What's a reasonable salary and equity to offer a first employee for a seed start-up?

January 29th, 2015

I have a long time non-technical friend (specializing in marketing), who have recently launched a social start-up and attracted some seed funding, after building a prototype with contractors.

He hires now his first full-time employee for the role of lead software engineer, and asked me regarding reasonable equity and salary to offer.

I think that single digit equity and 50% of market salary (with time-based increases) would be fair enough, any opinions on that?

Anonymous

January 30th, 2015

I have done a few technical reviews of staff for start-ups and acquisitions, I see this from time to time.

Some developers can become Tech Leads, a Tech Lead should be a leader and have a higher level of knowledge and leadership over the developers, they must also have an understanding of the business. They are mentors more then anything.

A Tech Lead should also have an understanding of the overall solution, mobile, web and servers, they should be able to setup SSL, tune servers and do code reviews, they are not a CTO.

You may also have an Architect, an Architect is more focused on the abilities, they may have been a Tech Lead at some point but they are more focused on technology. The abilities are important for scale-ability, reliability, maintainability, etc. Not all Tech Leads have exposure to multiple technologies or have expertise in the abilities, this is normally where start-ups get into trouble.

A CTO is an OFFICER of the Corporation, not a Tech Lead, not an Architect. There are big picture items that the CTO will be aware of such as LDAP, Single Signon, Security, etc. A little cross over from an Architect but more focused on value vs actual coding, the CTO may have written code and may currently write code but that's not really what they should be focused on long term.

A CTO should be able to help in getting funding, they will have connections, they will understand Term Sheets, they should have gone thru this a few times before, they help represent your companies technical capabilities short term and long term, they are the road map presenter for where you want to be.

I've been involved in technology and start-ups for over 20 years and do not consider myself a CTO, I am a Certified Architect, but that does not qualify me to be a CTO.

I have met many start-ups that have a tech lead as their CTO, to be honest, I have never taken a job with such a company.

Nothing says you need a CTO when you start, let your tech person get the company going, do take care of them as needed, don't make promises that you can not keep to them.

Don't expect to get funding when you have a Tech Lead as your CTO, they just might walk away, its OK to say you don't have a CTO, I see this a lot with start-ups, having "missing names" for your company corporate structure is better then having the wrong person.

If its your money you can do anything you want :)

Sumit Gupta Co-founder of Rightster, Seasoned CTO

January 30th, 2015

I have a slightly different take on this.

Don't freely give away your equity.

It's far more precious, and while it feels 'free' (as opposed to salary that really goes out your pocket), I would rather pay the salary if I can afford to. Do you really think that 50% of a tech lead's salary will equate to a 15% stake in the company?

Tech leads are not CTOs.

At least, not yet. Are you paying him 50% of a CTO salary? Unlikely. So give him equity that you'd give a Tech Lead.

Room to grow.

This guy is your first. If things go to plan, you'll probably have many more. By giving him 15%, you are giving away a serious chunk, keeping much less for the possibly dozens or hundreds of people that'll come in. Additionally, if this guy hangs around, he'll want to grow with you. If he does end up being CTO, then at various stages (and there's more than a few) in the journey you will want to offer more equity. Staggering equity like this has many benefits, which I'm sure you'll already know of.

It's a big world...

...and you're just starting up. As you grow, you will meet a lot of great people. Some people will also approach you when they hear about what you do. Some of them may be suitable for the CTO role. Getting someone who's already a CTO, to my mind, is far more efficient than 'growing one of your own'. Not that I want to discourage people from growing into that role... but it can take a long time - something that a startup is always short of. If you hire a CTO soon, you might want to think about what you're going to offer him considering you offer 15% to tech leads.

Don't get me wrong, I am not saying that you shouldn't give equity. I'm saying that equity makes people work harder, feel a sense of ownership, maybe even more tolerant of shifts in business that a startup usually goes through. But you need to be judicious about it. Not stingy. Judicious.

BTW, I think even 1% equity is pretty good. If someone is *asking* for 15%, that just shows me that they are thinking really small, and not too much into the future. I would, in fact, have serious doubts about hiring the guy.

Just my 2p/2c worth. Feel free to comment!

Shobhit Verma Ed Tech Test Prep

January 29th, 2015

Is the lead expected to be CTO eventually? In that case equity needs to be a double digit number. One of my friends at 500 startups thought anything less than 15% is a joke if he is the only tech leader you have. If you have several strong leaders, it could be different.

Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

January 29th, 2015

Yes, and I think that if they are giving 50% off salary for a while, they are investing in the company (whatever the value of that 50% salary is) so the % should be higher. I think if they got pretty close to regular salary and were not going to be the CTO, then maybe 2% would be OK (for the lead developer). If you are making them the CTO, and they are investing by giving up salary, then Shobhit is correct, better be closer to 10 to 15%.

You want your lead developer/CTO to stick around.

Robert Woltz CEO at MJD Healthcare Inc.

January 30th, 2015

You can tie equity to success of the company as well. Lets face it if someone makes your company launch to the point of great acquisition ask yourself what would you give him? You couldn't make it happen by yourself or you would of accomplished it without the added equity partner. So ask yourself deep down what kind of equity is this worth? .

Alex Ermolaev Founder at TeamCamp

January 31st, 2015

I would recommend being super clear whether you are looking for co-founder or for employee. Those are very different roles. The last thing you want is to hire employee who thinks he is co-founder because that would lead to all kind of problems later on. Co-founder/CTO should be expected to participate in all major decisions as equal, be experienced CTO (not future CTO), bring significant credibility to the business, participate in fundraising, work without pay when required and etc. 15% and 80% of salary would be reasonable. At the moment, you seem to be hiring an employee, which should come with much lower equity in 1-2% range and closer to market salary. Having clarity upfront will safe you a lot of headache later.

Lalit Sarna Business & Technology Leader

January 29th, 2015

Here is a modified version of my answer on another thread

Bringing on CTO talent based on equity can be tricky. Even tricker when you throw a little money in the mix. @Michael and @shobit have some great thoughts around this.

Founders often get emotional around idea of ownership and the notion of first risk.

So I offer another point of view that may help out things in perspective:

While I can relate to the hardships in getting some momentum behind a new idea, chances are that majority of the work still lies ahead of you.

Even after raising seed, most startups still have to do 98% of the work to get to a decent exit.

99% will fail and most of them due to bad execution.

So I urge my peers to pick the founding team wisely. Once you are sure about the candidate, focus on maximizing the chances of success by sharing equity based on the workload and risk you expect that team member to carry.

Jake Carlson Software Development Manager at Oracle

January 29th, 2015

I agree, that small amount of equity at 50% salary would only fly for a desperate candidate or if the idea is so undeniably a gold mine that he/she doesn't care.

Michael Kovacs CTO at Samsung Accelerator

January 29th, 2015

On the face I agree 100% with Shobit.. what incentive does someone have to take 50% market salary AND little equity? The reality is it's whatever the market will bear but we are missing important pieces of the equation that would be a good reason for such a "low" offer... Who is this founder? Can he/she attract the right people? How much money raised and the terms? How many rounds of funding before an event? How much traction is there now? How big is the potential? How unique is the product? How much importance does technology play vs. sales/marketing? What's the moat? etc.

Like I'd take single digit equity and 50% salary on Bill Gates' next startup as employee #1. :-)

But for your garden variety entrepreneur with a reasonable idea that's got some initial traction but a ton of risk, that's going to be too low for my taste.

Stas Oskin

January 29th, 2015

Thanks for all the answers, these are some good points.
Being always a technical co-founder, I never was personally in situation where the company was without a technical lead, hence my estimations were probably too low.

The lead developer is indeed hired to eventually become a CTO, based on the performance of course.
The seed is within 0.7-1M$ range, based on milestones.

So to recap, a fair offering would be either within 10-15% / 50% of market salary, or say 5%-10% with 100%?

Thanks again.

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