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NOTABLE! How much equity should I give this All-Star?

What percentage of equity should I give my COO?


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FierceRacoon

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Jun 1, 2019
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A key component of the agreement was that either of us could cancel the agreement upon 30 days notice. We also had a repurchase clause where if the agreement was terminated, we could buy back her shares at a pre-defined price. This price was equivalent to 200% of her market hourly rate for 20 hours per week.
....
She made 3% total and the proceeds for her from the sale were worth far more than the equivalent hourly rate that she put into it.
And what is now preventing you from terminating her and paying her this 200%? Integrity, I hope. But clearly, it was a terrible deal for her.
 

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SuccessATX

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And what is now preventing you from terminating her and paying her this 200%? Integrity, I hope. But clearly, it was a terrible deal for her.
I think you may have read into it wrong.

If we had terminated the agreement just before the acquisition, we would have paid $57,600 to repurchase her 3%. She made more than double that for her 3% when we sold the company.

There was a high degree of trust and integrity between all of the parties involved (me, my co-founder, and the woman we had this agreement with). We could have tried to terminate, buy back her shares, and take more of the sale proceeds. But that would certainly be against my moral and ethical standards.

I am not an attorney but I imagine that if anyone found themselves in that type of a situation, there would be some legal recourse because you would basically be trying to screw someone over.
 

csalvato

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Overnight VC funding with him on board.
That's the hope!
I'm sure you both already know what I am about to say in this post, but maybe it will help someone else, especially since I see so many people thinking the first step (or best early goal) is to snag some VC funding and then you're golden.

In general, VC funding is not always such a great thing. As someone who has worked exclusively for VC-backed companies, it's a terrible move in most cases.

I know very little about your venture @Scot, and assume you know this already, have weighed your options and decided that VC funding is the best route.

And on that same token, I have met people coming out of their Series C (or even worse, their exit) completely oblivious that they sunk a 5-10+ years of their life and their entire life savings to walk away from an 8 or 9 figure exit with $0.

Yes. $0.

If this sounds out of this world to you, then you probably are unfamiliar with how preferred stock and cap tables work in VC funded companies, and should read this quick reddit post (the best explanation I've found to understand how on earth this could happen):

https://www.reddit.com/r/startups/comments/a8f6xz View: https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_i_get_any_money_from_my_startup_a_guide/


To connect this back to your current challenge, @Scot, if you are looking at this guy to help you get VC funding quickly, then I just want to surface some considerations (that I'm sure you've already thought of):

  1. If he doesn't help the story, his assistance here may not be as impactful. Anyone with a good story can get VC funding. While connections will help get you a meeting (event), it's your story (the process) that will sell a VC investment the most. Numbers and metrics matter, but VC is not PE, and a VC is going to care about their gut take on you, the company and the story much more than metrics. So will this guy help the story? Does his leaving hurt the story, even if he was operationally useless?

  2. Will he help you minimize the amount of and quality equity you need to give away to your investors? No matter what arrangement you make with him, in all likelihood he will be getting common stock, not preferred. Most investors, particularly in early seed/Series A rounds, will be asking for preferred stock. If giving him 10% in common stock will save you 10% or 15% later in preferred stock to your investors (because it helps your story), then that's a huge freaking win.
Just some food for thought as you consider bringing him on board. It sounds like you know this already, and believe he does help the story, AND that this may help you get better VC terms...but I just wanted to leave no stone unturned for you.
 

Ronak

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I highly highly recommend a book called Who?, by Geoff Smart. It's a quick read, no fluff guide on finding, vetting, and defining your needs for various team members. Especially useful is their interview guide that helps cut through 99% of the fluff that typically pads resumes and interviews.
 
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Scot

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I'm sure you both already know what I am about to say in this post, but maybe it will help someone else, especially since I see so many people thinking the first step (or best early goal) is to snag some VC funding and then you're golden.

In general, VC funding is not always such a great thing. As someone who has worked exclusively for VC-backed companies, it's a terrible move in most cases.

I know very little about your venture @Scot, and assume you know this already, have weighed your options and decided that VC funding is the best route.
VC funding is not the first step for us. We're going to do an Angel round first, seeking out strategic investors. Eventually, yes we will go the VC route, but that wont be until Series A or B. And at that point, we'll be able to afford a nice M&A attorney and consultant to keep us from losing our shirts.

I really appreciate the post you linked to. I've read it before, but haven't looked it over in a while. It's definitely something that anyone who's looking at raising money should use as a lesson. Being able to manage equity is going to be a very intricate dance for sure.

If he doesn't help the story, his assistance here may not be as impactful. Anyone with a good story can get VC funding. While connections will help get you a meeting (event), it's your story (the process) that will sell a VC investment the most. Numbers and metrics matter, but VC is not PE, and a VC is going to care about their gut take on you, the company and the story much more than metrics. So will this guy help the story? Does his leaving hurt the story, even if he was operationally useless?
He doesn't necessarily help the story, but he enables me to tell my story. One of the more common pushbacks we've received from investors has been my lack of experience in the CPG sector. When you're playing with large distributors and national chains, its a very complicated and intricate arrangement you make. Its not something you just pick up a book and learn. So having him on the team gives investors the assurance that we can navigate and thrive in that environment.

And while metrics aren't the biggest thing VC's look at, its important. Ideally we'd seek out VC's that focus on the food & bev sector. Most of these guys don't even entertain a meeting until you have $1M in trailing 12 month revenue and have reasonable velocity in multiple sales channels. This is where my guy shines, getting us to these numbers.

Will he help you minimize the amount of and quality equity you need to give away to your investors? No matter what arrangement you make with him, in all likelihood he will be getting common stock, not preferred. Most investors, particularly in early seed/Series A rounds, will be asking for preferred stock. If giving him 10% in common stock will save you 10% or 15% later in preferred stock to your investors (because it helps your story), then that's a huge freaking win.
I really think he will. As mentioned above, his level of expertise brings a legitimacy to what we're doing. Gut feelings are great, but when you can say "Hey, the former VP of Marketing for this number one brand you know is our COO because he believes in our mission" it will assuage a lot of concerns that investors will have over my (lack of) experience in the CPG space.
 
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I highly highly recommend a book called Who?, by Geoff Smart. It's a quick read, no fluff guide on finding, vetting, and defining your needs for various team members. Especially useful is their interview guide that helps cut through 99% of the fluff that typically pads resumes and interviews.
I'll check that one out, thanks!
 

csalvato

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All that sounds great... I was pretty sure you knew all of that anyway.

Hey, the former VP of Marketing for this number one brand you know is our COO because he believes in our mission" it will assuage a lot of concerns that investors will have over my (lack of) experience in the CPG space.
Just a curious question: why would you put a marketing guy in an ops position? Why not make him CMO?
 
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All that sounds great... I was pretty sure you knew all of that anyway.



Just a curious question: why would you put a marketing guy in an ops position? Why not make him CMO?
I'm not really sure why the mega corp he previously worked for called his position marketing. It wasn't really marketing at all. Brand Manager was a much more suitable term for the position. Most of his skills lay in brand strategy, efficiency, and margins, not the actual marketing/advertising side of things.
 

floridaman

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I'll just leave this resource here.


I've worked in the startup world for the past 6 years and this book is referenced a lot when it comes to equity splits.
 
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We've reached an agreement.

Bob (not his real name) will be given 15% equity in my company, which will vest over 4 years. I see this as a win for both of us. The experience he brings to the company is incredible. But more importantly, the legitimacy his name and experience bring will be helpful in many deals, including fundraising. The most common pushback we got from potential investors was my lack of experience in the food and bev industry.

Here's the main points of the equity agreement we've reached.

Bob will agree to work for Super Awesome Corp in an evolving role in exchange for 15% equity in the company. Once company is converted to C Corp and shares are issued, equity will be in common stock.

Equity will be vested over a 4 year schedule.
• 1/4 of shares will vest on day 366 from start of contract
• 1/48 of shares will vest on the first day of each month following the initial 1 year vesting portion

Repurchase Clause
If Bob's employment with the company ends, Super Awesome Corp has the option to repurchase all vested shares within 180 days of end of contract. Repurchase rate will be $9,600 per 1/48 of equity. The price is determined as follows: Repayment of 2x average hourly rate of $50/hr for someone serving in this role, for 3 days (24 hrs) per week.

Buyout Clause
If Super Awesome Corps is acquired, sold, or merges, all unvested shares will immediately vest as of the sale to allow Bob to benefit from the acquisition.
 

SuccessATX

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We've reached an agreement.

Bob (not his real name) will be given 15% equity in my company, which will vest over 4 years. I see this as a win for both of us. The experience he brings to the company is incredible. But more importantly, the legitimacy his name and experience bring will be helpful in many deals, including fundraising. The most common pushback we got from potential investors was my lack of experience in the food and bev industry.

Here's the main points of the equity agreement we've reached.

Bob will agree to work for Super Awesome Corp in an evolving role in exchange for 15% equity in the company. Once company is converted to C Corp and shares are issued, equity will be in common stock.

Equity will be vested over a 4 year schedule.
• 1/4 of shares will vest on day 366 from start of contract
• 1/48 of shares will vest on the first day of each month following the initial 1 year vesting portion

Repurchase Clause
If Bob's employment with the company ends, Super Awesome Corp has the option to repurchase all vested shares within 180 days of end of contract. Repurchase rate will be $9,600 per 1/48 of equity. The price is determined as follows: Repayment of 2x average hourly rate of $50/hr for someone serving in this role, for 3 days (24 hrs) per week.

Buyout Clause
If Super Awesome Corps is acquired, sold, or merges, all unvested shares will immediately vest as of the sale to allow Bob to benefit from the acquisition.
Congrats!!! Sounds like a solid deal for both of you.
Now that you have a fair deal in place, go crush the market!
 

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