We are in the common stock series. At the moment I have been investing 32 hours a week in the startup for the past 4 months without receiving salary. I handle marketing, communications, PR and sales. The equity pool reserved for first employees is 40%. There are around 20 people working at the startup, from which maybe 6-8 invest the same or a bit more time as me. The two founders included. Thanks for your help.
Greater risk = greater equity. How likely is this to fail or just break even? If you aren't receiving salary yet are among 4-6 non-founders with equivalent sweat investment, all of whom are lower on the totem pole than the two founders, figure out:
1) Taking into account all likely outcomes, what is the most likely outcome in terms of exit? (ex: $10MM.) Keep in mind that 90%+ of all tech startups fail (Allmand Law study), and of those that succeed 88% of M&A deals are under $100MM. Startups that exit at $1B+ are so rare they are called "unicorns"... so don't count on that, no matter how exciting it feels right now.
2) Figure out what 1% equity would give you in terms of payout for the most likely exit. For example, a $10MM exit would give you $100k for every 1% you own.
3) Decide what the chance is that the startup will fail / go bankrupt / get stuck at a $1MM business with no exit in sight. (According to Allman Law's study, 10% stay in business - and far fewer than that actually exit).
4) Multiply the % chance of success by the likely outcome if successful. Now each 1% of equity is worth $10k. You could get lucky and have it be worth millions, or it could be worth nothing. (With the hypothetical numbers I'm giving here, including the odds, you are working for $10k per 1% equity received if the most likely exit is $10MM and the % chance of failure is 90%.)
5) Come up with a vesting path. Commit to one year, get X equity at the end. If you were salaried, the path would be more like 4 years, but since it's free you deserve instant equity as long as you follow through for a reasonable period of time.
6) Assuming you get agreement in writing from the founders, what amount of $ would you take in exchange for 12 months of free work? Now multiply that by 2 to factor in the fact that the payout would be far down the road, and that there is risk.
7) What percentage share of equity would you need in order to equal that payout on exit?
8) Multiply that number by 2-3x to account for likely dilution over time.
9) If the founders aren't willing to give you that much equity in writing, then it's time to move on! If they are, then decide whether you're willing to take the risk in exchange for potentially big rewards (and of course, potentially empty pockets).
It's a fascinating topic with a lot of speculation involved, so if you want to discuss in depth, set up a call with me on Clarity. Hope that helps!
Great question! And it was literally just addressed in this podcast episode with David Skok: http://www.hubspot.com/podcast
Disclaimer the information below (until the last paragraph) is about venture-backed companies.
Short answer: It's dependent on the stage. Less risk = less equity.
Long answer: Usually co-founders (if one is a CMO) would expect around 10%.
If the company has raised seed funding, and you're joining post-money coming in, a lot of the risk has been removed and the company has been valued at a higher level. That phase is less black and white. For a CMO in that range, it's about 1.5%. If you bring tons of experience, you could get as high as 2%.
As the company grows and raises money at higher prices, even more of the risk has been removed and the company is being valued much more than previously. Thus, the stock you would receive is worth much more than it would be at the early stage, which has more risk. The amount will drop down, if it's near the company going public, it could be around the .5% - .7% range.
If it's not venture-backed, David says that typically the CMO is underpaid. If this is the case, then help them think which is more important to the cofounders (who own the majority) - "would they rather have 50% of a grape, or 10% of a watermelon."
I hope this helps. Best of luck!
1. Figure out what equity you would have wanted if the company already had raised a round
2. Adjust for anticipated dilution of the Series A round.
3. Then, either double or triple that adjusted number to account for pre-funding risk, depending on how far along you are in the bootstrapped phase.
If the company does not intend on raising capital then skip 2.
I would say you should be in 3%-6% range if you are working strictly on equity. The norm is a 4 year vest with 1 year cliff.
You can shoot me message and we can discuss.
Why are you working only 32/hr week? I have to assume that's because you have a day job with a paycheck. If you handle marketing, communications and PR, that tells me that you are not working at the executive level developing a business strategy, but rather as functional level where you execute already developed strategy.
The first question I would ask you is what do you want our of your career and financial composition?
Assuming that you are going to maintain this workload level, I think that covetable note is the best way to compensate you for your time. Figure out the salary for your role with a large corporation, then use that as a baseline for the monetary value of your time for the past four months.
In terms of equity, with a startup that already has 20 people involved, single digits numbers come to mind.
I have hired more than 25 C level officers and directors in companies ranging from startups to mature cash flowing operations. The conventional wisdom/rule of thumb, such as it is, is that as a C level you accept "half" your free market salary in cash and the rest in equity. The real rule is never work for free. Every company tries to get as much free work as possible, and every C level officer tries to get as much equity and cash as possible. When it comes time to negotiate, which should be soon, use the comp level of the other C level officers as a benchmark. If you would like to discuss this further, please feel free to get in touch.
When there's no cash flowing, I think a grunt fund is nice (http://www.slicingpie.com/the-grunt-fund-calculator/). The problem is often keeping track of work and effort done by everyone. Without knowing that, it's hard to determine value sometimes.
Aside from that, a grunt fund should also answer your questions about equity. Provided the other people in the startup are on board with this philosophy of course. Either way, it's a good guideline and a good way of thinking about things.
Start with 15% and go down.
Don't stop taking massive action.
Best of Luck,
Michael T. Irvin
My books are available exclusively through Amazon Books. Check out my book "Copywriting Blackbook of Secrets"
Copywriting, Startups, Internet Entrepreneur, Online Marketing, Making Money
I infer from your question that you haven't worked in a marketing leadership role before at a startup. "I handle ...sales." Are you Head of Sales, too? If you are, and you're actually capable of making a meaningful contribution to revenue generation, your value to the company and the two founders multiplies.
The FAR MORE important issue is why you have waited so long and invested so much in this company without summing your role, expected contribution, quantitatve objectives and milestones, and already agreed on terms reflecting whatever this aggregate value is/will be.
You've just invested 500+ hours of your life based on assumption and hope. I've personally been down your road before, and done what you did. It's not smart.
The bottom line in startup life as an employee is that cash is better than equity. So few startups translate into anything that will improve the food or eat, or pay for your kids' education that you're far better off taking a cash/equity split as Alex Crutchfield suggested. If you're really the Head of Marketing and Sales, I'd ask for a high singe-digits equity stake (not options but with reverse vesting), with 50% in salary that you can spend to live.
If you're rootless (no kids or a big financial nut every month), and are up for the adventure, you might be willing to accept less.
Ask for the higher equity possible. Sit down with the CEO and other cofounders if any. Talk to them about what they have in mind... don't tell yours yet... listen. With your experience, with your 4 months without receiving salary, watch out, be smart. Marketing if done right is a hard needed task in businesses. Be creative, that is part of what you do. But don't be intimidated. Come up with ideas for them to ponder if they are unsure of how to keep you. I would count how much of the equity is giving to whom in exchange of what, and position myself (for the remaining equity if possible in some situations). I've been in a couple of proejcts in where equities were study over certain months and open to renegotiate. I started in one business with 49% of it. We all decreased when we brought one more person. And finally my plan have an exit strategy in place. My intention was doing what I love doing, helping someone bring their idea up, delegate and train, and move forward. We are friends, and once in a while we (the ex cofounders) consult on each other expertise.
Success to you!
When I was young and idealistic I worked for free.. Now I am old and wise.. Wish I was young and wise back then.. would have saved me a lot of heartaches...
Unless you are the founder and have a lot of go-to-hell money you don't work for free.The advice my colleagues gave you is true in the monetary sense but think about it...
If someone gives you something for free what value do you consider it to be?
Are you really worth 0?
the best way is to calculate the monetary value of services you are providing and then calculate your equity share in proportion to the value of company or startup. as an example if you are rendering services for which you could have been paid salary of sixty thousand dollars per year and the value of startup is one million dollar you can take a proportion of annual salary to startup value which stands at six percent. the stake of investor should always calculated on the basis of amount he is investing and the value of startup in which he is making his investment because the price of share of a company is determined on the basis of value of an enterprise.