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What's a reasonable salary and equity to offer a first employee for a seed start-up?

I have a long time non-technical friend (specializing in marketing), who have recently launched a social start-up and attracted some seed funding, after building a prototype with contractors.

He hires now his first full-time employee for the role of lead software engineer, and asked me regarding reasonable equity and salary to offer.

I think that single digit equity and 50% of market salary (with time-based increases) would be fair enough, any opinions on that?

22 Replies

Shobhit Verma
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Shobhit Verma Entrepreneur • Advisor
building an adaptive recommendation engine
Is the lead expected to be CTO eventually? In that case equity needs to be a double digit number. One of my friends at 500 startups thought anything less than 15% is a joke if he is the only tech leader you have. If you have several strong leaders, it could be different.
Michael Meinberg
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Michael Meinberg Entrepreneur
Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)
Yes, and I think that if they are giving 50% off salary for a while, they are investing in the company (whatever the value of that 50% salary is) so the % should be higher. I think if they got pretty close to regular salary and were not going to be the CTO, then maybe 2% would be OK (for the lead developer). If you are making them the CTO, and they are investing by giving up salary, then Shobhit is correct, better be closer to 10 to 15%.

You want your lead developer/CTO to stick around.

Michael Kovacs
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Michael Kovacs Entrepreneur • Advisor
CTO at Samsung Accelerator
On the face I agree 100% with Shobit.. what incentive does someone have to take 50% market salary AND little equity? The reality is it's whatever the market will bear but we are missing important pieces of the equation that would be a good reason for such a "low" offer... Who is this founder? Can he/she attract the right people? How much money raised and the terms? How many rounds of funding before an event? How much traction is there now? How big is the potential? How unique is the product? How much importance does technology play vs. sales/marketing? What's the moat? etc.

Like I'd take single digit equity and 50% salary on Bill Gates' next startup as employee #1. :-)

But for your garden variety entrepreneur with a reasonable idea that's got some initial traction but a ton of risk, that's going to be too low for my taste.
Michael Meinberg
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Michael Meinberg Entrepreneur
Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)
Very good points, Michael. And if Zuckerberg calls, I too would be onboard with single digit equity and 50% salary!

Jake Carlson
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Jake Carlson Entrepreneur • Advisor
Software Development Manager at Oracle
I agree, that small amount of equity at 50% salary would only fly for a desperate candidate or if the idea is so undeniably a gold mine that he/she doesn't care.
Lalit Sarna
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Lalit Sarna Entrepreneur • Advisor
Business & Technology Leader
Here is a modified version of my answer on another thread

Bringing on CTO talent based on equity can be tricky. Even tricker when you throw a little money in the mix. @Michael and @shobit have some great thoughts around this.

Founders often get emotional around idea of ownership and the notion of first risk.

So I offer another point of view that may help out things in perspective:

While I can relate to the hardships in getting some momentum behind a new idea, chances are that majority of the work still lies ahead of you.

Even after raising seed, most startups still have to do 98% of the work to get to a decent exit.
99% will fail and most of them due to bad execution.

So I urge my peers to pick the founding team wisely. Once you are sure about the candidate, focus on maximizing the chances of success by sharing equity based on the workload and risk you expect that team member to carry.

Stas Oskin
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Stas Oskin Entrepreneur
CTO at eyecam
Thanks for all the answers, these are some good points.
Being always a technical co-founder, I never was personally in situation where the company was without a technical lead, hence my estimations were probably too low.

The lead developer is indeed hired to eventually become a CTO, based on the performance of course.
The seed is within 0.7-1M$ range, based on milestones.

So to recap, a fair offering would be either within 10-15% / 50% of market salary, or say 5%-10% with 100%?

Thanks again.
Thomas Jay
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Thomas Jay Entrepreneur
iOS / Server Architect / IoT / BLE / iBeacon / Apple Pay
Why would the first employee get anything below market value, if anything it should be above since its a start-up.

Where is this located?

In San Francisco you would never find anyone as an employee below market value, everyone expects stock as well.

He is an employee not a founder, he did not have the idea and did not put the time and energy into the company, he will get paid, he could get fired, the company may or may not succeed. Its not his input that will drive the company, again he is an employee.

He may be a key employee and you would want to make him happy, again this is in a market salary and shares, I suspect you are not actually giving him part of the company put might offer him shares or options if he gets vested, this may be over 4 years so again unless he is around for a long time and you are around over 4 years, he would not be getting anything special, more likely then not he will leave before then anyway.

Man up and pay him what he is worth otherwise he will bolt at the first real offer when times get bad or the company has a down cycle.
Stas Oskin
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Stas Oskin Entrepreneur
CTO at eyecam
@Thomas - thanks for your remarks, do note that this is not my company and I merely act in an adviser role :).

Please see my clarification above your post.

Thanks.
Michael Meinberg
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Michael Meinberg Entrepreneur
Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)
@Stas: Yes, that seems fair. And 10% with a 100% salary is probably generous, but if the person is really talented and responsible for the core of your business, that would be worth it. You want them to be with you for the long haul, changing key team members mid-stream is a pain.

I am on both sides of the fence, I am both a founder of a software company, and while that is getting off the ground I am a independent contract iOS developer. As contractors that build out the app for companies, we offer a discounted rate (10% to 20% off our rate) and ask for 5%. If we really, really like the idea and seems it has real legs, we would probably sweeten that deal.
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