Non-Founder Equity
Some great comments here right off the bat. Frank asks on a previous post,
"I am just now hiring a COO (really a co-CEO). My first hire. What are the equity amounts offered to a key non founder at the early stage (Pre Launch)? I have read 5% to non founding CEOs, and 1% to COOs. In our case, he and I will be joined by no more than a couple senior execs in the next year. Thanks for any advice."
As you might expect, the first and most important answer is "it depends", but I'll throw out some quick thoughts.
1. If your company is pre-funding and pre-revenue, which it sounds like you may be, then a single point sounds pretty darn light for a COO. Don't forget this person's going to get diluted on financings along with you and everybody else.
2. The 5% to non-founding CEO's can be the kind of equity package that a non-founding CEO might get after a round or two of financings. Again, if you're pre-launch, pre-revenue and this person along with the founders are going to form the core of the mgmt team, you could easily be thinking 4-5% for this person, some people would say more is fine too. The dynamics change dramatically as you raise money, make headway in the market, etc., but don't get caught up in hoarding founder equity at the expense of getting the right team together when you're still pre-launch. The key is to remember that this person's equity is going to dilute with everybody else's on future financings.
3.I have no idea what Canadian equities law is, and I frankly don't know US equities law that well, but note that if you haven't raised capital yet and you're pre-revenue, then you can very possibly issue this person common stock or restricted stock (instead of options) without the normal tax consequence since the stock has no perceived value yet . This is a topic for an entirely separate post, but when your stock is "worthless", there are some real benefits to restricted stock over options. Again, caveat emptor, there are loads of pros and cons to options vs. restricted stock, but something to consider at this stage (and I'm not a lawyer, if your erection lasts for more than four hours after hiring the COO, please consult your physician, and so on and so forth).
I'll say something that will become a common theme here. Founders that worry about keeping as much of the equity as possible are not thinking about things correctly. Owning 5% of a billion dollar company is better than 40% of nothing (yes, yes, owning 40% of a bilion dollar company would be best. I've only had an audience for two days and you're already predictable!). If you're only offering a point of equity to somebody that's coming into one of the most senior positions in the company pre-funding, pre-revenue and pre-launch, you aren't going to attract the best person for the job. The right person will prefer more equity and less salary, and a point is *probably* not close to the right number.
Hope that helps. Need to do a post on options vs. restricted stock. Lots to say about that.
Comments
"I'm not a lawyer, if your erection lasts for more than four hours after hiring the COO, please consult your physician, and so on and so forth"
That set me up for the week!
Posted by: Ivan | February 19, 2007 03:54 AM
It gets even more gray when you have a company that's self-sustaining but strapped, less than $1mil in revs, and has a product but no focus, no clear direction, and no cash in the bank. Let's say a key non CEO person joins the company as a key man with no title (since they're irrelevant at a 10 person firm.) Basically, this company is more start up than not...but some of the risk has been mitigated. I know I was happy with sub 5% when I started, but now I know what I've done there, (headed toward $5-$7mil acquisition)and more than 5 seems like a reasonable amount to ask for. Shame on me.
Posted by: Doug Mitchell | February 19, 2007 12:54 PM
Only other thing I would add would be that if you are planning on raising VC -- you are better off getting your team immediately on a standard vesting schedule the VCs will like (and it's good for you too) -- four year vesting, first year cliff, no acceleration. Saves you from having to have the conversation later to try and implement these terms in conjunction with the VC terms. And the one year cliff is great from a manager's perspective in that if it doesn't work out within the first year, no big deal.
Posted by: chicagoal | February 19, 2007 04:34 PM
Regarding the previous poster's comment about "cliff".
If you're just starting out with just a prototype, and you're asking for someone rather senior to join you for an "all equity until funding" deal... there's no way they are going to go for the 1 year cliff, since they're bearing ALL the risk.
In this case how do you mitigate the risk for both sides? You don't want to sign over a chunk of equity to a potentially non-performing member, but at the same time you want to be fair?
Posted by: trevo | March 13, 2007 02:07 AM