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Advice for negotiating better terms for a possible CEO/President offer.

Hi Founders,

I am in talks for a possible offer to run a company that is pre-revenue, and therefore cannot offer base pay. The company used to be hot in 2012/2013 in terms of being buzzy in TechCrunch type of circles, but has lately stagnated in their growth (company valuation -- I know this is useless, but I'll put it here anyway -- is estimated to be $3.5 mm, 2 years in. I know, not much).My feeling is that maybe it hasn't been managed as well because the current leader is busy working a full time, high-level day job elsewhere, for a rapidly growing, well-known startup. So, he wants me to take over his company, while he will act as my advisor.

My challenge is to lead several developers and interns who are distributed (no common place of work yet), and help jumpstart their growth. The offer so far is 10-15% equity vested over four years. I think this is a poor offer, considering it's pre-revenue, there's no pay, and the company is currently worth nothing except for a very low estimate on paper. I'd like to go full time for him for 25-30% over a 2 year cliff. Can someone who has actual experience dealing with this, or negotiating in this space, please advise me? You can write here or message me privately, either way. With private messaging I can give you fuller details, but, as this is still a discreet negotiation that is taking place, I cannot reveal the company or any specific names.

Any words of wisdom would be greatly appreciated.

Thank you.

20 Replies

Leena Chitnis, MBA
0
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Leena Chitnis, MBA Entrepreneur • Advisor
Content & Publication Manager at NetApp
Oops, tried to edit this post, could not. I meant they are offering 4 years vesting with a 1 year cliff, while I want 25-30% vesting over 2 years with a 6 month cliff.
Chris Carruth
1
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Chris Carruth Advisor
VP/Director. Strategy | Business Development | Operations | Product | Solutions
Leena-

I have gone through something similar. Without disclosing final terms my goal was to end up, realistically, with between 5% and 10% of the company, knowing there would be several rounds of capital raises with dilution happening each round.

In this case the company was an app company with a pretty narrowly defined target product and the preliminary diligence showed it would not take development of any proprietary software, i.e., so all components were OTS. In addition, backend and other functions were all available as services so no huge infrastructure cost either. Adequate marketing funds, based on reasonable and realistic customer churn, were included in the cash flow so while a chance that customer metrics would be worse than planned, the likelihood was low.

That being said, I started with 20%, and assuming the current and final raise is successful, then I will likely end up on the lower end of my equity target range. Vesting was done in 5% increments with 10% after two years and the remaining 10% vesting monthly years 3-5.

I had wanted a shorter vesting time but I accepted because I knew the people involved.

FYI - I had checked with several local VC connections on this and they were comfortable that the deal was "fair" to both sides. Another reason I accepted the longer vesting term.

Chris


Reuven Granot
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Reuven Granot Entrepreneur • Advisor
Corporate Strategic and Scientific Officer at Perlis Ltd
Leena,

I was in a similar situation, just the other side of the table. We offered the CEO 20% with one year vesting. The main task was to raise seed capital. The CEO did a very nice job, but was not successful in the capital raise and left after only one year leaving all the equity. The reason was the non realistic expectations to successfully raise a too large amount of capital to enable paying salaries to the whole team.

If you are offered for such a long period, means in my experience that the founders do not seriously believe in running a successful business. I would run away except I would believe that I am the right leader to change this unsuccessful start-up to a success.

Leena Chitnis, MBA
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Leena Chitnis, MBA Entrepreneur • Advisor
Content & Publication Manager at NetApp
Wow, 20% vesting in a year just to raise seed? Where can I sign up?! :)

Thanks for this information, Reuven. I am having doubts, too, but have yet to meet with the CEO. All talks have been on email for now and I will start discussing with him on the phone soon, then Skype, then an in-person meeting with him and his unwieldily large team, as that is how I'm comfortable doing such business. He is open about where his business has gone down, so this much transparency is actually a good sign, and he seems amenable to improving the equity percentage -- not that that may mean much if the company's not worth anything.

So how did that work...did you make the 20% contingent on your guy raising the funds? Sorry if that's a stupid question. I mean, he did put in some work at least. Did he walk away with nothing after a full year? And why do you say it was unreasonable to raise an amount of capital to pay the team? Isn't that what is needed?

Leena Chitnis, MBA
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Leena Chitnis, MBA Entrepreneur • Advisor
Content & Publication Manager at NetApp
Hi Chris and thank you. I guess I need to face the unpleasant fact that I will continue to dilute along with the company as we go through raises. Thankfully, I'm a hard negotiator when it comes to raising (or spending) money, so maybe I'll be able to navigate this ship so that everyone involved can retain as much as possible in the end. However, no matter what my percentage is, if the company is only "worth" 3.5 mil now, and, say, is worth only $10mm at Year 5 (as pro formas have conservatively predicted), I'm not really going to cash out with much (for the risk I take and the time I give). In my 20s I would have jumped at this, but I'm in my mid 30s with a huge ass b-school loan to pay off. I could easily be making $160k now at a real job and would maybe end up with as much money as one of these "CEO offers" 5 years from now....

Right?

I could use your wisdom on this...
Michael Brill
3
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
(I've been on the hiring side of CEOs for troubled companies). Just a few thoughts...

At this point I would basically ignore everything re compensation... to have this level of discussion on an email thread without meeting (or even Skyping!) seems *really* premature.

Tons of questions: Why is the current leader working a full-time job elsewhere? What is their cash/burn situation? Have they raised money? What are the current investor(s) thoughts about the company? What is the composition of the Board (the people who will make this decision)? Why do you think the employees and consultants will stay with the change? Are they being compensated? What does pre-revenue have to do with you taking a salary or not? And what does "stagnated growth" mean in the context of no revenue... growth of what? What about the market? The product? Why hasn't it been successful?

IMHO, a compensation discussion right now is just about neck-and-neck with a discussion about what type of shoes to wear on your first day.


Chris Carruth
1
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Chris Carruth Advisor
VP/Director. Strategy | Business Development | Operations | Product | Solutions
Reuven - as others have said, if equity vests after only a year and the main focus is simply raising cash, then by all means sign me up as well!

Leena - I agree, if a startup is only worth $10M after 5 years, IMHO, not much of an opportunity. Once you factor in the probability of a successful exit, which in most cases does not happen, it may not make sense for you personally. As you said, the experience of performing that role would be a great opportunity for someone looking for just that...the experience.

Financially I don't see it, unless you see a way to move the company to a much higher valuation much sooner. Of course, if there is opportunity to create sellable/licensable IP it might be worth a second look, but even then the terms are insufficient. Just my opinion though..

Chris
Reuven Granot
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Reuven Granot Entrepreneur • Advisor
Corporate Strategic and Scientific Officer at Perlis Ltd
I live in Israel and my start-up is a solution for elderly aging at home. This market is only starting to develop. We are successful to raise attention but at the end investors are still afraid to invest in this market. So, the CEO after one full year of hard work and close collaboration with me decided to give up. She walked away with nothing, even I would leave her some equity for her hard work. The CEO thought all the way that if a founder leaves, should not take with her equity in order not to be in an extreme situation, that people left with equity and we had not enough to give the new comers.
Currently in Israel and Europa as I see angels are not willing invest as first investors more than 100,000 US$. VC are not willing to even check you if you can't first show that somebody (not family or founders) invested at least this amount. They force us to find first small investments, which seriously extend the time we shall be able to start earning from selling the product.
I have a patent pending for IP, but can't really start the process before raising the seed money.
This is my story. Hope that can help you, but consider the different situation in your place.
Reuven Granot
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Reuven Granot Entrepreneur • Advisor
Corporate Strategic and Scientific Officer at Perlis Ltd
@Chris, it is not such a simple or excellent deal as you think/ If I can't pay salary for work, I have to pay serious amount of the equity. It is like a salary I have to pay. The CEO left with nothing only because thought that without achieving the goal (investment) the company may not be successful in the future and she did not want to remain responsible as one of the company directors. I also has a software developer resigned after 6 month without being able to do anything we can use. This person had also a vesting contract and he is now not with us, but has 3% of the company.
Definitely, it is a big problem how to enroll workers without being able to pay salaries and still try to be fair.

Anybody things that now, when I am again rebuilding the team, I should offer much less? How much less? I am now considering to follow advice ofMike Moyer? in his book "Slicing the Pie".
Alon Gamliel
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Alon Gamliel Entrepreneur
CTO, Founder at JobList.co.il
@Reuven Regarding the developer that left with 3% of the company. Maybe now it's too late for this, but have you thought about buying his part when you raise the money? Do you think this option should be written in the contract in first place?
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