-acceleration-and-exits/

Jake Carlson Software Development Manager at Oracle

September 16th, 2013

And of course I would be remiss if I didn't plug the idea of just hiring an interactive agency to produce the MVP in the first place. It's a low risk way to get something tangible out there that you can sell. My company has helped startups at various states of growth, and I believe in many cases this arrangement is much more cost-effective than hiring on a full-time technical co-founder. I've seen many cases where a firm builds an MVP, and then some or all of that firm merges with the startup once it gets off the ground.

Luke Szyrmer Forward-Thinking, Creative Software Product Manager and Author

September 16th, 2013

I guess it depends on your definition of founder. I would think that a founder puts money into the company, in return for equity, whereas an employee takes a salary. If you are pre-product, and your CTO can't or doesn't want to make the product themselves and is already asking for a salary, it doesn't seem like they're cut out to be an entrepreneur.

As Greg mentioned, you do have the option of going for outside investment. I think it depends on what you're trying to do. These days for most tech & software products you should be able to get an MVP together without any significant money. If you need to go for money, it might look like you don't really know what you're doing or you don't believe in your product very much. It's not like the 90s where you needed a few million to get something off the ground. If you're doing something else, well then it depends. :)

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