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What is the average amount of equity to be given to a CTO?

I have been a solo-entrepreneur on my company Price Patrol for 3 + years now. I have outsourced all development, however for my current fundraise many investors want to see a CTO already on board or willing to jump on post funding.

What is a realistic equity % to offer him/her?
Pay range for a top notch CTO?

Keeping in mind I have raised from personal investment and family and friends $500k+.

Thank you for your insights!

PS: If you or someone you know is interested in this position, that is my main goal of being on FounderDating. Looking for a talented, full-stack engineer with team leadership abilities who enjoys a challenge!! Message me for more details!

-Vince Marconi
CEO/Founder
Price Patrol
PricePatrolApp.com

12 Replies

Joe Albano, PhD
8
0
Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
Wow this question gets asked A LOT here. A few things to consider:
  • Equity is not compensation - you can't pay your rent with it
  • Equity is not deferred compensation - there is no guarantee it will ever be worth anything
  • Equity serves a different purpose than compensation - compensation acknowledges past accomplishments, equity encourages ongoing engagement
  • Equity is subject to dilution
So some of the key questions are:
  • How much are you willing to pay this person (in addition to the equity grant)?
  • What guarantees are you willing to make with respect to employment, compensation, and the value of equity? (I could tell you stories!)
  • Under what circumstances will the equity have value, be valued, and be convertible to cash?
There is lots more to consider - but this is a good place to start. Cofounder/key employee arrangements are tricky and most startups spend far too little time considering them fully. I see too many of them after the train has come off the tracks!
Josh McCormack
1
0
Josh McCormack Advisor
Owner, InteractiveQA - Marketing, Web Dev, Testing, Data & Market Analysis
Good reply, Joe. Equity is a gamble, and it's value is based much more on likelihood of success than market share. Sadly, there are a near infinite number of things that can kill off a startup. And if the decision maker isn't willing to sell the company as fast as possible, the risk goes up.

BTW,http://pricepatrolapp.com/ seems like a fun idea. Just wondering if the tech couldn't be used elsewhere, too, for things like homes, cars, employees, best places to place retail businesses, etc.
Mike Moyer
2
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
This is a great resource:https://angel.co/salaries

If you pay him a fair market salary, any equity grant is a bonus.

If you don't pay him a fair market salary then the difference between what you actually pay him and a fair market rate is at-risk. It's essentially an investment in your company and he should get a % share of the company that is equal to his % share of the at-risk investments.

You time and your investors' money is also at risk.

Use the Slicing Pie model to make sure everyone get what they deserve. If you want a copy of the Slicing Pie book contact me through SlicingPie.com
Paula Weiner
3
0
Paula Weiner Entrepreneur
Founder & President, Weiner & Associates, Inc.
Great replies and important considerations Joe. I have an executive search firm and have worked with many start ups; as a general guideline a key first hire will receive between 1% and 3%, occasionally it's as high as 5%, but that's rare. All of the above considerations are important. In addition, will you be raising additional money and will that dilute established shares of the business. If you would like to have an additional information/guidance, you are welcome to email/call. [removed to protect privacy]
Joe Albano, PhD
1
0
Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
Mike - Interesting perspective. I always wonder how you "price" the risk. For example, if my contribution is worth X and we convince ourselves that X = Y% of equity (interesting in a pre-valuation company) but also agree that the venture has a 50% chance of success do I now get 2Y% as my equity?

The question of who takes on risk and who reaps rewards is always challenging and an important, often overlooked, part of the "while we're still friends" conversation.
Mike Moyer
0
1
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Joe- Slicing Pie does not price the risk, only what's at risk. In other words, the model counts the bets on the table, not the odds of losing it.

Think of the startup as a game of Blackjack. We each bet $1 on the same hand. The odds that we will lose the hand is not relevant because we are both subject to the same conditions. What does matter is how much we each bet. Because we each placed half the bet, we are each entitled to half the winnings. That should be clear.

But let's say the dealer deals a pair of aces and we decide to split them and double-down. I'm broke, so you put down $2 more. Now you have $3 at risk and I only have $1 at risk. Now an even split is not fair. You deserve 75% of the winnings because you placed 75% of the bet. Again, the odds of losing are irrelevant.

Even if we had agreed to an even split before we played, it would not be fair for me to demand half.

Startups are the same thing. We bet time, ideas, money, relationships and all sorts of other things. Each time we bet, we are putting the fair market value of the contribution at risk.

Startups need to track bets as they happen. It's futile to try and guess what everyone is going to bet.

Slicing Pie helps you keep track.
Chicke Fitzgerald
1
0
Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
Mike's book is the soundest methodology that I have found for looking at equity.

Vince, I would ask you another question. How have you gotten as far as you have? Your product looks great, but it looks like you may still have some data aggregation challenges, ensuring that the user gets results to his/her search.

A CIO may be more appropriate for you, taking a look at your overall strategy for the product, data, security, etc. A CTO can help you with the tools and platforms, as well as manage the development function (whether insourced or outsourced). You may find someone that has both skill sets (which is what I recommend for early stage firms), but it is rare. It is like finding someone that is good at both Sales and Marketing.
Clif Hirtle
0
0
Clif Hirtle Entrepreneur
Systems Engineer at Apple
Rather than providing a specific model beyond what has already been mentioned I will just say that I always found Startup's episode on the reality of dividing up the imaginary pie one of the most realistic depictions of the challenges in this space, what not do do, etc:

https://gimletmedia.com/episode/3-how-to-divide-an-imaginary-pie



Bert Wank
0
0
Bert Wank Advisor
Power Management Technologist ► Start-up executive ► Product Innovator
All good points, complex equation. Also consider your current funding level and your technology maturity, his/her value creation goal. For value creation guidance see www.worthworm.com. Evaluate risk-reward.www.foundrs.comhas a nifty tool for calculating equity contributions.
Must have skin on the game, preferably a (co-)founders cash contribution (out of cash=out of options to run the company). Does he/she have the ability to pay him/herself until a milestone is reached that either brings cash or investment to the firm? Run his/her funds for the fractional payroll through the corp account to test commitment,build trust. Successfulnegotiating!
mike precobb
0
0
mike precobb Entrepreneur • Advisor
Senior Vice President - Lyhtning, Inc.
It depends (safe to say). If you're truly starting up, he/she could be invaluable in both designing, implementing, testing the plumbing but also in helping in fund-raising. VCs find well-credentialed tech management very appealing. That part of the CTO valuation falls, somewhat, as product becomes fleshed out.
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