Equity for Startup Lead Developer/CTO (pre-funding, pre-launch)


4

Prerequisites I'm an experienced developer with broad knowledge of software engineering matters, having contacts in outsourcing companies and access to great talented tech people. At the moment I'm looking for startup opportunities and business people with ideas to start together or join as a Lead Developer/CTO.

I was recently approached by a guy who needs this kind of person in his startup as first employee.

His startup idea is web-based video streaming/publishing platform with subscription model aimed at niche market.

He has another co-founder who is considered a content manager, has market knowledge etc, I didn't have a chance to talk to the second co-founder. So they own 50/50.

The guy has spent 2 years doing the project, and put about 25-30K, he's fulltime in this project. The second cofounder is part-time.

He has no previous successful business experience. Second co-founder too.
He has no funding.
He has no revenue and paying customers. The revenue projections, market size, expected growth, business model in general was unclear, or not properly shared with me, so on this level I cannot assess potential, but it was said that he doesn't expect any meaningful revenues for a first year.
He built the contacts with potential customers and content providers.

Currently he pays a contractor to build the basic demo version of the web site. This product consists of just a few pages built using standard web framework. It wasn't launched even for idea testing purposes. Obviously, the content matters here, and there is some, but not a lot to be considered serious value proposition for customers at the moment.

The responsibilities expected from me are CTO grade with certain innovation in the future.

His proposal 4% of the company with vesting schedule (for 4 years with 1 year cliff), and no cash compensation. On my question about whether he seriously values my contribution as 4% he said that we can arrange some division of the potential profits in the agreement so when the company is profitable, everybody will have the portion of money according to the contribution, measured using agreed metrics and milestones. (How to measure this is another question).

My counter proposals Without adequate cash compensation I can only join part time (have to eat and live somewhere), considering it:

  1. Co-founder way: If 3 of us would start together today, 20% for me (again, with vesting schedule, which, BTW, should be arranged for all founders anyway), no cash. He doesn't consider this way as an option at this stage because of his effort/time/money he put into the project, even with lower percentage for me
  2. Early employee way: Some equity (4-8%) + less than my part time cash compensation in
    the company I'm an employee today (the ratio depending on equity). And with coming revenue or funding moving as full time employee. This is not feasible for him financially and he thinks that if I would get paid I wouldn't be interested in business success.
The question Could somebody explain, where is the catch in his proposal and how we can provision profits distribution for later stages, when, according to him, my interest can be comparable to his if not bigger. I always see the main negotiation between founders and first employees is around shares vs cash and not about agreements on dividing potential profits based on some metricKs. I always thought the stake defines this division.

It's hard to measure each other's value and contribution with these prerequisites.
But the main question is whether the approach he wants to take does make sense and is common.

CTO Development Equity Compensation Partnerships

asked Jul 27 '13 at 06:00
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Vasily Ulianko
6 points
Top agency to build award-winning mobile apps: Utility NYC
  • Sounds like a bad deal (4% with no cash), unless you genuinely believe this is going to blast off and be valued in the $1B range quickly. Don't forget that many "successful" startups never make any actual profit, as monies are reinvested for growth. You'd have to be very careful how you define the parameters for profit sharing. Gross revenue share would be much easier to live with, as it can't be manipulated so easily. – Steve Jones 6 years ago

2 Answers


2

One way to look at combined cash/equity compensation is: the difference between market rate for your skills and cash compensation you get is equivalent to a cash investment in the company.

For that reason 4% with no cash is extremely bad deal for you.

Using rather conservative numbers, your can easily get salary of $100k/year elsewhere, which is at least ~$130k/year cost to the company (including taxes, health care and other benefits). Over 4 years that's $520k.

Just to recoup that investment the company would have to be sold for $12.5 mil. After adjusting for 90% risk of failure of an average startup faces, it would have to be $125 mil.

Are you really willing to invest half a million of your own money into that company for 4% at the very early stage they're in? For comparison, Y Combinator invests ~$20k for 6-8% of the company and they don't have to do any work plus they spread the risk across many companies.

We have tendency to ignore opportunity cost but your calculations for this (or any other) opportunity should start with a simple fact: over 4 years you can easily make $400k by working full time for a reasonable company, risk free.

If you're offered less than your market value, you need to insist that the pay difference is valued at least as much as if it was money given to the company by an investor, adjusted for additional risk for you.

People who are offering you this opportunity don't seem to understand that (or are do understand that and are looking for someone they can take advantage of).

Either way, run in the opposite direction.

answered Aug 27 '13 at 09:56
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Krzysztof Kowalczyk
1,950 points

0

I would not do this.

1] Content publishing platform with a niche market / subscription model? There is going to be a ton of work not only in development but also sales and content creation. This is probably major undertaking and for no cash compensation you are taking a lot of risk that the 2 others will do their part. A LOT of risk. I don't like the smell of it.

2] If this is a startup that requires a unique platform to be created to deliver content and actually requires a lot of custom development versus setting up a Drupal subscription site or something then I think it is ridiculous there is no founding members that are developers. I hate seeing businesses that have business / idea people full time or doing work when they have no way to actually create / deliver the product that is needed. I wouldn't ever consider joining a company when I was to deliver the primary product deliverable without significant equity stake or at least some other co-founding developers.

3] Full time for 2 years ... no customers or pre-sold subscriptions?

4] 4% equity over 4 years? No cash? That is insulting.

5] Just find another group or idea. I don't like the sound of this, and based on how you wrote this up I don't think you do either. Trust your gut. It's always right.

answered Jul 28 '13 at 07:06
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Ryan Doom
5,472 points
  • 1) Some of the content creation has been done, and he justifies the proposal by this, but why he wouldn't continue paying freelancers/contractors or hire me for cash + some incentive equity as the work requires much more involvement and tech planning. He admits he didn't find anyone with better skills so far. – Vasily Ulianko 6 years ago
  • 2) This requires all custom development and the tech skills required are those as from solutions architect, in addition to product vision, planning, management other subcontractors etc. – Vasily Ulianko 6 years ago
  • 3) This was very suspicious and I said that if he spent so much and didn't even test the idea with some MVP and spent 2 years full time (possibly he was not 2 years full time, but now he is) is a bad thing and is not a reason to stand his groung. The MVP is being built only now. – Vasily Ulianko 6 years ago
  • 4) That's exactly what I said to him. I asked him to give me the contacts of the person who will agree on this, I would like such in my own company next year :) The actual incentive for me would be additional agreements (performance milestones, revenue levels and percentages etc), he suggested to talk to a lawyer about how we can arrange this so it does make sense for me. This sounds very complicated and "smells bad" as you say. Who knows what can be later. I can't trust these people with such proposal. – Vasily Ulianko 6 years ago
  • 5) I agree, current proposal doesn't make me passionate about this. In general I think the service can find the market, but the proposal sounds like 'I want a CTO, meaning "Cheaper Than Outsourcing". Furthermore, I think working on consumer platform is a huge bet, I'd better aim to do something B2B oriented. – Vasily Ulianko 6 years ago
  • Haha, I haven't heard that before CTO, "Cheaper Than Outsourcing"... that's good, I like that. Yeah, I'm sure a better opportunity will come along, as long as you aren't in a hurry you'll be available when the right opportunity does come along. Having had this "business" for 2 years, he should have some revenue or some direction, the idea hasn't been proven and no product is made and no customers have been sold. Therefore his business is worth. $0. – Ryan Doom 6 years ago

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CTO Development Equity Compensation Partnerships