I am joining a few months before VC pitches. I’m coming on board as CTO and will receive 3% equity vested over 4 years as well as 144k annual salary once the funding goes through. The requirement is that I work on the app for 5 hours a week. The app is partially completed but still needs much work which I will be instrumental in completing. The founder is working on it full-time while I have another full-time job and can only work on it part time until funding comes in.

I am now being offered 8% equity to be a co-founder, which will require me to work on the app 15–20 hours a week and accompany the CEO for VC pitches.

For the added amount of work (which is ofcourse unpaid until any funding comes in) and responsibility representing the company in front of investors as well as being an essential part of the early success of the app, I’m wondering if 8% is enough or if I should be asking for 20% instead to make it worth my while. But I am also going to receive a 144k salary once the funding comes in, so perhaps that’s too much equity to request.

Should I be happy with the 8% being offered? Should I bump it up some? Is 20% insane along with that salary?

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    Only you can possibly know the exact details of where your company is set at, what is a sensible salary and equity package for a CTO in your area. Adding a country/area tag will greatly assist. Also, from the sounds of it half to 2 work days a week isn't that much, you should evaluate it as such, and not as working full time on this in which case 144k salary and 8% equity may not have been enough. – Leon Jun 15 '18 at 7:00
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    @Leon: exactly which is why I am voting to close this question. – Pete B. Jun 15 '18 at 11:03
  • I've personally been involved in many (more than 10) pre-funding negotiations over equity stake. Many of them were heated discussions with hours or even days of back and forth. Only one of the companies ended up getting funding (that was accepted by the owners), so in retrospect, all of the other long intense discussions were fruitless. I suppose the lesson here is that equity stake only matters if you get funded or start pulling in a lot of money without funding. Furthermore, every situation is so unique that this question is impossible to answer without seeing the books and the potential. – TTT Jun 15 '18 at 14:37
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    Your are being paid $144K to do five hours work a week? – DJClayworth Jun 15 '18 at 17:40
  • No. Right now, while we wait for funding and I’m working 5 hours a week, I am getting nothing. If I agree to the co-founder terms, I will work 15-20 hours a week and receive raised equity to 8% (but potentially more if I want to negotiate that) and still get nothing in terms of salary. Only once funding comes in, which is uncertain ofcourse, then I will receive 144k. – zeckdude Jun 15 '18 at 17:44

20% of what? If the company is worth $100, then congrats go enjoy a few drinks this weekend. If this company is expected to be worth $100 billion dollars in the next 5 years, then you would be a very well compensated CTO.

The question of equity is how much you are bringing to the table compared to how much the rest of the company is 'worth' (in the case of a start-up, this is more of a future value rather than current cashflow)

The investors will get equity because they are infusing the business with cash. You get equity because it a) incentivizes you to make good business decisions and b) fills a compensation gap that you might otherwise make at a more established business. The founders get equity because this business was their idea.

They might be calling you a 'co-founder' but it sounds like they actually started it and got the business to this point without your help. As such, I think 20% is a big ask. They will probably balk at giving you so much right before they have to give away more to the investors. I could see getting 10-12% as a more reasonable goal. Although, this does depend heavily upon your location and the type and positioning of the business, so I could be way off.

You might also ask to be made an equal partner with the other co-founders. That is, you each get an equal share of equity (so if you are the fifth co-founder you get 20%). But that will also mean your equity will be diluted equally as investors and others come on board with the business. So you might end up back at 8-12%.

Update to address comments below

First, let me say that I am not a lawyer nor an expert.

If you accepted a 10% deal, I would expect you to either not be diluted at all, or maybe diluted a little at subsequent funding rounds and only in proportion to the equity you hold (i.e. if he holds 50%, you hold 10%, and another holds 40%, one dilution strategy to give equity to a fourth party that wanted 10% would be for you to give 1% (leaving you 9%), the founder to give 5% and the third to give 4%, but this all depends on the contract you sign and others have signed, so read that carefully)

I think a 4 year vesting is fairly common, but you could try pressing for 2 or 3 years instead or removing any cliff currently on the vesting schedule. The founder will still want some sort of vesting schedule to keep you invested in the company over several years (to make sure you don't just take the equity and then kick-up your feet and let him do all the work to make you money). Or you could save your bargaining for getting more equity rather than getting less equity more quickly.

In general I think you should sit down and ask how committed you want to be to this business. By your description, you could have a huge impact on the potential success of this venture. Also assess your risk tolerance during this. In a start-up, your job and your investments can be tied up in one place; and that place has a very real chance of total failure.

If you want to be very committed to making this a success and can handle the risk, then I would ask to be an equal co-founder with them (with equal dilution of your holdings when investors come on).

If this is more of a side project or you don't want the full risk. Stick to asking for 10% and do what you can and hope for the best.

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  • So there is only one founder and he’s having trouble finding people who are really dedicated to the project. There are some helping here and there for minor equity promises but I’m much more skilled and can offer more experience and passion so I think he realizes I’m a good person to have around and in order to incentivize me, I could make a point that more equity is needed. While there is a product thus far, it is incomplete and the code needs major refactoring which will be mostly on me. – zeckdude Jun 15 '18 at 22:31
  • I am located in Los Angeles and the business is a crypto-related business. In regards to being diluted when investors come along, if I’m not an equal partner and I accept the 10-12%, does that mean it can’t be diluted or do I need to make sure that is specifically mentioned in my contract? Also is the typical 4 year vesting applicable in this case? Or can I ask for something better? – zeckdude Jun 15 '18 at 22:35

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