Questions

Should you split equity equally with a tech cofounder if you have an MVP, some traction but you know that you're going to need a CTO when it takes off

3answers

If you and this person, *know* they won't be the CTO, then absolutely not. If there's an understanding that the engineer you are working with is going to "cap out" soon beyond the MVP, why would you ruin your cap table?

This *should* help you get a reasonable amount of equity. http://foundrs.com/

The most crucial question is where this current contributor is likely going to be out of their element. Are they only front-end and have no back-end ability? If so, you really should raise (from a friend or family member) or borrow the money necessary to pay this person a reasonable cash rate.

If on the other hand, they can take a successful MVP and build a reasonable back-end but will cap out on scaling it past 100,000 users, or for example, you're an enterprise company and you know you'll require a technical person to be part of closing early sales, then it's ok to give up meaningful equity.

But another key question is: Are you ok to let this person define your company's engineering culture? If this person isn't capable of or comfortable managing your tech team in the early-days, this person should have no more than 10% equity.

Of course, your shares and theirs (whatever you decide) should be subject to a vesting agreement (minimum 3 years and preferably 4).

It's easy to give away equity when it's worth very little but as I've said here before on Clarity, imagine your company today being worth $100,000,000. Can you imagine this person contributing $20,000,000 worth of value to achieve that outcome? $30m? $50m?

Here's the thing though. If this person can grow into a CTO, and wants the chance, and there's no warning signs that it will be a tough slog for them to get there, and they're a passionate believer in what's been built to date, then it's entirely reasonable to bet (with equity) that they can get there. I know a lot of CTO's of great Series A and beyond companies with amazing traction that started off as lacking a lot of the criteria of a great CTO candidate.

This is an area I've helped coach a lot of startup CEOs through and have experience in myself. Happy to talk through in a call to understand the specifics of your scenario and provide more detailed advice.


Answered 7 years ago

the answer is not as simple as you might expect it. The amount of equity you share must have a lot of considerations on your end before offering any amount or percentage... it also depends on how you have your "company" structured... llc for example has no limited partnerships but ownership % can be manipulated a bit... feel free to give anyone of us experts in this topic ;)


Answered 7 years ago

If you know that the tech cofounder is about to leave, then probably they should have options.

A cap table (with founder shares) has usually Equity and Options. The main difference is that Equity is hard to give and hard to take away (think: Shareholder agreement etc...), Options (easy to give, easy to take away).

The above question would probably be never be asked due to a number of reasons.

Without funding, it will be very hard to attract a CTO after a tech co-founder leaves.

Fundable startups at very early stage are usually composed of 2-3 founders. This is to due with many factors.
If 2 people, then one should have a majority, one minority. Someone has to lead (decision). With 3 founders it is different. If you have more then 3 founders, the startup might go into too many directions. it does not mean it does not happen, but you might be creating a barrier (IF YOUR GOAL IS TO RAISE MONEY).

It is very important that your MVP is validated with customers and gets traction. Traction is Users or Revenue.

I suggest you learn how a cap table works and if you do some simulations you will see how to answer this question.


Answered 7 years ago

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