Ask HN: CTO equity for a company in its seed round | Hacker News Reader

Ask HN: CTO equity for a company in its seed round

4 pointsmadhorse5 comments

I have been offered to come on as CTO & Cofounder at a startup, here are the facts:

- The CEO and his business partner both own half of the company

- The CEO's business partner is his father

- We would be three "cofounders": The CEO, The Chief Scientist and me

- We have a great working relationship, I am currently working for them as a contractor.

- The AR app is part of a portfolio we are building to test the traction of our product

- All three founders are instrumental for the startup to work, we all complete each other extremely well

- The chief scientist was one of the first employees at a company which recently acquired by a large multinational for around $100M. The company is in the same field as our startup.

- The company being turned into a startup has existed for 3 years and has sold websites + hosting. Hosting generates approximately $20k/yr in revenue. The company is only being renamed as it pivots and "becomes a startup" (This is purely for cash flow).

- I recently declined an offer for $97k + $15k in equity at a very well known publicly traded tech company. I am in demand.

- We are located in the province of Quebec in Canada

They offered me to buy a 10% share in the company (for a total of ~$15k) to come in as CTO & cofounder. The value is based on the current net worth of the company. we would all be paid minimum wage. Both the CEO and the Chief Scientist are pouring $50k in the company to infuse cash flow for the first year, as part of our agreement I would not have to follow suit on any capital investment for the first year.

After a lot of research I can't help but feel like I am being taken advantage of. The way I see it the startup should be incorporated as a new entity and the equity should be split more equally. Any cash infusion by us should be rewarded in the form of convertible notes which should cover the capital risk we take when a Series A comes around.

Am I wrong? Am I about to make a huge mistake?

There are a few concerns, but I am not sure I'd say you are being taken advantage of (yet).

Concerns I'd have:

1. By not incorporating a new company, any past liabilities that the old company may have could haunt the new venture. This typically comes true when suddenly it goes from a small business with small revenues to a business worth suing because there is real money at stake. Of course, being in Canada might help as it isn't as litigious as the US from what I understand, but I could be wrong.

2. They are family, the one key thing to be aware of when working with families (yours or not) is it can be a nightmare. I spent the vast majority of my childhood and early adulthood working in family businesses (tech and otherwise), my family worked really hard to not do what most do in the business but it was a daily effort to be aware of it. Family fights different, family will stick together over almost all else (yes there are exceptions) and you being the outsider might be used as a weapon on either side which puts you in the middle. e.g. Son wants to go one way, Dad wants another, You may agree more with Son so then he'll use you against the Dad to get (or try to) his way. Not saying it is always like this, but I also consulted for years and dealt with family businesses and always saw patterns of strange behavior you wouldn't see otherwise.

3. The equity just doesn't make sense, unless they are giving you a different share class which could be really bad. This is again where it isn't clean so I'd be cautious and get more details first.

In the end, these maybe great people and you may all work super well together and this will all be fine. It will boil down to your level of comfort and trust with them. My 2 cents, if you trust them, just get them to put everything in writing and have an outside legal advisor go over it for you. You don't have to get a lawyer to negotiate it or be confrontational, just get some advice and make sure it makes sense and you are covered. If you don't trust them or your gut says they are trying to pull something on you, run and run fast.

Thanks for your answer

I’m not too scared about the family part, I came in acutely aware that it could be an issue but after working with them it seems to be a non problem.

The part I’m most confused about is the equity, it doesn’t seem to be a standard way of doing things in the startup world.

The equity isn't standard and it is odd. Only you can make this call. But if nothing else it seems odd.

One point, 98% of all business are not managed or dealt with as a startup like SV would. I have been apart of a lot of businesses outside of SV and so many were not structured as you'd expect based on reading tech blogs etc, but a few were super lucrative for me. SV is an echo chamber, don't use it as your only source of reality as it is really an isolated odd case of reality.

Depends on how far along the company is in. If it was no code and just 3 people agreeing - you should have gotten 33% and whatever salary you're okay with. If it's pretty far along that's a bad deal.

So either way I’m not getting a good deal ?

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