Use Equity to Hire the Best
It’s a high-class problem to have: Your company’s growing quickly, and you need some superior talent to help you manage it. Facebook’s Mark Zuckerberg needed Sheryl Sandberg to be his right hand and COO; Netflix’s Reed Hastings hired Leslie Kilgore as his CMO; Google co-founders Larry Page and Sergey Brin recruited Eric Schmidt to be their CEO.
Unfortunately, executives of this caliber generally already have day jobs. Sandberg was a vice president at Google, Kilgore was director of marketing at Amazon, and Schmidt was CEO of Novell. Day jobs like those, at big companies with big-time resources, make it extremely hard to poach the talent you need. These executives already have generous salaries, good benefits, job security, and possibly even a decent amount of flexibility and work-life balance. It’s your job to persuade them to give up (almost) all that. And like it.
Your weapon of choice, of course, is equity. It’s almost impossible for a start-up to compete on cash compensation, and it doesn’t make much sense to try. A seasoned executive at a big company is going to join a start-up because he or she craves the opportunity to build something from the ground up. What makes that possible for the person, financially, is the promise of equity: that if everyone plays his or her cards right, the value of the equity stake could grow to dwarf the money to be earned at a more established company.
There is no magic formula for figuring out how much equity it takes to lure top-flight talent. And how much equity you have to give largely depends on how you’ve funded your company up to this point. But early-stage companies should generally allocate at least 15 percent of their available shares for future key hires.
Now, who gets how much? A member of your senior leadership team, up to and including the COO, may get anywhere from 1 percent to 3 percent. The exact amount depends on how much salary you can offer (more salary equals less equity, and vice versa) and the significance of the person’s role in the organization. Very early engineering or sales team members often receive anywhere from 0.15 percent to 1 percent equity.
CEOs are in their own league. If you’re bringing on a CEO to run a venture-backed company, you can expect to give him or her 5 percent to 8 percent of your company’s equity, and maybe even 10 percent. In all cases, we’re talking about common stock. Signing bonuses are rare, but substantial performance-driven bonuses are not.
Of course, there’s no guarantee that even the most promising hire will work out. So you want to protect yourself in case, against all odds, you’ve hired a dud. It’s typical to require a four-year vesting period, but often, no stock vests until the first anniversary of the executive’s hire -- the so-called one-year cliff. That helps make sure the employee really is a good fit before he or she starts getting shares in your company. In very rare cases, a company will even require employees to sell their stock if they leave the
company, minimizing the number of shares owned by nonemployees.
The amount and terms of equity become irrelevant, however, if you are unable to convince the executive you are recruiting of your vision and potential. That’s what sets the successful founders apart from the rest, and in the end, that -- and a lot of hard work -- is what’s going to bring value to any shares.