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CTO compensation

Our start up is about to make our first offer to a CTO and we'd like to get input on salary & equity that would be appropriate. Here is our situation:

2 full time founders (1 product person, 1 marketing) - we are taking no salary and have been self funding the company
We recently raised a seed/angel round (~$500k)
We have a great offshore development team and the product will be ready to launch in the next couple months
We need to bring on a strong technical person to get us ready to launch and beyond

We've found an excellent CTO candidate and are making an offer. Here is the question...
1. He needs/requires a salary and is asking for something in the range of "market" so not really a huge discount to market
2. What is the right level of equity that we should offer? We have heard anything from 2% to 20% and are really seeking input on this point.

Any advice would be greatly appreciated.

Wendy

26 Replies

Bill Kelley
4
0
Bill Kelley Entrepreneur • Advisor
Business Mentor
2% max with 3-year vesting if you have to pay "market rate."

I question whether you want someone with so little skin in the game. OTOH, we all have different financial situations... just proceed with caution. You will burn through your initial funding fast paying a market rate and your CTO may end up being the largest consumer of that initial money. Are you prepared to risk it all? Because if your CTO candidate isn't the one that will help close a first round, you could find yourself in a tight spot.

This is a longer discussion, of course, and highly dependent on the personality, skill and commitment level of your candidate. But I wanted to throw out a couple things to ponder...
Joe Mellin
2
0
Joe Mellin Entrepreneur
View My Learnings
Man if you guys are doing fine with development and are pre launch, I would not hire someone who needs a salary.

There is a bunch of talk (seen bens blog) about hiring for who you need right now not who you need in 6 month or a year.

So I would suggest not hiring the person. Keep working with off shore, launch the product, see if it gets traction then revisit the hiring. If you need to pivot post launch having a fully salary Dev can really hurt your business.


David Joerg
1
0
David Joerg Entrepreneur
President, GGTracker
Best essay I've seen on the topic:http://paulgraham.com/equity.html

As you'll see, it depends on a big list of things. If your product is truly technologically advanced, then the CTO is more core to your value.

How long would it take you to find another CTO you like as much as this one? If you don't hire this CTO, you're going to be going that much longer without one. How much is that time worth?

Mark Piekny
0
0
Mark Piekny Entrepreneur
Engineer, Consultant & Entrepreneur
Yeah. Your seed funding is substantial, but I still agree with Bill. Any C-level candidate, who would naturally want equity as such,should have skin in the game outside of an equity stake: cash, capital equipment, etc. Perhaps this individual is mearly VP material?
Cynthia Schames
1
0
Cynthia Schames Entrepreneur
Founder & CEO, AbbeyPost
Wendy As an early stage startup with "only" 500K in funding, this CTO seems to be asking for the moon. A market rate plus equity is really, really very generous. 2% equity is WAY too much for an early stage employee being paid market rate at a C level tech position, in my opinion. I would offer either close to market with 0.05% equity (a taste), or a significant discount on market salary with 1-2% equity. Best, Cynthia
Fahad Siddiqui
1
0
Fahad Siddiqui Entrepreneur • Advisor
Startup Founder
This one's hard to just give a blanket answer to.

You want the person to be committed to the success of the company for the long term, so obviously, you need to give enough equity that he cares.

At the same time, you need to be fair to yourself, keeping in mind that you will be diluted in the future, and the math needs to make sense for you eventually.

I'd say somewhere between 5 - 10%, but I'd probably try to trade some salary for equity. Not with the intention of being unfair, but to align interests.

Market salary deserves market equity, which would be around 1-2% for a company at seed stage. But, for a senior position, that low amount for equity does not bode well for the long term.
Ryo Hang
2
1
Ryo Hang Entrepreneur
Do More
share risk, share responsibility, share the success.
Mitchell Geere
1
0
Mitchell Geere Entrepreneur • Advisor
Founder at Daybear
I totally agree with Joe. Right now you are simply trying to see what works, you will not have scale issues right now and if you do you can raise more money (i.e. you have a valid product and market fit) and hire at market rate.

If and when that happens I work with a sliding scale. On the left I have full market salary and the right I have full market equity. Each side means you take one without the other. The more salary the CTO takes the less equity, the more equity the less salary.

I found that someone who is fully into the business and not a founder would set you back about $120k per year with a 1-2% option with a four year vesting (1 year cliff). Keep in mind $120k is pretty low especially for today's market in San Francisco and New York particularly elsewhere $120k is very reasonable and probably at the high point.

Your biggest challenge right now is to make sure you are getting your product built as quickly as possible to get validated as soon as possible. A CTO outside of this core vision may add additional overhead beyond the salary and equity. The guy you found could start slow for pure equity but part-time (I have done that before too) in a try before you buy type situation.
Mike Moyer
1
2
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
If you are paying him a market rate you shouldn't have to give him equity because he is not taking any risk. It's not like the job market is so secure that he is risking job security. So, if you can pay him a full salary then leave it at that. If you are paying him less than his market rate you should provide a equity in return for whatever compensation is at risk. The best way to allocate equity in a startup company (by far) is by using a dynamic equity split! In a dynamic split he (and everybody else) would receive equity in direct proportion to their contributions (and what's at risk). If you already have a fixed equity split (which I never recommend), 2% would probably still be high if you are paying him a market rate salary.
Jake Carlson
2
1
Jake Carlson Entrepreneur • Advisor
Software Development Manager at Oracle
I would start him off with a low % equity and no (or modest) salary but retain him in a limited capacity as simply managing the off-shore development team. If you are already doing this yourself, it is not a full-time job. What you need is his expertise, not necessarily a lot of his time.

Giving him a bit of equity for his minimal time commitment is more than fair and allows you both a 'trial period' without making a huge commitment financially. When management of the product becomes more complex and requires a larger time commitment, hopefully either he will believe in the business enough to trade some salary for equity, or you will be in a better position to afford to pay him his market salary.

I agree with what people have been saying about treating each situation individually. In my case, I would not work as a CTO for equity only simply because I am not in a position financially to do so. That doesn't mean I am any less committed to my work, it just means I have a family to support / other obligations.

Just remember, it's not a 'all or nothing' proposition.
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