When bringing on additional C-suite employees to a startup, should the equity percent be based on the last round of funding or, if just entering the next round at a significant valuation bump, would the equity percent be based on that upcoming round?
This is a pretty important question and insight, especially these days.
C-suite employees get an equity grant, 9+ times out of 10, based on the current cap table. Or if you are close to another round, often based on the upcoming cap table.
What this means in practice is VPs and CXOs often get far more equity by joining … later. And far, far more risk-adjusted equity by joining later.
I.e., imagine you grant a VP of Sales 1% of the company at $1m in ARR. And then you do 2 more rounds, and sell 20% of the company in each round. And add a bit more to the pool. By then, that VP of Sales might only have 0.6% of the company.
But if she waited … and joined later … she’d get that same 1%, without all that dilution. So that means almost 2x more stock! With far less risk (the company is further along). And probably higher comp (because you can afford more.)
So what does that mean? It means 10 years into a bull run, the top VPs and CXOs are often waiting. Folks that 5 years ago might have joined at $1m-$2m ARR are waiting to join a hot start-up at $10m ARR. Folks that might have joined before at $10m ARR are often looking for a $30m-$50m ARR “start-up”. And so on.
This adds to the challenge of recruiting in The Best of Times in Cloud, at least in the top tech centers.
Net-net, you may either need to pay up more. Or take more risk on a stretch candidate.