15 Jun Stock: How Much To Give To Your Co-Founders And Employees?
For many entrepreneurs choosing to offer shares and stock options raises a tricky question: how much stock shall I give to the key and early joining employees? How to make sure that conditions are fair for everybody and that you are building a great employer branding, which means a company that people want to apply to, work for, and keep working for? The answer is more simple than you might think.
Here is a quick scene where a few buddies get together to build their own company, where the proportion of the shares distributed in that setting will depend on the agreement among friends. I have seen situations where it was said: “let’s do 50/50”, but then one ends up working a lot of days and nights and the other gets a day job elsewhere or just being a 9 to 5 brat and not taking the venture very seriously.
I suggest thinking a lot before committing to the 50/50 situation in order to avoid frustrations on your side. If the mistake has been done already, you can still correct it during the next fundraising event, by negotiating with your investors an anti-dilution provision for you as a founder, but not for the rest of the founders. I have done this in the past myself.
Keep in mind – for your future investors out of the FFF circle (Friends, Family, and Fools), that it’s not a good sign for them if you own the majority of the stock, and if you are the only decision-maker in the company (it’s being considered as too risky).
Anyhow, let’s focus on a more probable case where you are still looking for a co-founder, or aiming for filling a key executive position and you must decide on the number of shares that should be distributed to them.
When deciding, always ask yourself a question first:
Am I a technical founder myself?
If the answer is Yes, then you are already in a good position to keep more and give less to the new technical or non-technical founders.
Particularly at the early stage, technical founders provide higher value to the company than non-technical ones. It’s just the way it is. In the case of an early exit or an acqui-hire, for example, when people buy your company for your patent and key tech talent, your awesome CMO or COO would just not bring you any value in negotiations with a prospective buyer.
If your answer is NO, here are my two cents: it depends on which country you are in. Great talent is hard to come by in some places, and if you spent months or years finding the right fit, you may need to give away more of your pie and even pay a current market salary or slightly below on top of giving away a significant amount of shares.
For top positions to fill, such as CTO, count on giving at least 6-8%, and a max of 15-18%, in some extreme cases. If it’s a CMO or COO, which are non-technical roles, but you believe they are absolutely the right fit for your company at this moment in time, anything below 4% is very appropriate.
When it comes to employees, it’s important to put together an ESOP (Employee Stock Option Plan) and have it already done when creating your new company. This one is the company’s “Bible” for all questions related to stock and can be frequently updated without any notice or signatures from all parties who have already received the stock.
The ESOP amount could be anywhere between 5%-10% from 100% of all shares, and the amount of payload shall be equally distributed among the co-founders. You won’t ask your new employees to pay for the stock, even if it’s a nominal price, which means you have to pay for it yourself.
In my current company nanos.ai, the ESOP is rather high – 16%, it was a deliberate decision as we, co-founders, wanted to have enough compensation incentive for our future employees for the years to come.
From this ESOP you are going to draw small portions of stock each time when a new team member is hired. Here is how it works in our company: we are quite “socialistic”, all early employees got the same amount of shares at a very low nominal price.
They don’t need to pay for these shares, but if they eventually cash in, this nominal amount will be deducted from the overall payment they are going to receive. It’s important to know that you can always grant more stock to an extraordinary performing employee later.
If you still have doubts, I suggest starting with 5-10K in stock options for low responsibility positions and various consultants and going up to 70-80K for high responsibility “hard-to-find gems” in your new company.
Setting up the company’s conditions for stock options
Co-founders’ shares and ESOP as well as if any investors on board, and their shares, will be reflected in a cap table.
What is the cap table?
It is a list with information on stocks, financings, and ownership in your company, basically an Excel sheet. There are multiple tools where you can keep your values and have those automatically adjusted if one parameter is changed, but Excel does the job if the number of co-founders and employees is below 20-25 and the number of fundraising events is below 3.
It’s important to keep your cap table clean, meaning that there are no “dead bodies” in it, i.e. people who are no longer with the company but kept a significant amount of stock. It needs to be updated frequently, for instance, with the information on people leaving your company and the stock being kept if at all.
It’s a painful topic, but as an entrepreneur, you may have experienced a situation where one of the key buddies is acting weird and not playing along anymore.
A well-thought-through Shareholders Agreement or SHA will help you to keep the cap table clean. A good SHA should define the following important conditions:
- A good leaver description
- A bad leaver description
- Set a long cliff period
- Provide a slow-paced vesting schedule
Ideally, you want your cliff period to be at least 18 months, so if a co-founder or an employee leaves before that, they have no right to keep the stock. In the case of the vesting period, it should last for another 2-4 years, vesting monthly for a small percentage, let’s say 2-2.5% every month.
Let’s have a look at this example scenario where an employee, let’s say, a developer, receives 30K worth in stock options (usually described in an Allocation agreement, which is a separate document signed between you and your employee or a co-founder):
- Current share price – $0.50
- Amount of shares – 30K
- Cliff period – 18 months since the first day of work (full-time only)
- Vesting – 2% monthly
Imagine, there was a fundraising event that drove the company evaluation from let’s say $10M to $15M, so that in a year the price per share goes up 50%. Now your employee is “richer” and his stock options are worth $45K, on paper.
But he can’t sell it any time he wants but should keep this paper agreement in a cool, dry place until the company gets sold. It’s a great incentive and sweet addition to the annual salary if you currently cannot afford to pay the full market value they would get elsewhere (at Google, Apple, or other less-hyped corporations).
If he or she leaves the company before 18 months from the start, no stock can be taken away from your company. If he or she leaves in 18 months plus 2 months, then 2+2=4% from 30K leaves with that employee or a co-founder. Having those conditions set in place will help you keep your cap table as clean and your head as sane as it can be. Hiring is a guess, firing is knowledge (not my words, but I completely agree with you, #GaryVee).
Depending on the country, once the company is sold, the amount of cash your colleague receives is considered to be an addition to the salary and is subject to income tax. In some countries (Switzerland), if you joined the company as a co-founder at the earliest stage, you can avoid taxation on your income, which is a great deal.
Overall, stocks and stock options are a great way to keep your colleagues engaged and make them feel like the co-owners of your company if done right.
An important disclaimer – I am not a lawyer and only speaking from my own experience as a co-founder of nanos.ai and other companies. Before making a decision it is best to get affordable legal advice in your country to help you to avoid possible mistakes and frustration!