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What should I ask for when negotiating a CTO position in a funded start up?
39 points by fbliss on Aug 11, 2011 | hide | past | web | favorite | 35 comments
A new start up that is receiving funding has offered me the opportunity to take on a role as the CTO. The opportunity could be the largest for me, as the players are well established in the industry they are selling to. What kinds of things should I cover in making the opportunity a good one in terms of compensation?



(1) How easy will it be for the startup to find your replacement? If they can they list a position on Craigslist and get a bunch of qualified candidates at $80/hr, that will likely be the compensation.

(2) What is your opportunity cost? If you can get easily get a contract developer job for $125/hr, that is what you "should" be paid.

In the example scenario, a smart startup will try to get somebody with $125/hr talent at $80/hr. The cheapest way to bridge this is by stroking your ego and offering you BS title like "CTO". WTF is a contractor CTO? They will probably not let you attend "real" executive team meetings and vote on important decisions.

My suggestion: (1) Let them know that your time is wort $125/hr. and you'd take $50/hr in stock (and CTO title). It becomes a good deal for both of you. (2) Work smart and work hard. Make them offer you a great compensation package to be the permanent CTO.


Frankly, you shouldn't wait for the equity portion because of the cliff. You won't vest any shares in the first year, so if it is for a "contract" CTO position initially, why the trepidation from them for the stock right away?

They will pay more for you without stock, and they won't lose any stock if they don't keep you longer than 1 year, so they shouldn't be reluctant to issue options to you. If they are, they sound as if they are gun-shy in issuing their option pool, which is suspect. Not only for you, but for other future employees as well.


Thank you, I should note that these are preliminary talks and there are some missing bits of info on my end - they have approached me to do this, but we haven't talked details yet, so a follow up with probably come out of the discussion we have in a couple weeks.


Forward vesting... you want it. When/if they sell the company you do not want a bunch of unvested stock options disappearing. Has happened to several folks I know, and myself in the past. Forward vesting causes all of your options to vest in the event of a change of control, or sale of the company.


Also known as single trigger (the change of control being the trigger). More common for a CTO role is double trigger, meaning you forward vest if there's a change of control AND you are not needed in the new company (laid off).

Generally single trigger seems to be popular for the more business-y type roles that tend to not be needed as much as tech roles in the acquiring company.


Good point, but I still think he should figure out how much equity he is going to get. Right now from his commments he is getting zero equity with the possibility of a small percentage sometime in the future. Hardly worth giving up anything else during negotiations.


I'll come back with details and probably a follow-up question in a couple weeks after our discussion about the long-term opportunity. I haven't had any offer yet, only an invitation to consider joining them since they have secured funding.


You're going to be vested over a long period of time, possibly with a cliff.. so don't forget that in your negotiations. Beyond that, ask for what you deserve


I don't fully understand the cliff concept, if you could enlighten me? Thanks!


If you look at your equity vesting as a line graph, then for the first year your options are worth nothing (this is before the cliff). The line is flat on the bottom of the graph. If you leave the company at this point, you get nothing, equity wise.

On your one year anniversary, that graph jumps up from zero to something like 20% vested, which looks like a cliff on the line graph. If you leave the company at this point, you get something like 20% or 33% vesting (depending on the number years til fully vested -- 4 years + 1 year cliff usually works out to 20% a year).

Beyond that, you basically step the graph up however many percent for each additional year.


Just for clarity with standard terminology, "4 year with 1 year cliff" usually means 4 year vesting, with 25% vesting at the end of the first year. Thus, it's 0% for the first year, then 25% immediately at the beginning of the second year, and then 1/48th of the total grant for each of the next 36 months.

4/1 is basically the silicon valley standard.

Usually you get the next increment on leaving (i.e. if you leave mid-month, you get the vest for that month), and often if you leave before a year (but after doing stuff, and amicably), you get some portion of the first 25% -- letting someone go after 11mo just to avoid the cliff is usually not done. If someone turns out to have been a bad hire after a month, it's more likely to just let him go and stick with the minimum terms of the contract (i.e. nothing).

IMO if you can't trust the management of the company, you shouldn't work there anyway. You should have contractual terms which are mutually acceptable, but it's almost always possible for an employer to exceed or fail to meet those terms, with limited recourse for most employees.


This is correct -- I have no idea where I got 20% from.


If your shares vest over three years with a one year cliff, this essentially means that you accumulate the shares over three years, but if you leave within the first year you get nothing.


Google will help more than I can, but basically you get nothing equity-wise until you've stayed for a certain period of time... possibly a year. If you quit or get fired within this time, you also get nothing


In that case, I highly recommend you take hours and hours and hours and read and learn everything you can find about startup options, payouts, and historical stories of how people got screwed!

Don't walk in there unprepared.


Well, that's why I asked the question in the first place, here, and I haven't been disappointed with the excellent advice and points from others.


Please read these topics on options/equity and the like:

http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-m...

http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-...

It is important also for other hires that are offered equity/options, so you will probably have to explain it to other people.


Google Brad Feld's term sheet series.

Edit: http://www.feld.com/wp/archives/2005/05/term-sheet-vesting.h...


To learn about the CTO stock options, vesting, and employee pool of options, this is the best book I've read on the subject: Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld and Jason Mendelson.


This is definitely a great book. But be aware that every lawyer and VC worth their salt has read this as well.


Great, then I'll get it! Thanks!


Have everyone agree to a definition of your role in the company. Are you a cofounder acting as CTO with cofounder equity, or are you an executive employee?

Once that question is answered the rest is pretty straight forward.


The position begins with contract CTO work and then a discussion about equity.


Then right now you should be negotiating toward contract executive level pay for the given company size.

Don't be tempted to sell yourself cheap in the hopes of goodwill or some other f'd up rose colored outcome during equity discussion.

Usually if you aren't cofounder you are going to get a pretty crappy chunk of equity and should be viewed as a lottery ticket and nothing more.

Sounds like standard market rates should be your goal.


So it's basically a high end contract with a chance to go full-time?

If that's the case, I'd go $20k-$30k /month as a good starting rate for an executive level technical contractor.


Are people really making that in this situation? Sounds awfully expensive in my experience.

EDIT: I get that people can rationalize that amount, but are people you know of actually getting it. I, for one, would have a very, very hard time paying someone $60k in cash for two months of early stage "CTO" work (and a very, very easy time taking it). But I'm more interested in the facts: are people actually paying short term contrators at early stage startups $20k-30k/month?


Contractor implies that you're getting no benefits and you're paying up the self-employment tax instead of the company.

For a CTO-level position, at a startup that's raised a Series A? You bet I'd want that much money. Assuming a typical start-up level workload, that works out to somewhere around $80 and $120 an hour, which is pretty reasonable for CTO-level talent, considering the higher tax burden and the need to secure your own health insurance.

EDIT: Yes, certain (funded and/or profitable) startups will pay this much (or the equivalent in salary and benefits) for a talented CTO. Note that this implies actual CTO-level work and not "oh, I'm just going to call my first developer hire the CTO to flatter his ego because he's the only technical guy on staff." (That sort of title inflation you should run from - it's just going to cause HR trouble when the company grows and needs a real CTO, and it's usually offered in lieu of an appropriate salary.) If you're putting "CTO" in quotes, you need to hire a developer, not a CTO.


I doubt it. It sounds extremely expensive to me as well. You might make that as an "executive level technical contractor" for a major software firm, but probably not for a startup that's just getting funded. At small startups, there are often a lot of people with CXO titles, and it doesn't really mean much.


On contract a good engineer can easily make $125 an hour (5k a week, ~20k a month) a CTO should be higher then that, so not this is not expensive. Remember this is contract and there is no equity on the table.


First of all, there is no such thing as a contract CTO. If you are contract then you don't have a title or any stake in the company, ask for market wages for your skill set and experience. For 80-120 an hour you are a Sr programmer with expert level experience in your specific field as an independant contractor. Note, this doesn't mean you've built 2 websites with Rails and don't know shit about scale or performance. If they have no other technical people on staff and are BS'ing you with a title, run away, this isn't going to work out for you.


I'd have to disagree. My companies CTO of over 2 years is on a contract and doesn't touch code and I would describe as being in a typical CTO/executive role.


so does a CTO need to have coding skills? Or just directing based on his/her technology vision? In my understanding, a CTO needs to know at least some coding and can verify their subordinate code and fix bugs, so forth


Don't just think of compensation in terms of dollars and equity today.

Also consider: - What are the benefits implications? - How much will this increase your future marketability through connections and learning? - How will this impact your ability to do things outside of work? (10 hour workday? 12? 16?) - What will the work environment do to your mental health?

As items with current and future $ implications, this is part of the compensation discussion.


I can share details from a previous startup: Co-founder position. CTO title. Board seat. $120k, 5% equity up front, 5% vested over 2 years. VC backed.


[deleted]


Corrected the grammar, thanks. ;)




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