How much equity should a CTO ask for?

10 June 2022 ยท 2391 views ยท Updated 01 April 2024
Question

Hello Vadim.

I have 6 years of experience writing code. I've been grinding away in the tech industry for a good while, hopping between projects, freelancing, all the while harboring this big desire to build something that's mine. Then, out of the blue, an old college buddy hits me up with an idea. It's a good idea, so I join his company. I've been working for this startup as employee #3 with unofficial CTO title, getting a 50% of my market salary though, but I feel like I deserve some equity in the company? They offered me 1% but I feel that's too low in terms of shares?

So my questions is how much shares would you ask for?

Thanks!
Nick

Answer

This is one of the top questions I hear from technical co-founders. Being a co-founder is great, and it’s especially awesome when you get to start with a brand new company. But if you’re going to be working for free, or at least at a very low salary, there are some things you should remember regarding your shares.

Equity, in simple terms, is your slice of the future pie. The amount varies widely and is influenced by the startup’s stage, your role, the commitment you’re bringing to the table and the risk you’re taking on. At the idea or pre-revenue stage, equity offerings tend to be larger, reflecting the higher risk. As the startup matures, these offers shrink but become potentially more valuable.

Think of it as over time your share of the pie becomes smaller, but the pie itself gets bigger, so it’s still more valuable.

First of all, If you’re working for no salary, then you may as well be a co-founder, as any business that can’t afford its key personnel is a venture that might not pay off. So we should be talking about 25-35% here, depending on your resources investment into this company.

Your SalaryYour Equity
80% – 100%0% – 2%
60% – 80%3% – 6%
40% – 60%7% – 15%
30% – 40%16% – 25%
Less than 30%26% – 35%
Example of how much shares you should expect.

Second of all, if you’re getting a full salary, then at most you should be entitled to 5% of the company depending on how well you can negotiate.

Also, you need to make sure that the founders aren’t just saying you’re a co-founder to make themselves feel better about taking advantage of your labor: are you actually listed in the company’s paperwork? Not having signed anything or the company not being legally formed is a huge risk for you. Without formal documentation, your equity and contributions are not protected. It’s essential to halt further development until there’s a legal framework in place that recognizes your role, equity, and any terms of separation, should things not work out.

As a CTO you are responsible for the whole product delivery, and it makes sense to have you in the documents also. Do you have an ownership stake in the company, or some written form of agreement how the shares will be distributed?

Are there other co-founders who are being paid salaries but not getting equity? If so, then it might not be a good idea to work for free; those other co-founders may well end up owning the majority of the company come time for an exit.

It’s a challenging conversation to have, but it’s crucial for ensuring that you’re entering into a business relationship that recognizes your value and contributions. Remember, successful startups are built on strong foundations, and that includes a fair equity for CTO and equitable treatment of its founding members.

Wish you the best of luck.

I’ve recorded a youtube video where I go in-depth about CTO Salary and CTO Equity:

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  • RRei

    Totally agree on not underestimating the value of a good CTO. The tech foundation is what most startups are built on. But also, don’t forget to factor in the risk. 1% seems low unless there’s some serious cash compensation involved too. Remember, equity in a company worth zero is still zero.

  • Mark

    I think the focus on getting everything in writing cannot be overstated. Verbal agreements are worth nothing. Insist on formalizing everything. And yeah, negotiating for more equity makes sense, but prepare for pushback. Maybe suggest performance-based milestones for additional equity?

  • Henry Clarke

    Absolutely, securing written agreements is a must in start-up settings. It prevents potential misunderstandings and safeguards your contributions. Remember, initial small equity can grow significantly, so negotiate wisely considering long-term potential.