Overview: -40K Funding from an investor -Single non-technical founder -Company has a Beta up and running with a few thousand users at 2 universities -Company has 2 existing paid contracts and 3 verbal agreements with other universities -Expected exit within 3 years at 30M Existing Employees: -Part-time Lead Web Developer (10%, 4 yr vesting, built MVP from scratch as original developer) -Part-time Senior Web Developer (2.5%, 4 yr vesting, recent hire) -Full-Time VP of Biz Dev (4%, 4yr vesting + commission, recent hire) Technical Co-Founder: -Full time commitment, would be a true partner, would lead our mobile development and potentially oversee web development as well later on as a CTO -Very strong technical and interpersonal skills -Current salary 230K
First, congratulations on your recent funding/recruitment successes! This is an excellent question, and a transaction I have been directly or indirectly involved with numerous times before. Each circumstance can be unique, the two most important considerations to look at as a starting point would be 1) what is the current status of the technical product and 2) what is the current funding or capitalization status of the organization. Generally speaking though, the type of range you could be considering here could be in the mid to high single digits all the way to a nearly equal share in the venture as what you (the original founder) have. My gut reaction, based on your brief description, if that you are looking somewhere on the higher side of the range here (given the candidate, venture status and other data points you offered.) Getting to a firm and real number though will require some more analysis. So our challenge now, in order to answer this correctly, is to dive deeper into a few other details we need to uncover. To name a few:
- Are they participating in an initial capital outlay/investment?
- Are there any expenses of them joining the venture (moving etc) that they will incur? Who absorbs those costs?
- How much familiarity do you have with this person prior to joining your venture? Have you worked with them directly? Have you spoken to anyone who has?
- How critical is the tech stack they are supporting to your overall ecosystem now?
- Is this CTO going to spearhead and participate in day-to-day development, or just own the roadmap/vision?
o Are they a full stack developer?
- What is the near and long-term vision for participation from your other employees? Are they going to be moving to FT status at any point in the near future?
- What participation, if any, will this person have in the fundraising or sales process?
- Beyond the current $40k investment and upcoming cash flow, what other capital inflow and outflow are expecting in the next 12 months?
- What are your alternatives if this candidate didn’t work out for delivering the application? Would you pause this priority altogether or need to aggressively explore a new option in order to meet client demand etc?
Once you establish these and other pieces of data, you can start looking at comparable plans out there and piece together what your starting/ending point is as far as comp terms you’d like to offer. It’s as important to remember that in addition to extending a number here, these are in fact negotiations and it is in your best interest to know what your strategy is with this candidate so you know how aggressive or passive to be in terms of making adjustments along the way after your initial offer. I would also highly encourage you to research alternative solutions and even engage other candidates right now in the process so that you can have a better sense of what is available in the market to you and also have an advantaged negotiating position since you’ll know to what extent this person isn’t the only game in town to consider.
As I said before, there are several details which may dictate or alter precisely how you approach the offer and negotiation process with this new hire. I'd be happy to hop on a quick call to discuss further so we can dive into detail on 1) how important this particular candidate is to your overall scope so that we may 2) identify the appropriate starting point and end point for negotiation purposes and 3) consider alternatives to this plan as your backup plan in case the conversations with the candidate do not go as anticipated (or inversely, so you can have a clearer understanding of how advantaged or disadvantaged of a negotiating posture you need to take.) Reach out and request an appointment so we can connect and discuss further.
Answered 8 years ago
This is a very easy problem to solve with an exact answer. You should use the Slicing Pie model for equity allocation and recovery.
When someone invests time, money, ideas, relationships or anything else into a startup they are taking a risk. The value of that risk is equal to what they would have otherwise been paid by someone who could afford to pay them. This is known as fair market value.
The Slicing Pie model measures relative risk of the various participants and allocates equity accordingly. It converts all contributions to "slices" (a fictional unit of risk) using a function of fair market value and a risk multiplier. So, a person's share is equal to their slices divided by all the slices. The result is a perfect split!
The model also determines the right buyout price (if any) when someone leaves the company.
I've written a book on this topic, called Slicing Pie, and you may have a copy if you send me a note through Clarity or through SlicingPie.com
Answered 8 years ago
Hi — you will need to work out what your potential equity split is for current and future hires/partners/investors are, and then try and work backwards from there. From experience, it is better to have a simple, clear and transparent structure so that everyone involved knows where they stand.
You also need to find out what your Tech Co-Founder is looking for, to keep him/her motivated.
Basically, keep it as simple as possible, and ensure you have sufficient elbow room for whatever comes in the future.
Is your situation already resolved?
Answered 8 years ago