25% equity plus 6 month cliff | Hacker News Reader

25% equity plus 6 month cliff

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Someone reached out to me to join their pre-funded early stage start up. The guy started the product by himself, attended an incubator, Outsourced the product and the app to be built at his cost and handled the data and ML for this product himself. He wants me to be the CTO and handle the mobile app as well as the backend. There are seven units sold and he’s in talks with some VC trying to raise approximately 200 to 500,000 in seed funding.

He’s not looking to bring me on as a cofounder but just as a CTO.

My question is at this stage is 25% with a six month vesting Cliff fair? Typically at this point I would only consider 50% and cofounder status but he has put in the time and money so I can understand why he doesn’t want to give 50% but does 25% seem too low?

He originally only wanted to do 20% with 1 year cliff.

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I think you’re getting some mixed advice here. While I agree with a lot of what the previous u/psyklic, has said, you need to realise that this isn’t just a blank startup from scratch. For 50% equity, you’re starting on the same level usually.

If you were both starting from scratch and equally investing time and/or money, 50% would be fair. However, this person has already pre-funded the startup, built the product, and handled the initial development and data. Given this investment, 50% equity for you doesn’t make sense.

From our experience with early-stage startups and various incubators and accelerators, 50% equity is only reasonable when starting from scratch. Since the founder has already invested in and developed part of the product, a fair range for you might be 20-30% depending on your overall value (e.g. beyond dev too, are you ex-airbnb, facebook etc that his investors will drool over or mid-senior dev).

The most critical aspect you need to evaluate is his ability as a CEO to sell and raise investment. 50% of nothing is pointless, but 25% of a successful venture is valuable. Assess his background, experience, and network in sales and fundraising. If he can drive the company forward, then 25% is a solid offer.

It’s also important to have a transparent conversation about your roles and expectations. The equity split should reflect the risks and contributions both of you are making.

P.S. The vesting terms are really generous indeed. Maybe ask him plainly why he set such terms compared to industry standards.

Goodluck!

Assuming this means 25/75 percent, there is a strong counterpoint to this:

99% of the work is ahead of you. 95% of the risk is ahead of you.

So why get only 25% if the CEO gets 75?

Here’s a split I would want if joining an early startup as CTO / co-founder-in-all-but-name:

40% CEO. 30% CTO. 30% Employee pool (this assumes another big chunk will need to be given to at least one other key hire in the next year).

Normally vesting is over a much longer period, e.g. four years, so he is insanely trusting of you. For example, what if you worked for six months got the equity then just left? Then he might find it difficult to raise funding.

At such an early stage, 25% and no salary would usually be considered a co-founder. Of course, there's no legal definition so in actuality it's whatever you agree to. This situation is very common, where a founder didn't really derisk the company as much as he perceived.

For being a co-founder, the question becomes to what degree can you accelerate the business. Is funding holding him back and your background/involvement will encourage investment? Is the product what's holding him back, and you will 10x its dev speed? You'd make a logical pitch that with you as co-founder, the company will grow way faster than without. Additionally, I'd do some online equity calculators and present a logical case for a given percentage.

I'm also not sure what the strategy is with the seed range. You want to have enough to survive hopefully 2+ years AND propel the business forward. The low end implies maybe you'll pay yourselves minimally. However, you may need another raise very soon since it doesn't help blow up the company -- you'll have to hire/rent office space/marketing/etc.

>At such an early stage, 25% and no salary would usually be considered a co-founder. Of course, there's no legal definition so in actuality it's whatever you agree to. This situation is very common, where a founder didn't really derisk the company as much as he perceived.

This is strange Silicon Valley vernacular.

In the real world, a "co-founder" is someone who founds the company.

> In the real world, a "co-founder" is someone who founds the company.

In the real world too, not all founders are there at the exact moment the company is incorporated. If I incorporate a company, 6 months later have little accomplished, then realize I need skilled people to come all-in for equity -- they're certainly going to be co-founders.

In this case we lack the full story, but this company likely would still be considered very early. They're raising a seed round and asking someone who would be critical for growth to risk everything only for equity (presumably). If he wasn't critical, the entrepreneur would likely wait until after funding and hire a founding engineer.

Just walk away. That’s my first instinct.

You two don’t seem like you’re on the same page, and getting there will probably create some bad juju.

Whatever he wants you to do, I’m guessing his plan is to dilute you or cut you out as soon as he can. That, or he has no idea what he’s doing.

To throw him a reasonable bone, the initial cost he spent can be an IOU from the company to the founder. You can massage this number to account for his direct cost, and maybe throw in a small amount extra for his time. After that, 50/50.

Anything else is asking for trouble.

To "throw him a bone" you'll "let" him get an IOU for what he put in (at very high risk) to create the "initial something" from "nothing" ?

I must be honest, if someone approached me with that attitude that would probably be the end of talks.

> I must be honest, if someone approached me with that attitude that would probably be the end of talks.

… and if I were the tech guy, I would feel like I dodged a bullet.

I appreciate that MVPs, idea validation, PMF (if that actually exists for this product), and actual sales are worth something, but imho they aren’t actually worth that much if the core product was outsourced.

The upside for the CEO will be moonshot growth rather than trying to optimize a partial cash out after an early success.

Ok, real talk from a business-side guy who can program badly…

The business guy paid for the development of an MVP out of his own pocket, and he seems to have found PMF. Awesome! Now he wants to go big via VC.

If he wants to succeed on the VC route, he needs the/a tech guy way more than the tech guy needs him. To wit:

- The app he paid to built will most likely be no part of any of the company’s future other than maybe a series A.

- The first CTO will be responsible for the continuous development of a product that can get multiple rounds of funding. This includes things like the initial code base (most likely, assuming a rewrite that can scale will be necessary), initial stack/tools, etc. Early bad decisions can be a major setback or even a company killer, imho.

- The first CTO will create the tech culture in the company. Imho, the tech culture has a high predictive value of potential to go deep into the VC cycle.

- The most likely value of whatever the CEO created will either end up rounding to $0 or worth 8-figures plus, so trying to extract value at the current state seems misguided.

- That said, he did effectively/actually lend the company money for early stage development costs, so it’s reasonable to expect that to be paid back once money starts flowing.

Apologies for the wall of text, but I see a lot of technology die on the vine because one side or another thinks what they have is worth way more than it actually is, and this looks like it could develop into one of those scenarios.

The CEO successfully navigated the first or maybe second of many inflection points that he will need to navigate before he hits unicorn status. He’s not at the end, he’s just at the beginning, but he doesn’t seem to be thinking about it that way.

If this were a cash-flow oriented business rather than a VC business, this would be a very different conversation (most likely no equity but a competitive salary). But it’s not, so the CEO needs to find the partner than he’s willing to go the distance with.

The biggest risk with being an early stage CTO, is being discarded. It's VERY common for the CTO to actually just be a programmer building the product, who once ships the MVP, has trouble holding his job.

I wrote a whole essay on this[0], but usually you need a founding engineer. They may or may not grow into a CTO, but a CTO of a 2 person startup needs decidedly different skills and motivations than the CTO of a 10 or 100 person company.

0: https://www.mooreds.com/wordpress/archives/2555

Right but usually they tell the founding engineer that they are a CTO, give them equity, but low salary. In real venture backed businesses where the equity ends up having real value, the "CTO" is gone by ~18 months. This is the point where the product is in the market, and is getting some sales. I see it constantly by non technical CEOs in NYC

Yup. You should walk in eyes wide open to see which role you are in. Clues you might be a real CTO:

* you've been a CTO in the past

* you meet with the board and investors

* you are involved in strategic discussions

* you have budget control

> the "CTO" is gone by ~18 months.

Well, I hope they exercised and got the equity they legally earned.

True, but you could also spin that as: "The biggest benefit with being an early stage CTO is that they don't need you for the long haul - vest early, take a small exit, and move on to the next gig." With a 6 month cliff, that sounds like a really nice way to minimize risk while giving something a shot.

The six month cliff is excessively in your favour

My thought as well.

Bad signalling to insist on 6 months. Unless I'd worked with someone already, I'd be extremely wary of signing away a quarter of my business to them within such a short period of time.

The cliff is just when vesting starts. That doesn't meant they get the full quantity of shares after 6 months.

What does 'fair' mean? Life isn't fair. To make this easier don't think of this in terms of 'fair' think in terms if what you want.

Start with the obvious; are you happy with the salary sans equity? Because, let's be honest, chances are the equity is worth 0. Assuming this fails (most startups do) will you be happy just walking away?

What about long-term? If you're both there 10 years from now I'm guessing it's because you both made it work together? Will you be equal then?

Personally I wouldn't ask for 25% in 6 months. I'd ask for 5% a year. For 10 years. (With any dilution taken into account.) And a decent salary along the way. (Same as him).

Yes he's done work, yes he's put in money, yes he's proved thd concept - all valuable and worthy of reward. But after 9 years this head start won't matter as much.

My two cents: Ask for a market salary And add a condition linked to dilution:if he dilutes you by 50% , salary rises by 100% and so on That way, you garantee yourself a market salary and if the investors come, your salary will increase accordingly if you are diluted.

I don't have direct experience with startups, but 25% seems fair for the stage it's in. Six months vesting seems extremely fast and great for you. Most 401k plans at boring companies take around 5 years to vest. Six months for 25% equity is amazing.

Even his initial offering of 20% vested at 1 year still seems like a good deal.

What difference does "cofounder status" make in this case? Do founders have different rights or opportunities?

Why do you care about "co-founder status"? What does it even mean? It's just words. The deal is good, I'd take it.

You'll both be happier if your title is NOT CTO or Chief anything. Same for Vice-President.

If the company is successful, odds are that you won't be Chief a few years from now. That's a painful change. You'll probably leave even if, realistically, you shouldn't.

If the company doesn't work out, "CTO" can be an obstacle to getting a job at a "not startup."

You're better off with a meaningless title. In the US, "director" works.

Does his equity vest too?

6 month cliff? lol.

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