What deal should I accept for a somewhat part time CTO position?


2

I am a developer with a few years of experience and someone asked me to work on his very early stage startup (2 people right now). The company is doing ok, not making a lot of money but it's boostrapped. I can see some evolution in the future, but it's never going to be the next Facebook - and that's not the plan.

The CEO wants to redo the website from scratch (the previous one was terrible) and the previous developers is obviously a bad fit. My job here would recreate everything, which is quite simple, and take care of new features from there. I don't see this taking me a lot of time, but it will still take some work. I also already worked with the CEO and it went smoothly.

They don't have much budget, so they want to offer me a mix of cash and shares. It seems to fit for me since I really don't want to do this full time, but I still really like the project so I'm willing to drop my rate significantly for some shares.

What should I accept as I have no idea of what ratio of shares to cash would make sense ? What usually happens in this kind of situation ? The other people in the startup are business oriented so I'm worried I might miss something in a deal they'd offer me.

FYI I'm not in the US, but in a European country that have somewhat similar rates. This is a throwaway account.

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asked Jul 18 '13 at 01:43
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Mthrowaway
13 points
  • Why not invite them to make you an offer? – Steve Jones 6 years ago
  • @SteveJones this is my plan, but I still have to figure out what I should accept once they make an offer – Mthrowaway 6 years ago
  • Of course, but it tends to help if you let them open negotiations first. Good luck. – Steve Jones 6 years ago

1 Answer


0

It mostly depends on how risk averse you are.

The problem with being paid in equity is that there's a high chance (say, 90%) that equity will be worth nothing, either because the company will fail or because it'll never have an exit event (i.e. IPO or a sale to someone else). For example, I currently own shares of privately held company. The company is very successful (millions of revenue) but my shares are worthless unless the company is sold to some other company or becomes public.

An investor spreads that risk by investing multiple companies.

You should think of yourself as investor in that company and since you only have one investment, it's incredibly risky (90% chance of failure).

As to how much equity to ask for: do the math.

Decide how much you would otherwise be paid for your time. Let's say it's $50k/year. Decide how much of that you want in equity. Let's say it's 50/50 i.e. $25k/year in cash and $25k/year in equity.

Figure out the current valuation of the company. If the company had a funding round, use that valuation. If not, make one up. Let's say it's $1 mil.

If you were an investor in that company, $25k would give you 2.5% of the company. That is the absolute minimum you should ask for, but you should adjust upwards for the risk. Let's say there's 90% chance the startup would fail, the fair compensation would be much higher (too lazy to do the math, look it up, but basically it has to compensate for the fact that there's 90% chance you'll get 0 and only 10% chance that you'll get $25k).

Obviously, the equity grant would vest over time. You wouldn't get the whole 2.5% ($25k) from the start, but you would get part of it over time e.g. every month.

Now, the fact that fair compensation is much higher than $25k doesn't mean you'll get it. An investor, for example, can't use that logic.

Ultimately it'll be a result of negotiations between you and the company. You might disagree on how much you should be paid, you might disagree on company valuation (for the purpose of calculating equity), you might disagree on the cash/equity split.

There are no right or wrong answers.

You certainly shouldn't feal cheated (e.g. if you think you should be paid $50k/year and they think it's $20k/year, then you should walk; if they offer $45k/year, maybe it's still acceptable to you).

The important thing is that you know what are your numbers:

  • how much you want your salary to be assuming it's all cash
  • what percentage of that you're willing to accept in equity
  • what is the valuation of the company (for the purpose of calculating equity). BTW: high valuation is bad for you, low valuation is good

Then you take those numbers to the company and negotiate. If they accept your numbers or offer lower numbers but still acceptable to you, you get the job. If they don't, you walk.

Personally I'm very risk averse so I wouldn't work equity. I treat equity like lottery ticket: it's nice to have and it's awesome if hit the jackpot, but I value it at pretty much $0.

answered Jul 18 '13 at 10:20
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Krzysztof Kowalczyk
1,950 points
  • that makes a lot of sense – Mthrowaway 6 years ago

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