Equity for CTO, brought on around beta


2
I'm in a predicament. I currently work as a Senior Software Engineer for a medium sized company (top 200 website in U.S.) and get paid above average. This company treats me very well, the people are hardworking and get along, and I really enjoy working here. Granted, I've been here just under a year, but that's my impression so far. I get stock and a great bonus. Things are good to say the least (and I've worked at Microsoft and other bigger companies). For me, where I'm at is a really good fit.
The problem is, I've been approached by an acquaintance to help him found a company. This acquaintance has been CEO of a couple of companies and raised 1.5 million for the last company he worked for. He learned the basics of programming and for the last 6 months has been building a site that already has some traction for it only being in beta so far. He is at a point where raising $1M for us to run with for the next 12 months is not a problem. He says that when he started building this site he had me in mind for helping him found the company. His other CEO friends tell him to just hire out a lead engineer, but he really thinks I should be co-founder with him. He values me not only for my engineering abilities, but also for my business acumen and people skills.
I think there is a lot of potential, but where I'm not so sure is when we sat down to talk equity. He wants to bring me in at 15% equity. It just seemed so low for what I've have to give up to join him, so I pushed back (I was thinking more like 40%). We went back and forth and the highest he'd go would be 25%. I realize that he's taken the site a bit past the 'idea' stage, but to me it's still very early on, and even 25% seems a bit low to me.
His argument is that I'd only come on upon funding and thus I'm not taking a lot of risk. The risk to me is that I'd be dropping 40% of my salary to join him, and if it goes belly up I'm back to square one.
Does anyone have any advice as far as being in a situation like this goes? I've read Spolsky's response in terms of equity, and I agree with him, but I've also found conflicting advice. I always pictured being a co-founder we'd have closer numbers in terms of equity. But I do realize he's gotten a good start. I just wonder if I'll always feel unequal (though he has flattered me with his high opinion of me).
Thoughts?

CTO Equity

asked Mar 11 '14 at 17:15
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User33845
11 points

2 Answers


6

Nice to mention you read the post by Spolsky, it's a good one.

If I understood you correctly, you are ALSO offered a salary that is 40% less than what you make now in addition to equity, that is actually a big deal. It's not typical for co-founders to even take salary early on, which is obviously a higher risk. A higher equity position would make sense if you were to work for free, but since you are also getting a salary, the equity being negotiated is a trade-off for the difference in the salary and your market rate.

Sounds like you are young and truly interested in the opportunity. Unless you have some financial obligations (big student loans, saving up for your first place or a wedding) you aren't giving up too much just yet. If you are going to be a lead engineer (by function) and CTO by title, it really will not do any harm to your resume, especially if the software you build is also an interesting project/experience in your opinion.

Do ask how much equity you would be giving up to investors for the money coming in. Dilution might be a bigger worry if you end up giving away most of it. Also, see what the valuation of the company be upon a deal, that will give you an idea what your equity stake is worth.

To minimize risk with your current job and paycheck, don't rush to quit just yet. Get involved with venture on your nights and weekends and don't quit until the check is written by investors (unless you have faith in your partner and savings to live on) and your agreement is signed. If you are in good standing with the company and they value talent (although sounds like you haven't been there long), you might be able to ask for a 1-month unpaid leave, so you have a way to come back if something goes wrong with the funds or the deal drawn up on paper ends up being different than what you discussed and agreed to. Do discuss this with your manager instead of just resigning - most good dev managers will leave a door open for talent to come back, even months later (I have in my dev manager days). That also means not burning bridges and not say anything negative about the company, sounds like that isn't an issue, so that's all good.

Good Luck!

answered Mar 11 '14 at 19:07
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Webbie
2,835 points
  • I really appreciate your comments. Thank you very much. You raise a good point. I own a house and have three kids. While we are willing to sell the house, I have to think about the time commitment away from the kids. They are still young and I don't want to miss them growing up. Though I may have more flexibility to make it to their activities, since I'll have more control over my time (or at least I think I would, but I may be wrong). – User33845 6 years ago
  • I think mortgage and kids are the kind of the commitment that swings the argument, at least for me. If you have to sell a house that you are happy with it's a big sacrifice because a great house is not easy to find. Also, it would be harder to get a mortgage later on without a steady paycheck history, this one gave me a big pause as mortgages became harder to get. Startups are hard work, at least early on, the flexibility comes way later when things are steady, so I wouldn't count on it being there or you risk loosing focus. My advice - try to pick up the startup gig on a weekend basis. – Webbie 6 years ago
  • Great advice, Webbie, thank you. – User33845 6 years ago

1

Assuming that you're talking a proper CTO role - building a technical product, managing a team of technical people and being responsible for the future of the product (and therefore, company), your friend needs to realise that whatever he's built is going to get thrown away - because it's just a prototype. From a guy who's learned the basics of coding.

If that's the case - I suspect he's undervaluing your contribution. Whilst you're not taking on the risk of working for free pre-investment, you are taking the risk of starting a business from scratch, you are taking the risk of your reputation, and you are making financial and life sacrifices to do so. There needs to be adequate "reward" for these risks.

If my assumption isn't the case, or, he doesn't admit it, or it's not a truly technical product, then he should get a lead engineer instead.

Remember, he's asking you. You specifically. There's a reason for that. Your job is to find out what that reason is and come to an agreement on what the *actual* value is, not what either one of you *feels* is right.

Or just do it. Or don't.

answered Mar 12 '14 at 08:38
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Nick Stevens
4,436 points
  • Thanks for your response, I really appreciate it. How do you suggest we determine *actual* value? – User33845 6 years ago
  • This response has really helped me gather my thoughts about this. Thank you again. – User33845 6 years ago
  • Hi "User33845", sorry I missed your follow up question. Defining the value would probably work best by having a face to face conversation, about what you think being a CTO is plus the stuff above, which might be enlightening to your partner. – Nick Stevens 6 years ago

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