Have just been given an offer at a young startup (~3 yrs, 1 other employee [the CEO] and 2 contractors) for a CTO position. Offer is all-equity with a roadmap in place for salary after revenue goals are met. I am a reasonably experienced engineer who has previously served as CTO for a small startup.

My role would include the management of the technical team, re-architecting the core technology stack, PMing product requirements in a technical context, building out the product roadmap, and plenty of coding.

Existing CTO is leaving soon, current equity split is 60/40, and my offer is 12.5%, 4 years vesting with a 1 year cliff. Salary climbs from $0 to $1K / month, $2K, $3K, commensurate with revenue goals.

Bullish on the product and the domain, but originally said no on the basis that I would be inheriting an existing tech stack (with some decisions that made sense at the time) that I would have to substantially rearchitect in order to meet business goals successfully. Thought originally that I would have to work in a codebase that I didn't want to work in, but the CEO has expressed willingness to let me swap out some parts that I find particularly badly-suited to the business needs (hence the rearchitecting).

En route to establishing good will with the company, I've already volunteered to do some light amount of consultation and coding.

I am not exactly sure how to evaluate this offer. If the company were just starting out now, I would probably expect a larger amount of equity, but appreciate that this is discounted based on how old the company is. I assume also that my willingness to take equity and defer cash means that the equity amount should be more than it might otherwise be.

Appreciate further that a robust answer to this question might depend on information that I don't have access to, i.e. current revenue, CAP table after existing CTO exits, etc.

What I'm looking for is a good way to think about evaluating this offer.

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    Why is the existing CTO exiting? – jcmack Jan 30 '19 at 6:07
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    financialsamurai.com/… – selbie Jan 30 '19 at 7:29
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    You would be CTO, but the CEO dictates the stack stack? – selbie Jan 30 '19 at 7:30
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    Umm... "3 years, 1 other employee (the CEO)". I'd understand the situation after a couple of months, but 3 years? "after revenue goals are met" means that for 3 years they're just burning money instead of actually becoming profitable? – V N Jan 30 '19 at 13:56
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    What you've described is a one-man shop that wants free programming. – Fattie Jan 30 '19 at 14:14

OK, let´s evaluate (bit cynical, worst case, but you know, they say pessimist are more successful):

Offer is all-equity with a roadmap

No money

1 other employee [the CEO] [...] management of the technical team

What team?

PMing product requirements

So you´d be PM too?

re-architecting the core technology stack

And Architect?

but the CEO has expressed willingness to let me swap out some parts

Who will be CTO?

plenty of coding

Ah okay!

So they need a coder, but the don´t want to pay for it ...

What I'm looking for is a good way to think about evaluating this offer.

What´s 12.5% of nothing?

Oh and bonus:

Why is the existing CTO exiting? - answer given was that he wants to take some personal time off but will still be around

So the founders are already in disagreement after a year and you are in the middle of it. So at least you´ll get drama for free! Find out what is going on there!

Edit: You want serious? If you can dismiss all the above concerns, and can afford it ... go for it. Look at:

  1. Is the funding sufficient? If yes, why can´t they pay you? If not, why won´t anyone fund them?

  2. What Assets do they have? Ignore all IP/ ideas. Regard only working and usable code, physical assets, and existing customer base/ turnover? If you are unsure talk to a financial accountant or try to get a loan with that company. The Bank will know how to evaluate a business.

  3. The CEO has over 50%, so he will have the ultimate say in everything. You should really know him well to put your own financial well faring completely in his hands. Have some meetings and some discussions with him. How well can you discuss with him controversial points?

  4. Can you even afford to offer your time for free? Why not meet in the middle. You get a below-market-rate, the bare minimum to cover your living expenses. Get a little less share for that.

PS: Watch some episodes of Lions Den!

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What I'm looking for is a good way to think about evaluating this offer.

They have so little money that they're pinning your 1,000/month income to revenue goals!

The only way to raise revenue is sell stuff - one of the things that they can sell is stock in the company.
Only if your shares can't be diluted, do you have 12.5% of the company.
If they can be diluted, you'll see your ownership percentage of the company asymptotically approach zero because there is already no money!

Also, can you live with the fact that the CTO who is leaving has 3x your equity in the company?1

Here's my math on that...
You say that the split was 60/40, so I assume the exiting CTO had 40% equity.
If they are giving you 12.5% that leaves the previous CTO with 35% and the president with 52.5%
All figures rounded... including the 3x.

1 Please note I didn't say it isn't fair, I just asked if you can live with it.

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  • The point about being cash poor is fair, but that's also reasonably normal for startups that bootstrap. And of course equity gets diluted, but the point is that the general pie is growing. And the current split is notional in the way that all equity is: the existing CTO isn't 100% vested, and there may be an agreement to buy back part of his equity and redistribute part of it. – prospectiveCTO Jan 30 '19 at 17:49
  • For instance, 5% of $10,000,000 is more than 15% of $1,000,000. Dilution is obviously fine if your valuation is increasing. – prospectiveCTO Jan 30 '19 at 17:51
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    Agreed, but you are the short man on the stick. In one digit fractions the president has 1/2, old CTO has 1/3, and you have 1/8. If dilution is a factor of 10 you have 1%, and 1% of $10,000,000 is $100,000 and you are GIVING UP that much now to work there on the chance that it works out! – J. Chris Compton Jan 30 '19 at 17:59
  • Again... it is okay to take it if that's what you want to do. I'm just trying to help. – J. Chris Compton Jan 30 '19 at 18:00

Just for what it's worth, this may help you think about the possibility:

  1. Get a normal programming job (so, making 70k - 300k a year depending on your experience)

1b. Lean towards contracts or perhaps a "four day a week" type of role, to give you a little more flexibility for item (2)

  1. Regarding the "enterprise" mentioned in the question. Tell the guy you will re-architect the product for him on a part-time basis while working the normal job in (1). What you want is..

2b. All you want is some earnest money - I suggest $2000 a month 1 - and you want a large slice of the shares.

This is a golden deal for the one-man shop in question.

A. He gets to replace his current crap technology base with a serious one made by yourself

B. It costs him almost nothing

So my suggestion, a good approach with opportunities like this: while working a normal job to keep your Mercedes in oil changes, do the project that is needing done, and you want to take a risk on, on a part-time basis.

Take nothing, other than some earnest money.

Cross your fingers, and if the product hits it was worth it.

Good luck!

1 Note that earnest money must be paid in advance. So that's $2000 today and you begin, and then $2000 in a month, and so on. (Note that if the guy can't come up with a whole two thousand dollars, the whole thing is just utterly absurd. Startups spend a couple thousand a week on laptops and copier paper.)

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I think that I found an answer to my own question:

Restated, the question is asking what the value of the equity is.

An equity calculator (like this one) asks questions like:

  • How many shares are you being offered?
  • What is the total pool of shares outstanding?
  • What is the current valuation of the company?
  • How much funding has the company taken so far?

This sort of framework lets you trade roughly between a salary amount and equity, at which point you can decide whether cash should have a premium.

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    This is good for an established company, where you can have some sort of reference price. With a startup, the risk of total default is immense. All your shares are essential gambling money. Think of it as giving up your wage for premium lottery tickets. You should always get a hefty risk-bonus for not taking hard cash. And you should be able to afford the loss! – Daniel Jan 30 '19 at 14:21
  • Early-stage startups should honestly be able to answer all of the above questions. I agree that you should get a risk-bonus for an equity preference. – prospectiveCTO Jan 30 '19 at 14:25
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    Funding is assets... except the part of the funding that was already spend for things not turning into assets (obsolete code base, office rent ...) – Daniel Jan 30 '19 at 15:23
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    That may be true at the exact moment the funding was granted, and you may or may not follow that valuation. Startups fluctuate rather drastic and quickly in value. The point is, the people handing out the funding mitigate their risk by investing in numerous startups (an other things, too). They don´t need this specific startup to succeed, as long as it is offset by gains elsewhere. You on the other hand will put all your eggs in one basket. Judge for yourself! – Daniel Jan 30 '19 at 16:12
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    It is an excellent warning if you are not! – Daniel Jan 30 '19 at 17:36

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