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How Much Equity Should a Startup CTO Receive?
Equity is usually calculated based on the risk involved, but how much should a startup CTO receive?
It’s very common in startup companies for employees to receive some sort of compensation for their work. This is normally because startups are very risky workplaces that can go under much more frequently than established companies.
If you’re participating in the work and helping the company get off the ground, it seems only fair that you’d also get part of the reward.
Chief Technology Officers (CTOs) are typically one of the most important people in a startup, so how much equity should they expect to receive for their work?
CTOs will often receive some form of equity in the startup, which means rather than a fixed salary, they will own part of the company and will get a percentage of profits. They’re normally the ones taking on the most risk, as they probably have lots of skills and experience that would make it easy to find a more stable job elsewhere. But just how much is fair?
Let’s consider what goes into this decision.
Do CTOs take a lot of risks in startups?
In startups, it’s usually the founders that take on most of the risk as they try to set the business up and find an initial product market fit, secure launch capital, build a prototype and get buyer interest secured.
A lot of times, startups don’t need a world-class software person straight away; they just need someone to take the product off the ground. In most cases, it may not be the CTO taking enough risk to justify high amounts of equity.
Is it good for CTOs to receive equity?
If you’re choosing equity over a salary, it can be a big risk.
Equity is a percentage of an imaginary figure because you won’t receive any money until the company is profitable—and with startups it’s not easy to be sure profitability will ever be achieved.
Founders can also tend to overvalue their stock by imagining what their company could be worth if it were to reach a $1B valuation. But no one knows for sure how much the company will be worth in the future as there are so many variables at play.
Having equity as a replacement of salary is like a lottery ticket—if the company does extremely well you’ll be lucky, but this statistically won’t be the case for the majority.
How much equity do CTO’s receive on average?
It’s difficult to say what the average amount of equity a CTO receives. Broadly speaking, they can expect anything from 0.5-50% equity in the startup they’re working for. Usually this amount will be reflective of the risk that has to be taken.
Should CTOs receive more equity?
You may hear CTOs complaining about a single-digit compensation, but you have to ask yourself whether those who are complaining would actually be willing to go out and do the work to ensure the startup's success?
Would they go out to market and get the initial momentum needed for a new product launch by meeting 100 investors? Put in years of networking, face countless rejections, the ups and downs of setting up a corporation and finding accountants and lawyers, all for the promise of receiving compensation further down the line?
If they’re willing to do all of these things, they probably will be rewarded with higher amounts of equity. However, if they don’t want to do this they shouldn’t expect high amounts of compensation for their work.
Is the amount of equity received negotiable?
Equity is negotiable and will be different in every startup. Startups don’t follow typical workplace hierarchies so the role of CTO will differ from organisation to organisation too, some may be very hands-on while others may act as more of an overseeing role.
Either way, equity is a function of how replaceable the CTO is. Would it be difficult to find someone to do the same job to an equal or higher standard? If the CTO has been there since the beginning, they’ll have a very big impact on the company and may be hard to replace.