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Ask HN: What % equity should I give to CTO?
20 points by threesevens on Sept 2, 2017 | hide | past | favorite | 38 comments
Background: I'm a non-technical founder that has contracted a B2B SaaS MVP.

Now I've started getting clients that are interested in purchasing, and will need to start making improvements.

What should I give equity wise to CTO/1st engineer hire coming on? This is still part-time.



So far I see everyone here tell you to give 50% or more to the CTO. Which is hardly surprising since you are on a website for technical people.

But even if I am a developer myself, I disagree.

There is a tendency on HN to consider the technical people in a company as the ones that contribute the most. In my opinion, that is often not the case.

In fact, someone even called you "the idea guy", as if all you did is having the idea.

I think that, as others have pointed out, the sensible approach is to split equity based on the value brought to the company. But value does not equal necessary effort, time spent or "tangible" output in the form of code.

While a CTO might spend a lot of time building "tangible" assets which are definitely important, that is not the only value brought to this company. There are assets other than code.

You went through the process and the risks of validating the product and bring in the first customers. Those are assets too and are what makes the business exist in the first place. Without those, all the code a technical person can produce is worthless.

So I would say you should consider the value this CTO will bring to the company and compare it to the value you already brought yourself and will bring in the future.

All in all, though I think that proposing anything from 50% up for the CTO like others are doing in this thread is not reasonable.

Also consider that with an even split, it will be hard to take a decision when you disagree with each other. Someone must be able to have a final say on each matter. Since I doubt you want that person to be the new one you will bring in, I would say that their share should be from 49% down.

Finally, it's not in your question, but do you need a technical founder? You might, so you are the only one that can answer this. But also consider that, since you have clients that will bring in revenue, you can just use that revenue to hire someone on a contract basis first and on a stable basis later, without slitting the equity.


It really depends on the company. If your product is software then the CTO is in charge of your entire company minus ancillary functions and should definitely get a ton of equity.

If your startup sells shoes or something the CTO isn't nearly as important.


Even if your product is software, it doesn't matter at all if nobody knows about it and/or buys it. How do people learn about a product? Marketing teams. How do people buy a product? Sales teams. Neither of which report to a CTO customarily.

As someone who has been a VP of Eng and/or CTO in multiple startups, I'd love+ to say my value was the most important, but the truth is that simply isn't correct. It's a team effort and everyone has to be putting in effort to succeed.

+ - actually, I wouldn't, but you get my point hopefully ;)


Eh, I don't buy it :). Every company has sales, accounting, marketing. The thing that makes a software company special is their technology.


I suppose the task at hand is then to differentiate between whether it is a software company or a company using software.


Don't underestimate selling shoes or something at "web scale" - this is what Amazon does ;)


And exactly the reason their engineers are treated as a cost center. Logistics and sales are more important than sound engineering.


In my area amazon are known pay really well. They push you hard, but is seen as a good place to develop as a developer.


Thank you for this response. Naturally, I agree 100%.

You're right, I may not need a CTO. I would love to bring on someone to do part-time work as it comes up, until revenues start coming in. Scaling up from there and having that person become the CTO and grow into the role would be ideal.


> It's actually in a really good place, tech and build wise.

> CTO will come on to make updates to the product and make it even better/fix bugs.

Let's be realistic here. Based on the statements you've made, it's very clear you're not looking for a CTO nor are you looking for a partner. You're just looking for a programmer. So my suggestion is you cut with the bullshit and just hire/contract someone, and don't give up any equity.


Someone's building a commercial product for you for free? Before reserving any equity for a potential CTO (who really sounds more like the developer who's supposed to finish your product) you should consider compensating them for their work first.

If you and your future CTO will be equal partners with equal responsibilities the remaining equity should be split in half.

"Non-technical founder" often translates to "the idea guy". This might or might not be the case here but you should definitely ask yourself what you'll be bringing to the table before bringing a partner into the game. If he or she will do most of the work while your contribution mostly is the original product idea that's a recipe for trouble once business doesn't run as smoothly as you wish (which it inevitably will at some point).


It was a good friend of mine that was 50/50 partner, but ended up choosing to work on another project instead. I was left with 80% of an MVP, so I hired a contractor out of pocket to finish up.

I'm a VP of Sales at a startup, and have done the design, product fit, and selling. Literally everything aside from coding.


> ...MVP made for free from friends/contractor.

> ...I hired a contractor out of pocket to finish up.

?

Also, if your friend gave you 80% of an MVP without any compensation, watch out: You might not actually own that 80% of an MVP.


http://avc.com/2011/04/how-to-allocate-founder-and-employee-...

Fairness, and the perception of fairness, is much more valuable than owning a large stake.


I'm a development team lead / senior engineer who's sometimes assuming the role of CTO for young companies. From my experience, the best way to approach this is: * Express the work required in money (as you would with any contractor - determine the market value of the work involved) * Multiply this value a few times (coefficient more or less is a subjective evaluation of the risks not succeeding) * Calculate the possible profits after 1-2 years of running business (how much of that money you will be able or willing to pay out in dividends?) * Equity share should be as big as to allow receiving the amount of money obtained in the second step

For example - let's assume that building your MVP and maintaining it for 6 months until you're able to cover maintenance and improvement costs, would cost you around 30 000 $. Then let's multiply it by 3 or 4 and get around 100 000 $. Let's say you're certain that you will be able to pay out 500 000 $ in dividends in the second year. That amounts to about 20% equity share.

Also, it would be very good to give cash as well. Depending on the amount of the equity share - 20-50% of the market value for the job involved.


Reminds me of the people who reach out to me about building their product, and want to give me 10 percent of their "company" to build their entire product from scratch.


Will you be paying the CTO a market wage? You get what you pay for whether that's in equity or cash. If you're looking for the CTO or engineer to work for no salary, I would think in terms of bringing them on as a co-founder with 40%-50% equity.


Why do you believe that you need a CTO? Your post, while short, seems like what you really need is a programmer or two.

Presumably, someone wrote the program which you have been contracted to provide to customers? Why can't you go to the original party who wrote the program? Is "contracted" the correct word in your case? That would mean that you have already entered into a written contract to provide something to customers.

Or, are you saying that you entered into a contract to purchase a program, you showed the program to some people, they want some changes, and you need someone to change the program?


I do need a programmer, but I would like someone that also takes accountability and ownership of the business. Eventually they'd grow into a CTO role.

I wanted a product made for my own use case, so I paid someone to make it. Now I'm showing people, and there are minor changes they'd want.


That makes sense. I really hope that takes off for you.

Regarding a CTO, though, maybe a business manager would work for you. That certainly sounds cheaper to me, and you'd still control the product direction if desired.


> ...MVP made for free from friends/contractor.

> I currently own 100%...

This is not a reassuring combination of facts. You should start by giving the people who built your product some compensation.


What sort of value are you gaining from the MVP? Can you make money now from it? Is there substantial market learnings to be gained from it (outside friends and family usage?). If not any of the above then you'll need a CTO who can build a production-ready service. Personally, i've seen some pretty shitty MVPs and would probably build from scratch.

Start at 50/50. Its on you to justify more for yourself.


Yes, I should be able to sign on at least 10 paying customers ($500-5000 in MRR). It's actually in a really good place, tech and build wise.


If you can get the customers to pay before get a CTO, you can give him 10-20% and a good salary. If not, at least 50% and you will have a hard time convincing someone good enough to help you achieve success.


I agree, it will be very hard to convince a CTO or any good engineer for that matter to join for even 20%, especially since you are pre revenue.


I think this overstates the value of the MVP. It sounds like the CTO contributed only technical assets, while the OP is the one building the actual business.


That's what I was thinking. I won't be able to afford a "good salary" for a while, and it's still part-time only. I was thinking ~15% and then salary once we're there.


Why would someone code for 15% of currently nothing vs go consult for 150 bucks an hour?

Could a developer do your job plus his own and thus own 100% of the business? Some developers can sell too.


> I was thinking ~15% and then salary once we're there.

This is not what I suggested . If you want a junior as CTO you can find some in dev bootcamps, universities or startup events.


Every situation is nuanced. So this is pretty generic advice. But if this is a true partner that you're going there distance with, then go 50/50. There may be some starting point difference now, but it's a long haul. Having someone as committed as you makes a big difference.


Here's a pretty good blog post / tool for figuring this out: http://blog.gust.com/cofounder-equity-split-framework-object...


Have you considered Mike Moyer's method, described in the Slicing Pie? http://slicingpie.com/ It is pretty fair and adjusts over the time based on the delivered values.


So the CTO will be the one actually determining if it's a success? Upwards of 51%.


No, I'll be the one performing web demos and selling customers. I've gotten pretty far with product market fit, now it's figuring out marketing and selling.

CTO will come on to make updates to the product and make it even better/fix bugs.


How many paying customers do you have?


Currently none, but 15 beta testers that will either convert to paying customers or cancel < 30 days.


Alright, IMHO, you don't have a product market fit. For a B2B product, you need at least 10 paying customers before you can declare some sort of product market fit.

You won't have a "real" product market fit until you have 20 "solid" customers. "Solid" customers are less likely to churn and use your product on a regular basis. It always takes longer for the deals to close and the money to hit about bank accounts. Of course this depends on your deal size too.

As far as equity is concerned if you want a co founding CTO you need to part with at least 20%. The CTO should feel invested enough. With low equity, he/she is more likely to leave you on first signs of trouble or slow down.


How much can you pay? There's a formula. If you can pay market value 0%. If less enough to make up for you are not paying based on current and projected cost of the company in 4 yrs assuming a 4 yrs vesting cliff.




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