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Ask HN: How much equity does one deserve as a CTO of a seed funded company?

10 points by vs2370 ↗ HN
Hi HNers, I met a founder recently who has put out an offer for CTO/VP of Engineer title. But the offer is 20k less than my current salary and equity is 5%. The company has received a seed stage funding from a reputed VC and has gone through a incubator already. Is this a good offer?

23 comments

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malanj
One way to figure it out is to calculate what the 5% is worth. Here's a very rough/inaccurate calculation - that ignores option prices etc - that might give you an idea:

Lets say the company's post seed valuation is $3m (random guess). So 5% is $150k. Your shares probably vest for 4 years, so that's ~$40k/year of shares.

Given that you're (most likely) getting ordinary stock (not preferred), you should discount that $40k quite heavily.

In short: it's probably not a bad offer, but definitely comparable with your current compensation.

kjksf
It's a good explanation but what should also be mentioned that you have a very high (let's say 90%) probability that you won't see any money from those options.

In economic terms this is called expected value and assuming 10% of success, expected value of the options would be $150k * 0.1 i.e. $15k.

hollerith
>assuming 10% of success, expected value of the options would be $150k * 0.1 i.e. $15k.

That is wrong because the post-seed valuation ($3m) already has the risk of failure baked into it. i.e., those investing at that valuation already know about the high risk of failure. If the startup had a 100% chance of success and the seed-stage investors could be convinced of that fact, the post-seed valuation would have been about ten times higher.

Your calculation would be correct if $3m were what the company would be worth if it succeeds, but it is not.

TuringNYC
Not quite -- those investing are valuing your company at that in light of [probably] having an entire basket of companies, so they have the benefit of averages. As an employee, you have one shot at this, so the risk is far higher due to lack of diversification.
rahimnathwani
Lack of diversification doesn't play into the calculation of expected value. The expected value of 100% chance of $1m is the same as the expected value of 1% chance of $100m.

If you're an individual trying to make a utility-based decision, though, you have to take into account the diminishing marginal utility of each additional dollar, i.e. you care much more about the first $1m than the next $1m.

vs2370
thanks, can you plz elaborate on preferred shares? how will that change the math...
rgovind
I believe if you have ordinary stock, it will get diluted during subsequent funding rounds. Preferred stock may not
malanj
You can think of preferred stock as both a loan and shares. If the current valuation is $3m and you have 10% preferred stock, then you have the choice of taking your loan back ($300k) or keeping your shares.

If things go well (company value increases), then you have to take the stock. However, if things don't go well, you get to take all of your money back before any common shareholders get any money.

So in marginal cases (where the company doesn't become very valuable), common stock tends to be worthless and preferred stock still has a chance of having some value.

vs2370
thanks again.. so basically if I negotiate to get preferred stock and if the company gets valued at 100 million, I can cash out 5 million since it would not get diluted with subsequent funding rounds..
TuringNYC
Be careful with the assumption that you can just "cash out" -- firstly some companies simply will not let you...you are stuck with the equity for 10+ years until an IPO. If you are allowed to sell, selling in the private market is not as easy as eTrade -- you will pay a big commission and you only get what someone is willing to pay. See http://www.ft.com/intl/cms/s/0/27e9444c-0879-11e5-85de-00144...
rahimnathwani
I have never heard of someone being granted preferred stock in a startup, except in return for cold hard cash. Part of the rationale of preferred stock is to protect investors from the CEO just selling the company tomorrow and taking home a large % of the cash in the bank.
smt88
The equity is very likely to be worth nothing in the long-run. Even if it does become liquid at some point, that's going to be years down the line. I imagine there's a 3+ year vesting schedule attached to it, as well. Are you sure you'll be there that long?

Pretend the equity is worth zero and then make your decision.

eip
I think of equity as having roughly the same value as a jar of farts. For most startups this will be the case.
smt88
"I know that most farts aren't worth anything, but these are OUR farts. They're going to be worth millions!!!"
zer00eyz
Lets just assume you can LIVE WITHOUT the 20k in pay.

If you stay in your current job and put that same 20k into the stock market for the next 4 years (80k total) and then do 10% gains for the next ten years... you come out to 200k in your pocket.

If the founder your talking to was asking you for 80k would you give it to him? Go ahead get out your checkbook and write him a check for 80 grand right now. See how thats going to make you feel, take a good long hard look at it. Ask yourself what its going to take to GIVE HIM that check, what would he have to tell you or show you or do for you.

That cash out of your pocket is REAL, its tangible. The options, don't count them, ever. They are incentive not compensation.

nicholas73
Both the non-taxed 20k and 10% gains are not going to be realistic.
zer00eyz
last 3 years the S&P would get you close to 10%

the last ten years on the S&P would put you firmly at 5%

Thats assuming you don't pick a decent fund with return rates that sit somewhere in the middle. If your lucky/smart you fund may return much higher, or you get slapped and loose money.

If one isn't doing it already, 401k withholdings can go up to 18k a year (close enough to 20k a year), and you can get some more savings in there depending on your marriage and partners employment status.

If OP isn't maxing out his non taxable investments today, then him putting aside 18k in 401k from his current paycheck (rather than taking the cut) has even MORE upside for him, than I'm suggesting. And hitting the right fund (and its unlikely) could have 14% returns.

SO I fully agree with you, my estimates could be foolishly low (or outrageously high) we simply don't know.

bosky101
Ask if they're willing to hike it back to your current salary on the next round of funding.
alain94040
That sounds fairly typical, yes.

Another way to think about it: if you take the job just to get a job and don't particularly believe in the startup, then focus only on the salary. If you have other choices of jobs, but really believe this startup can succeed, then do care about the equity. Which as I said, sounds fair. You can probably get a little bit more with good negotiations (6% - I'm guessing no way to 10%).

AnotherMarc
It's hard to say if it's a good offer without knowing how well you're currently being paid compared to market for the salary, and what you would bring to the company. That said, 5% for a senior executive is pretty typical, I think. And I would expect a seed stage company to pay less in salary for a CTO/VPE than a more established company would for the same sort of role (regardless of titles).

You already got some good advice about how to consider equity as part of your total compensation, but that's not what you asked. Hopefully, you've already done some thinking about how much (or little) to value equity yourself. In a vacuum, 5% seems OK for a CTO. If the technology is a critical piece to their business and you have unique expertise in it, you should probably expect more.

rahimnathwani
Yours is the only response that has attempted to answer the question which was asked. As you say, the others have focused on how to value the offer, i.e. to compare the salary+equity with an equivalent salary-only offer.

For the OP, Angel List may be a good source of comparative data. It has job postings with salary and equity ranges for similar positions.

brudgers
Did you mean "reputable VC" or is it one of those many incubator + reputed VC's that are increasingly common out in the wilds?

How many engineers would you be VP'ing?

How is the rest of the equity distributed?

What does the company's growth look like?

What is everyone else going to be doing...i.e. is this business type founders looking to outsource building their vision?

Good luck.

mattwritescode
As a CTO I would guess something from 4% - 6% some will get more depending on a number of factors. The thing is a CTO could get 10%, but if it is a bad idea or mismanaged then that 10% might be worth $0 after 4 years. A well managed, great idea might still get you $0 but it might also get you $1,000,000. You never know. You have to way up if you think this idea is something which will be viable.