When developing a startup and building a team, one big part of the process is deciding how to split up the equity. Different situations call for different action; you must consider time and money invested, value contributed, and necessity of each member. Each situation is unique depending on these factors.
If you’re in the market for a CTO or looking into adding equity to the compensation of your tech team, take the advice of some experienced members of this field. I have curated 15 answers to this common question for entrepreneurs, CEOs, and advisors in the startup realm going through dozens of articles on the Web and best answers from Quora:
It depends if they are Founders or Non Founders and it can be anywhere from 1-33 percent. Why the 33 percent, because if you are less than 3 people and cannot survive w/o a technical/co founder/CTO then they are worth it. If you just need a CTO then it’s in the 1-4% range.
–Amish Shah: Entrepreneur, Investor, Advisor, Strategist for startups
They’re only equal partners if they are equally willing to share responsibility for the downside as they are in sharing in the upside.
–Edward Mance: Founder & CEO of MudfogMedia.com
While it appears that the businessperson (usually with the money behind the venture) is more important, bear in mind, any success beyond ‘average’ is due to the brilliant ideas of your partner – the one you are funding.
I’d say, consider an even split if you are truly partners. If you merely hire a CTO to run a dev team to build what you have envisioned, that’s another matter. In that event, anywhere from 1-5% is reasonable.
–Gillian Muessig: CEO, Outlines Venture Group, CEOcoach @WebmasterRadio.fm, cofounder MOZ
The amount of equity that you give him depends on him & you. How much do you value him? How much can he do that you can’t without him. You state that this isn’t a “co-founder” role, but it is “ground floor”. I think you want to share equity generously with the “ground floor” team.
–Tim Kilroy: CEO, Adchemix – Search Guy – Big Ambitions.
Depends upon how important the technology solution is to the company, and what on-going role you play as a CTO. In a recent case I know well, a CTO with an active sales and marketing role as the product rolled out (databases) ended up with a bunch–over 10% after all funding.
–John Lonergan: brings more than 20 years of industry experience in the fields of diagnostics, medical technology and software.
This really depends on the type of person you’re looking to hire. If you want the type who could start a company from scratch as the CTO/Tech Co-Founder, then you’re going to have to cough up an amount of equity that will interest them… anywhere from 20% to 50%. Being a co-founder is as much about control as it is about compensation, and you’re not going to attract the cream-of-the-crop, jack-of-all-trades-type tech co-founder if they don’t feel like they have a hand at the helm (in today’s environment they’ll just go start their own company).
– Andrew DiMichele: CTO and a cofounder of Omada Health
Good technical people are a rare breed. You need to trust me on this one -I had a hard time hiring good engineers even when the market was crushed in 2002. Good people always have a good offer on the table from someone else.
–Etai Raz: Startup and Me
An alternative is to find some part-timers as I did (if you do not believe the CTO candidate can build the platform completely) and offer them smaller pieces (that might also add up to 15-20%). The difference for me is I now have a team of 5 or 6 for the approximate price of a CTO and I have 3 different core skillsets included. I believe I was very fortunate to find the core 3 guys all in one Startup Weekend, but I cannot be sure that it does not happen all the time. Lastly, if TTM is critical (not enough cash to bootstrap for too long), then 15-20% might be your only option. You cannot raise outside capital in today’s market without MVP and traction.
–Joe Monastiero: Founder, nFlate. Product visionary. Business-side professional with a strong technical background. Serial firestarter.
I’d think of this a bit more holistically. You need a developer / CTO to get anywhere (it seems). If this is an app business and you’re not technical, then that person is arguably at least as important as you at this stage.
Equity should be ONLY for those that put money in. I understand some may disagree. Here are my thoughts regarding rules for investors vs employees –
1) Investors put capital at risk. They are being compensate for that risk with a return, or loss.
2) Employees put labor and time in, salaries, bonuses and profit sharing compensate you for these efforts.
–Mike Kalis: Entrepreneur, Real Estate Innovator and Disruptor, Father of 2
When the day comes, there’s a lot of extenuating circumstances that will impact the percentage breakdown, but if both CEO & CTO get started around same time, do not let the fact that it was your idea get in the way of properly compensating your developer.
–Adam Wexler: Agent of Change. Founder & Chief Evangelist Officer @ Rank ’em
Frankly, the job of a CTO is much harder the later you bring them in and the less they will be able to do to help you recover from earlier technical short-cuts. We have an expression in engineering which is “technical debt”. Technical debt is built up over periods that things are done wrong or incompletely and must be paid with interest to correct them some point down the line.
In terms of compensation, a new CTO typically sees about $200K and 3% equity. I was at $220K + >=3% at my last two startups. Some CTOs may be in a place and have an interest where they are willing to trade salary for equity, some won’t be.
– Jeff Kesselman: 25 year veteran of the computer game industry with a degree in both computer science and film production.
A great book called Slicing Pie that will answer a lot of your questions about equity distribution and fairness for startups. I wish I had read this book 3 startups ago…
Here is the Amazon link: Slicing Pie: Fund Your Company Without Funds eBook: Mike Moyer: Kindle Store
–Jeff Lewis: Entrepreneur – Finance, Education & Enterprise Software
Think about it this way: a person’s (%) share of the equity should always equal that person’s % share of the risk. This implies that you need to track the contributions made over time and allocate shares in proportion to the risk taken.
–Mike Moyer: inventor of the Grunt Fund and author of Slicing Pie
If you have raised your series “A” or enough seed funding to pay them for a year plus then you can probably get away with 4-8%. If there is still a lot of risk involved or you want them to cut their salary until more funding comes in, then you need to treat them like a late founder and it will be more. You tie this to a three year vesting schedule so if they bolt after a year they lose their stock.
What are your thoughts? Have you distributed equity among contributors? Please share your insight on this topic in the comments.