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Background:

I'm the co-founder for a 2 year old startup that is currently bootstrapping and solidly profitable (300k+ revenue this year).

When we hired our 3rd and 4th employees (COO and CTO respectively), we already had

 - Paying Users
 - Net Profit
 - Money invested into the company
 - 12 months of sweat equity

CTO Hire:

4 months ago we told our CTO we would be willing to offer 12 - 18% equity vesting over several years for that kind of position but have not finalized it in writing. I'll admit that conversation wasn't well-researched. His contributions are a major boon to our continued success, but I think that figure is really high.

Question:

I feel that 8 - 10% would still be a great deal for him. Is the second offer fair and what comparisons could I use to strengthen my case?

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You told him one number now you want to back pedal. You made the mistake, not him. he took the job based on your initial offer. He performed well. You need to follow through on the promise. With that said, IMO your 12-18% should never have been on the table. That seems way too high to me. But you have to honor your promise. The good news is he is apparently a great fit for the company and he is meeting your expectations and the company is growing. Be happy, move on, I am sure there are other issues that need your attention. Let this one go and chalk it up to experience. – TimJ♦ Sep 26 '12 at 17:48

2 Answers

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WOW -- I would not go for more than 5% Equity because of the company's stage, especially if you are adding some average annual salary. If you are not giving salary at all then I would go for 8% or so. That is just my opinion.

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up vote 10 down vote

This is going to be blunt - sorry :-)

8-10% is not fair and not a good deal. Because you've already given the CTO a different figure that they have been working under for the last four months.

You change things from under them now then you're:

a) Morally in the wrong as far as I'm concerned

b) (Obligatory not a lawyer warning - go ask a real lawyer) probably legally in the wrong depending on your location. Verbal contracts and all that.

c) Got a pissed off CTO - which is going to effect his work, and the work of the people they manage.

d) What if the CTO walks? How much of a hit is that going to put on your ongoing progress? (If somebody did this to me now I'd just walk straight away. If somebody did this to me in my 20's I'd probably grit my teeth, grin and look disappointed but chipper, and immediately start looking for a new position. The message it sends to me is "they broke their word - I can't work with people I don't trust".)

e) What if it walks and writes a ranty blog post that gets picked up and goes viral? How much PR damage can "screwing over employee #4" do to you if it goes public?

f) How much harder is recruitment going to get once it's know that employee #4 was screwed over? (and it will get out - even if nothing goes public. People talk to each other. I have a mental list of companies I don't do business with and don't recommend because of similar stories that have never made the headlines).

At the moment, if I were in your shoes, I'd do the research for folk in that area and try to negotiate around the lower-end of the range that you initially gave. I really would not try and drop it beyond that. The risk is way to high.

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I appreciate your perspective and the solid advice. The last thing we want is to make him feel screwed over as he's a huge asset to our company. We might just have to bite the bullet on this one. As a follow-up question, if we had to do it all over again would 12% be a fair cut for a CTO at this stage or is it too generous? We are aiming for some kind of parity between shareholders (early-employees). – User406112 Sep 21 '12 at 14:27
I really have no clue as to whether it's a good number or not. Depends on the company. Depends on the problem space. Depends on what the CTO is/needs-to do. There isn't a generic "right" answer. – adrianh Sep 22 '12 at 10:44

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