suggests, anyone joining 11 months post-funding is functionally an employee, regardless of whether you want to use the term “founder” to describe them.
Before we even get to how to get them the equity, there is the if and why. Most people would say that a founder would have at least 10% of an early stage company’s outstanding common stock. Given the company’s valuation and progress, and the dilutive effect on investors, is this even something that makes sense and that the investors would approve? Is it because the company hasn’t gotten too far, the investment accidentally created too high of a valuation, or it needs a reboot? Is it because the current team is lacking something crucial, or a key founder left and needs to be replaced?
You can certainly issue options to a new key team member as you would to anyone else. However, anything in the 10% range would break the stock plan and create some tax issues of its own, not to mention that the huge looming purchase price is a problem all to itself, you’re just delaying a problem not avoiding one.
A company can loan or grant a person the cash needed to buy their shares, or for an early exercise of options. The disadvantage of a loan is that it gets paid back: either forgiven at the option of the board (in which case there is debt forgiveness income), folded into a net proceeds upon liquidity, or potentially, demanded back at some point.
If they are truly so important that they are worth a big stock grant whether under-market stock or a big bonus to fund a stock purchase, a company might just do that and accept the tax hit. This problem comes up in later-stage companies making new C-level hires
Q: I have bootstrapped my startup to our recently launched MVP by using paid contractors, and I’m now looking to bring in key team members (at least a CTO) as co-founders. Given that I have not raised any funds yet, one of the potential CTO candidates has agreed to join me on an equity basis. What do you recommend I offer the CTO candidate to demonstrate that I really want to work with him as a co-founder, but at the same time not make a decision that will deter potential investors (e.g. issuing him preferred instead of vested common stock for his work/contributions)?
on equity splits. He generously offered to share his perspective on your situation:
Congrats! Bringing on a key technical leader is a milestone that you should be proud of, and which will impress any potential investors. Your question around equity has a few components, but directionally you’re exactly right:
What’s the CTO’s value? If they’re a true cofounder, would you consider giving them equity startingaround 10%of the company — all the way up to a share equal to yours? For a very early stage company, we see “late-arriving cofounders” all the time. Otherwise, senior engineers/founding team would usually receive 1-5% of the company. These are all averages and situations definitely differ.
The stock grant should be common shares with a standard vesting schedule. Even outside of investors, this will give you comfort that you have time to evaluate this new team member before handing away meaningful portions of your company. Any venture investor will likely begin a vesting schedule for you as well.
Given that they’ll start work during the vesting period, the CTO might ask for something from you which signifies commitments — such as if they’re terminated without cause pre-vesting cliff, that you grant them some negotiated amount of stock. In my mind, this seems fair. ???
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