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How much equity to give a new team member in a startup?


I want to describe my situation and get your thoughts - as many as possible - on what is a fair offer to a new team member in a startup.

I started my company a year and a half ago of which I am CEO. During that time:
+ I brought in a CTO and a full-time developer to build version 1.0 of a platform - the CTO put in 5 months of unpaid sweaty equity, and the full-time developer 10 months
+ Put together a world-class advisory board includign well-known names, and brought in a head of BD with deep connections with truly major investors
+ Put in $70,000 of my own money, brought in $25,000 from an angel
+ Launched the scalable platform with various partners
+ Got some modest/moderate success which led us to realize I need to expand the offering (the expanded offering uses the technology we built and adds to it additional features)

I am considering bringing on board a good friend of mine who's deeply knowledgeable in the industry. He has past experience fundraising as well, and would own fundraising for our second round. He'd start as COO with - if he does well - become CEO. He's been part of the discussions to expand our product offering.

Few questions (would love your thoughts on):
+ How much equity is fair to give him (e.g., X% of company)?
+ Should there be vesting? If so, how long?

Obviously, there's different viewpoints but would like to know what you'd think is fair. Thanks for your thoughts! The more the better.


17 Replies

Nick Damiano
0
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Nick Damiano Advisor
Co-Founder & CEO at Zenflow
Is he getting paid from the beginning? That's a very important consideration. I'm guessing not, or only minimally, since you don't have much money into the company. Something around 20% sounds right, but it also depends on how you split it initially with the two technical founders.

Always have vesting. Standard is 4 years with a one-year cliff.
Jonathon OBryan
0
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Jonathon OBryan Entrepreneur
Founder of The SmartSheet
20% is way too much... But, would need to know how salable your product is, that is very important, when considering... How much revenue per year for the next 3 years, with this guy aboard is possible, then start running numbers, and the percentage will jump right up and smack you in the face, trust me... And it will be fair for both parties... Resolve this issue now, so you can continue your momentum, by all means don't let this splitting of equity be a major factor... win/win/win situation, is always best, the third win is the business itself!!! Based on what I read, I believe you start at 5%, which is fair enough, this is assuming you earn 100k NET in sales per year... Just take action, and the answers come all on their own, like this format here...
Nick Damiano
0
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Nick Damiano Advisor
Co-Founder & CEO at Zenflow
@Jonathon Assuming he's not getting paid, this is a co-founder. He's also a potential CEO who may be the most critical person in the company. From what he describes, this company is far from a slam dunk on product-market fit, and the overwhelming majority of the work lies ahead.Companies always make the mistake of overestimating what proportion of the work is behind them. They're frequently off by an order of magnitude. At 5% he would be getting absolutely fleeced.
Jonathon OBryan
0
0
Jonathon OBryan Entrepreneur
Founder of The SmartSheet
They provided very little information on product or pricing, or fit for that matter, really hard to determine, but she could do a pre-investor evaluation on their business for free... And I said 5% as a starting point, so many other factors to consider... Too many to mention as you probably agree... I wish them luck, and much success!
John Barley
1
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John Barley Entrepreneur
Insurance Broker | Risk Management Expert | Organisational Health Coach

I have been told that you should never do or go into business with a friend . If it all goes pear shaped 1) you loose a friend 2) it gets really really ugly .

If you wish to have a partner it may be prudentto find a person or persons that add real value and can be a contrast to yourself but you need that person to provide a balance.

Furthermore if you keep friendships out of the equation then you not being swayed by the heart and more from the point of logicand thus your questions resolve themselves

Alex Chan
3
0
Alex Chan Entrepreneur
Co-Founder at DataNovo, Inc.

Not to get overly mathematical, but there's a formula that you might be able to use as a starting point. If "X" is the average outcome for the company with the addition of this friend of yours, then he is worth "Y" such that X = 1/(1 - Y). For the company, this translates into Y = (X - 1)/X.


In your case, if you feel that his tenure and contribution would increase the average outcome of the whole company by 20% ("X"), then Y is (1.2 - 1)/1.2 = .167. So you'd break even if you trade 16.7% of the company's equity for him.


It's very difficult to make any assessment without knowing whether he is being brought in as a co-founder and whether he's being compensated financially. If he is for both, then you should up the ante. If you are recruiting him as one of the first employees, a different set of rules governs. Generally, you try to strike a balance between his compensation and his equity. Higher compensation means lesser risk, which yields lower equity (and vice versa).


"Standard" vesting is 4-year vest with 1 year cliff, as Nick has succinctly stated. I would not recommend deviating from this standard unless you have a reasonable justification.


As a side note, most early-stage startups do not go out and recruit COO. Hiring an experienced, full-time COO may cost you more than you pay yourself. Are you willing to make the financial sacrifice? Can you realistically forecast additional revenues you'll gain from the decision? Put another way, will hiring the COO free up enough of your time that you can focus on generating additional sales or raising capital for the company? Or will product quality improve as a result of the new COO that will in turn improve client retention and repeat business? Maybe that you are better able to control costs because the new COO will be accountable to do so? If your responses contain more than 2 maybe's, I'd reconsider and not recruit one at this time. Maybe's, unpredictability, and unforeseeability are key recipes to disaster. So avoid them at all cost.


Until you can answer these questions for yourself with great certainties, it would be unwise to invest your time to recruit, hire, and train a full-time COO for your company. Instead, you might want to consider hiring one on a part-time basis-perhaps some random John Doe or Jane Smith with relevant work experience or a retired executive-to test whether your decision makes the most economical sense.

Vinayak Rajanahally
0
0
Vinayak Rajanahally Entrepreneur
Founder & CEO at eventValue
Please share other vital details like - Your Current revenues, profitability, equity split amongst cofounders, salaries, etc., New COO's expected future contribution in terms of revenues, profits, his current market salary, etc.,

Without above details, any suggestion will be vague and guesstimates which may not be helpful.
Neil Gordon
0
0
Neil Gordon Advisor
Board Member, Corporate Finance Advisor and Strategy Consultant
I suggest erasing "percentage of company" from your mind, and think in terms of value, instead.

One approach is this: (i) Project (i.e., guess) the future value of the enterprise; (ii) evaluate the risk of getting there; and (iii) discount the future value, accordingly. (Note, based on what you've told us about accomplishments, you get a much higher enterprise value today than you might have gotten previously!)

With enterprise value in hand, it's a simpler matter to determine the reasonable range of an equity grant.
Richard (Dick) Benkendorf
2
0
Managing Partner Technology Impact Partners
make it performance based
Jonathon OBryan
0
0
Jonathon OBryan Entrepreneur
Founder of The SmartSheet
go to: SCORE.com :)
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