First let’s establish as fact, a couple of assumptions. This is a key role in your organization, at a distinct stage in a specific type of new company; and as a team member so critical, we need to be on the same page as to our context in working through this question.
Early stage = pre A. May have some seed funding but you’re still working on product marketing fit; an early stage startup
CMO. By many measures, the most important role in the organization besides the CEO (If you disagree, start here first). We’re not talking about a growth or customer acquisition hire, this is the role that distinguishes a business
This is a startup so you WILL be under-compensating the role. We’re presuming the ideal, long-term, leadership for this position, someone who wants to take the risk with you, for the upside, and will take lower than market compensation as a result.
We are talking about a startup and not a new business – Seeking investment is highly likely; seeking, and the potential, to exit is a certainty (otherwise the equity doesn’t mean anything).
What you have to keep in mind is that a CMO is NOT a growth hacker, an email marketer, an SEO, nor someone who merely knows AdWords. We’re talking about the person who will take the reins FROM the CEO/Founders with regard to Product, Customers, Market, Roadmap, Customer Support, Sales, Competition, the respective budget, decisions, hiring, etc. This is not a VP Marketing.
If you disagree with any of the above, or the hire you have in mind is not suited to that, you aren’t talking about CMO in a startup
With all that in mind, be conscious of the fact that THEY are taking a compensation, AND career risk. The equity grant isn’t a token as an employee, a CxO isn’t an employee so much as they are a late founder. Chief means they are as responsible, accountable, and involved in as much as anyone else running the company.
CMO or not, your startup is still likely to fail and so since this person isn’t a founder, you have to be comfortable with the idea that they are taking as great a risk as you, and deserve the upside of their impact.
You need the best. You need the best committed, passionate, and involved. If you don’t do that, you’re chances of success will go to near zero. I’ve seen it happen time and again; an early stage CxO is essentially a cofounder and a mismatch in this regard is as destructive to the business as actually having a spat with a cofounder.
Get to the point(s) already
Market for a pre-Series A non-founder CMO making market salary is something in the 5–10% range. Post-dilution through Series C, that’ll take you down to about a point, fully de-risked.
Giving up $Xk per year in cash, over five or so years (early stage CMO isn’t likely your late stage CMO) = X*5 in present value equity given the fact that we’re still not accounting for risk AND the additional time it will take before the company is likely to deliver any return (another 5–10 years).
What does that look like in points? No idea as it depends on present valuation, investment requirements and plans, post money valuations, etc. but easily fair to say 15%+
In a New York Times interview with David Gelles, James B. Stewart, Jessica Silver-Greenberg, and Kate Kelly, the Times journalists noted that Elon Musk, “choked up multiple times, noting that he nearly missed his brother’s wedding this summer and spent his birthday holed up in Tesla’s offices as the company raced to meet elusive production targets on a crucial new model.”
I’ve followed social media, sites like reddit and twitter, a little more closely when it comes to this particular human. I’m a fanboy. I have followed the sites where Musk has been discussed and I found myself more disappointed than understanding.
Honestly, much of the public commentary reminds me of how people can be real a**hats. Not him mind you, the judgement of him. I’m seeing tweets and comments along the lines of, “woe me, billionaire celeb founder is having a hard time.”
Doing what we do, starting businesses, is among the most stressful life decisions anyone can make. EVERYONE loses it at some point. People are never exceptional and shouldn’t be idealized.
Some of us fall off the grid and just check out (I tend to do this). Some of us lose it at home, quietly, emotionally; if they’re lucky, they have a partner there to help (me too by the way, my wife is an angel). Some of us crack a poorly worded joke, comment, or thought, out of stress more than intention. Some take an ambien to get some sleep, have a drink too many, or worse lose control in the process.
We do work that means that we will fail. Failure is inevitable in entrepreneurship. You spend your money, your time, your reputation, your personal life… in hopes of making the lives of others better.
And we’re constantly judged for the missteps.
Even in making it work, we hear things like, “why is it taking so long??” “why aren’t you/we doing this instead?” Team members leave us, families are strained, and rumors spread in whispers that reach our ears, “maybe they’re full of it and there’s nothing worthwhile there.”
And then one day, you put a battery-powered car in space.
No one is infallible. We’re all, all 400 billion people, in this together for the next few decades. There’s no one else but us and after us, we won’t care what we accomplished nor how much we cried. All that will matter is what those next have and think because of us.
I think the man who helped build PayPal, Tesla, and who is changing the way we get to space, deserves to have some cracks in public. In fact, I applaud that he is cracking, it’s a good reminder that even those we put on pedestals are no better than the rest of us trying to make a difference. Let’s not be too hard on ourselves… no, better: let’s prop each other up rather than tearing down our humanity.
[Photo credit: Photographer, Michelle Andonian for OnInnovation. This photograph is made available pursuant to a Creative Commons noncommercial, attribution, no derivatives license.]
Looking at it through the lens of a startup (small team), years ago I had a great discussion with a group of VCs that the ideal core leadership in a company is CEO, CMO, CTO (or, as appropriate to the type of business)
Explaining further, we discussed first that the CMO’s job is to answer why, for whom, with whom, when, and where. The CTOs job is to determine what and how. The CEO discerns all of that into a vision to align everyone and to draw the resources they need to build a successful company: human resources, capital, and attention.
I always liked that notion as it’s consistent with economist Peter Drucker’s observation that only two things create value in business: Marketing and Innovation. Drucker also noted that everything else is a cost…
So it could be said that the CEO’s job is to overcome and mitigate costs… so that Marketing and Innovation has what it needs to create value.
This is also why startups have the 3 core leaders and roles like CFO, COO, etc. are applicable only later. Until the company has created enough value, it shouldn’t have (or need really) other major cost centers.
Anyway, that was the thought provoking perspective. It’s a point of view that always stuck with me. So, more specifically, what does the CEO do?
The job varies a bit based on the organization’s mission (i.e. vision; CEO), product (i.e. what the market wants; CMO and CTO), goals (…CMO and CEO) and its need to operate profitably (er go – control costs; CEO). See it? It also varies depending on the size of the organization and the number of employees among other factors.
The Chief Executive Officer (CEO) is the highest-ranking executive manager in a corporation or organization. They’re the boss of the bosses.
The CEO has responsibility for the overall success, responsibility in that they are accountable to shareholders (by way of Directors), of an entire organization whereas the other roles are responsible for their organization. The CEO generally has the ultimate authority to make the final decisions; though if you’ve watched a season of Star Trek, you know the Captain doesn’t decide everything in engineering, do they?
But, they have overall responsibility for creating, planning, implementing and integrating the strategic direction of an organization. This is why the two roles figuring out what that is, CMO and CTO, are the other keys.
Day to day, the CEO works to inform the entire organization’s awareness of everything; both the external and internal competitive landscape, customer markets, opportunities for expansion, new industry developments and standards, etc.
Let’s be clear though now about how a CEO isn’t the title appropriate to just “the boss.” CEO is not the title of a business owner nor sole proprietor. CxO titles shouldn’t be handed out just because they run that piece of a business, or all of the business. Such titles are the President, VPs, etc. In a corporation, the CEO reports to the Board of Directors. The CEO serves at the discretion of the Board of Directors.
So, if you have a boss who says they are the CEO, but they can’t be replace at the whim of a Board… not actually a “CEO” in the conventional use of the title.
They may run the company, own the company, or be the President or some such, but CEO would be an erroneously used title.
And it matters! You might think, eh, it doesn’t, but it does. This is why you’ll often see titles such as CEO and Chairman of the Board (meaning they are on and chair the Board of Directors as well as being the Chief Executive Office) or President and CEO… “CEO” means, in the world, that there are Directors to whom the CEO is accountable. The Directors represent shareholders because a “Company,” means the business isn’t just solely owned or an LLC, corporations have shareholders, who have a say in what happens… Directors in a Board represent those voices, and a CEO is appointed to run the Company.
The CEO may own much of the business, and may have founded the business, so his or her commitment to the business is significant but as a Company, it’s no permanent nor guaranteed.
Note though, a Board of Directors doesn’t run the company and their authority is actually minimal and advisory to the CEO… but should they feel the CEO is no longer running a company in the best interest of the shareholders, they replace the CEO.
Responsibilities of a CEO
Creating, communicating, and implementing the vision, mission, and overall direction. Leading the development and implementation of the overall strategy.
Leading, guiding, directing, and evaluating the work of other executive leaders including presidents, VPs, and company directors, depending on the organization’s reporting structure. In doing that, the leadership makes certain that the strategic direction the CEO set filters down through the organization.
Depending on the org’s structure, they work with the leadership to grow and enhance the skills and abilities of employees. Only if these significant players continue to learn and grow will the organization succeed at the level desired.
Soliciting advice and guidance, when appropriate, from the Board of Directors.
Assuring that the plan creation involves significant input and agreement from the organization so that there is little push back.
Overseeing the complete operation of an organization in accordance with the direction established in the strategic plans. Controlling and mitigating costs as well as drawing resources.
Evaluating the success of the organization in reaching its goals.
Maintaining awareness of both the external and the internal competitive landscape, opportunities for expansion, customers, markets, new industry developments and standards, and so forth. Looking at potential acquisitions or the sale of the company under circumstances that will enhance shareholder value…. because… that’s how shareholders get their investment back!
Most importantly, the CEO holds leaders accountable, in their cost-centered role. Guiding budgets, rewarding and recognizing leadership, and even coaching or removing those that are detrimental.
The organization’s CEO is a key player in that they are the DNA that binds the leadership to the goals of shareholders. Most effective companies are run by the other leadership: the CMO, CTO, etc. just like the Enterprise thrives because of Scotty and Bones, not Kirk deciding everything.
Why is this such a meaningful topic to me, in my work with startups. These C-series titles MEAN something, both legally and perceptibly. They distinguish your intentions and the expectations investors, partners, and advisors and (and should) have about your company. If you call yourself the CEO of your startup, it means you have (or intend to have) shareholders (investors) and that they then certainly can (and should) remove and replace you should the company need to do so.
The equity granted to your team speaks volumes more than merely being part of the compensation. When building a committed, invested, passionate team, something which should be your paramount priority as a founder, nothing matters more than HOW you accomplish this.
Is your team comprised of investors or employees?
I want you to first ask and answer that question by warping your perspective of the term “investor” for a moment. I’m not asking you if your co-founder and employees are indeed investors, I’m asking you if they are investing their time in your venture. How do you perceive their contribution? In my opening paragraph, I intentionally used the term “invested” when describing what might be your team. Are they invested? I think of it this way and hope that you do too, people that work for startups are investors. Now, that’s a bold and potentially confusing statement as it minces words and might make one wonder if that means people working for you are indeed the investors. But that’s not what I mean. Consider the fact that nothing makes a formal investor any more an investor by definition than the mere fact that they gave you money in exchange for equity. Money, they earned, through employment (unless they have family wealth or won a lottery). What makes your initial team any different? Rather than investing their money directly, they are doing it indirectly, with their time and experience; often in the sense that you are underpaying what they are really worth as professionals for the simple reason that they want to invest in and contribute to the success of this venture. What do they get for that investment?
Is your team comprised of employees or investors? How do you perceive their role? Do you value that investment of their time? Perhaps even if you don’t value it, are you paying them less than market for their work? These are important questions that drive at your personality, your psychology, and the culture and organization that you’re building. Think of it simply this way before we really explore how you determine the equity to grant:
Employees are paid a market rate for their work. You have no investment in them, as such, and you are both financially free and clear to part ways at any time. You’ve paid them a fair wage, their value. You have no other obligation to them but be clear about the implications of that: they have no other obligation to you.
Investors give you something of value that you need in exchange for ownership in the business relative to the value of the business, their contribution, and the risk involved. Are people working with you not investing something? You are investing in them by way of their gaining ownership and they in turn are more committed, passionate, and involved in the success of the business because they own a piece of it through blood, sweat, and tears.
The critical importance of this question of equity is evident in those two distinctions: what commitment are you making to your team and how passionate and committed do you want them to be in what you’re doing?
“Wait a minute Paul, we do invest in our employees with on the job training, a great work environment, etc. We are loyal to our employees and they love working for us.”
All of that is well and good but such benefits are fundamentally intangible, without clear value, and short term. When dealing with the question of equity, you have to consider that equity establishes permanence in the form of ownership. The intrinsic and real value of such a thing requires much more consideration than simply asking, what is my company worth and what’s the standard grant for such a person?
Determining the Equity to Give Your Startup Team
Start by appreciating that the equity due someone has less (but not nothing) to do with their job and more to do with your stage, their role, their value, and the potential valuation of the company with which they can consider equity vs. compensation.
Your Stage
If you are seed stage or even earlier, the person gets more than were the case at a later stage. They are taking more risk and have a greater impact at this stage and thus, deserve more.
Disagree? I think you treat your team like employees and that has implications to their passion, commitment, and contribution. Are you paying them well enough? At a seed stage you are VERY likely to fail and the team contributing to your success is making a greater investment in that success than would be the case when you are more established. You are likely to completely fail under which circumstances, you all lose everything. You walk away with nothing. That’s a risky proposition for anyone contributing to your success and that risk warrants more investment in THEM to ensure they benefit in some way should you see any degree of success. If you aren’t paying them a market rate, they deserve more because they are investing their opportunity cost in you.
Their Role
Are they considered a founder? C-level? Part time? Consulting or freelance? Or (god forbid), are you outsourcing? More to less, relative to my list. It has nothing to do with the job. The developer or marketing person doesn’t get more or less because of what they do, it’s the level of their involvement, their role, that matters.
If you’re outsourcing consider that the right answer is that they get no equity unless you aren’t paying them at all. Individuals who are building a company of their own are making their own investment, in their company. It’s a subtle distinction from consultants and freelancers who are investing in you but will forever remain free from you; individuals can be committed to you (and you to them), they get paid and earn ownership (though to a lesser degree, obviously, than full time employees) – outsourced companies are only committed to their business and you don’t want to mis-perceive ‘partnership,’ or non-compete as suggesting that they indeed care about your success as they are building their own company and will focus on the success of that first.
Their Value
Their value is as a person with an industry standard compensation. That’s what they are worth. I appreciate that you think they are worth what you think your app is worth or what you are willing to pay to get something done but you can’t think that way when dealing with equity. A job that earns $300k is a person valued at $300k a year.
So, how do you deal with equity if you are only paying them $250k? What if you’re only paying them $100k? Now contrast that against the person who earns, given what they do and their experience, only $150k per year. They are intrinsically worth half as much so under paying them, paying our second hire only $100k when they are worth $150k is proportionally distinct from paying our $300k person only $200k. In both cases, we’re paying 60% of what they are worth but the higher paid individual, the person worth more is sacrificing much more of that value to invest in you.
The POTENTIAL Value of the Company
Having establish who is working with you and their value relative to your stage, the next decision is contingent upon what your company COULD be worth.
That’s a critical path to dealing with equity effectively. It is NOT based on what your company is worth. It’s not based on a perception of future valuation, alone. It is contingent upon being able to liquidate that value and if in the future you can’t exit in some way that they can get cash money for their ownership, their ownership isn’t worth much is it?
Is the company’s equity likely to be worth anything, when, and how much? This requires an exit (or IPO).
If your company won’t likely get acquired, can’t IPO, or you simply never want out, then equity doesn’t really have financial value, it has value in ownership. Be clear, might your company get acquired at any point in the future? Then it has financial value and you can you determine the value of the equity you are granting someone relative to that future value. The distinction is simply that instead of having equity worth something, they are effectively a partner. Begging the questions, do they get a say relative to their ownership?! If the answer is that it’s not likely worth anything and they aren’t considered an owner with an opinion, why would they want equity??
Balance all of those questions first
Notice we haven’t even talked about what you are willing to pay them, what you can afford, nor vesting and the risk of committing to someone. Before you can even start the conversation about how much to actually give them, you have to agree on your stage, their role, their value, and the potential valuation of the company in the future when it can be liquidated.
Now consider how much they should be paid for their job (cash money) and balance/negotiate with the equity. More equity if you’re underpaying, less equity if paying well.
What of a Cliff and Vesting?
One of the most under-appreciated considerations in an equity grant is that of when they get to start earning equity and over what time they get more. Most companies default to a standard 1 year cliff (when they start earning equity) and 4 year vesting (over what time frame and how quickly they get more).
You do NOT need to follow the conventional 1 year / 4 years and could cliff earlier (which might be worth something more to the person) or vest faster (same idea). For example, I’ve heard of companies letting people go after 11 months; getting from that person as much as they can before they get any equity at all. Nasty and unethical, no? But it happens. Why not set a cliff at 3 months and vest over a longer period of time? Value them more quickly so they are held in regard promptly but that doesn’t mean they have to benefit from the entirety of the grant moer quickly; stretch it out.
Consider that a seed startup takes years to be worth anything whereas a later stage company has a shorter cycle to some liquidity: at a later stage, the equity is worth something more quickly so giving it to someone, more quickly, might be worth more to them.
Point being, when the equity is “theirs” is also an important consideration as it conveys more quickly on your part, a commitment and investment in them.
Why Equity Matters
In mature startup ecosystems, I’ve experienced that there are standards, norms, to the equity grant relative to roles. C-levels at the Series A stage get X. It’s conventional. Does that happen where you live/work? If your local economy is still wrestling with these standards, you have an inefficient ecosystem in which everyone constantly needs to discuss, negotiate, and consider the value of equity before making commitments. That’s a burden on both parties and something that slows the pace of innovation.
Correct me if I’m wrong but you need a mentor that is passionate about your space, invested (personally not financially) in your vision and the opportunity, and all but on your team.
The least effective mentors are those that are assigned by Universities or Incubators as though just anyone who knows more than you do will work. These days, everyone wants to be a startup mentor. Whether they have ever done a startup or not, whether they have ever raised money or not, they are ready to advise entrepreneurs. After all, who doesn’t want the CMO of Airbnb as their mentor?! You don’t, even if you have a marketing gap, if your venture is designing smartwatches for babies.
You need to communicate with potential mentors just as you should be communicating with potential team members, partners, and investors: 1. why, 2. the market, and 3. how you define success. Only then can you find those who not just ideally suit your needs but those who WANT to support your success.
From there… network network network. Not much advice to give in that regard. Mine AngelList and LinkedIn for the people that might be ideal and start the conversation. Trust me when I tell you it’s easier than trying to get a response from a cold email to investors; people who truly mentor are open and receptive to hearing from you as long as you’ve done the homework to make sure that THEY are ideal for you.
The real question is what message you send. How do you get potential mentors excited, engaged, and on board? the answer lies in communication and I’d encourage you to consider that your approach lies in these three simple steps:
Be clear about your why. Not your Product-Market fit nor Problem-Solution statement. Ideal mentors only even care about what you are building and how AFTER being compelled by your why – Learn more here: The Pitch
Then flip the idea of Product-Market fit. You want to communicate your Market Product fit; that is: who cares and what’s the opportunity therein. The Market. Then, why your product is right for them – This will give you a sense how – emailing Angel Investors
Finally, know your definition of success. The answer is not some generic startup reply such as “getting acquired.” What specifically does success look like? Keep in mind, mentors are not investors so you should NOT be trying to convey an answer they want to hear. What does success look like to you? To what end are you working? Here’s how to think about startup success
That’s it. Simple right? Keep in mind the point conveyed before we even explored those three steps: Do your homework to make sure those to whom you reach out are ideal for you. It’s not hard, if you email me asking for help with your Yoga studio, I’m probably not going to reply. No offense, it’s just not my thing; make sure you answer those 3 questions about your venture and then do your homework to identify those who are ideal.
One final thought. Are you seeking mentors or advisors? Take some time to think about what you need and be clear in your approach to them. In spite of many organizations mincing words, there is a difference and you want to build your team with the appropriate mix of mentors and advisors. More on that here.
The question of the perfect team is timeless and yet the answer seems obvious as most successful startups are renown with their famous duo, or sole founder. Larry Page and Sergey Brin come to mind. Mark Zuckerberg seems to have done it alone, no? That media fervor for the unicorn startups and their celebrity founders lead us to believe that it only takes the one, or two, easily leading entrepreneurs to believe that they can build exceptional companies on their own, or with a co-founder. Beyond the famous teams, my mind is immediately drawn to the Founders Dating site or the Co-Founder Meetups which imply that the right team is merely a marriage of two partners. I think that’s rarely the case.
Consider the three men in a tub; the bravery, the heroics, as they endeavor together to the Faire. It goes without saying, piling into a tub and rowing out to sea took gumption, passion, and commitment. More importantly though, keep in mind that most nursery rhymes and fairy tales were tools that teach; born of an age still flush with mystery and mystic, people believed in witchcraft, had no concept of germs, and taught their children to beware of strangers by spinning yarns with hidden messages. The message implied, I think: that it took the three, and their unique talents working together as one, to succeed in spite of the stares from the critics. Sure, some called them fools but doesn’t it take a bit of foolishness?
Three, not two
While the successful ventures with one or two founders abound, what’s easy to overlook is that there are three skillsets therein. There must be.
Years ago, Andy Elwood shared in Forbes that the dream team consists of the Hipster, the Hacker, and the Hustler. Before that, Steve Blank pointed out that the best teams are comprised of the Hacker/Hardware, Hustler, Designer, and Visionary adding:
“Great technology skills (hacking/hardware/science) great hustling skills (to search for the business model, customers and market,) great user facing design (if you’re a web/mobile app,) and by having long term vision and product sense. Most people are good at one or maybe two of these, but it’s extremely rare to find someone who can wear all the hats.”
Saul Klein, founder of SeedCamp, is more clear, “My view is the Platonic startup has a founding team of a developer, a designer and a distributor,” but setting my own experiences aside, frankly, I prefer the light-hearted point of view with a touch of philosophy and history: The Butcher, The Baker, and The Candlestick Maker.
How do those three in the tub, a company build?!
A hacker, a designer, and the one making the bread. Woven into the three characteristics, whether Blank’s point of view or Klein’s specific skills, are some fundamentals: passion, disruption, vision, creative, reliability, understanding, and sales, to name just a few.
Saul Klein goes on to explain the three as follows, and I can’t help but place my fairy tale characters in each of these roles:
someone who understands how to build technologies and systems to solve problems (the candlestick maker)
someone who understands the human factors behind those problems, why they exist, what it takes to fix them and how to shape the experience (the baker)
someone who understands how to reach, talk to and sell to the people whose problems are being solved – and keep finding more of them (the butcher)
Your candlestick maker is an artist, designer, and engineer. The maker of something new but more than that, the person capable of working around the problem of having the wrong metals for that candlestick or re-architecting the design when the one envisioned won’t stand straight.
You can rely on the baker for the wheat bread and the hamburger buns (though damn if he isn’t always selling 8 hot dog buns when customers have 10 hot dogs at home). The baker knows what people need (ha! “knead” – sorry, it’s Friday) and what it takes to serve those needs and mold the dough to precisely the right experience.
And those two founders alone might create a very nice, bread-based candlestick company but something is missing. Sure, people want to stick their candles in a nice sourdough, there’s a market for that and as long as they remain Lean and validate what customers will pay, they can build a business. But that’s not a startup worth investment. That’s not the ideal team. We need the butcher.
The one willing to hack, to distrupt, and to chat with Alice Nelson when she’s picking up the lamb chops. The butcher knows how to bring home MORE than just the bacon and spilling a little blood along the way just goes with the territory.
Combined, with some tomatoes thrown in, we have a candlelit chicken pasta primavera dinner. A romantic result that will assuredly lead to a long and happy marriage for all *ahem* three of you.
So ask yourself, who wears the apron in your happy startup marriage? The roles are not so aligned as builder, designer, and visionary nor definitive as developer, sales/marketing, and operations. But they are comprised of 3, as the ideal startup is that which knows it’s market, has a vision to disrupt it, and can see that vision through.
