Equity Distribution for a CTO in a Pre-Revenue Startup: Navigating the Mobile App Beta

When it comes to offering equity to a CTO or tech co-founder, the percentage you agree upon can greatly impact the success of your venture. This is especially true for a startup with a pre-built mobile app in beta, especially when the co-founders are non-technical.

Defining the Value of Your Co-Founder

The decision on what percentage of equity to offer a CTO or tech co-founder involves several critical elements. Firstly, you need to consider the timeline for when your app will start generating revenue. If you have a clear timeline and understanding of your business's financials, you can more accurately gauge the risk and potential contribution of your co-founder.

The predominant factor here is the level of equitization required for the tech co-founder to fully commit to the project. For example, if you believe the tech co-founder can single-handedly develop the app and it has the potential to propel your business to success, you might consider offering a significant portion of equity. In such cases, 40% over a 5-year vesting period with a 12-month cliff might be appropriate. However, if the answer to many of these questions is 'I don’t know,' it suggests that more technical expertise is necessary, and the creators of the app may need a substantial incentive to join.

Strategic Considerations for Pre-Revenue Startups

When distributing equity in a pre-revenue startup, it's crucial to consider both the level of risk and the expected contribution of the co-founder. The agreement on equity percentage should reflect these factors, striking a balance that motivates and aligns the interests of all parties involved.

For instance, if you anticipate that the tech co-founder will roll up his sleeves and help develop the product to profitability, a 20% equity stake might be appropriate. However, it's important to note that the tech co-founder might seek a higher percentage, given his leverage in the negotiation process. More experienced tech founders often have multiple offers, so they are likely to negotiate for more equity to reflect their significant value to the venture.

Building a Solid Business Plan and Pro Forma

To successfully negotiate equity and align everyone's interest, it is imperative to have a robust business plan and financial projections (pro forma) ready. This not only helps in future fundraising but also showcases your vision and business acumen to potential co-founders. A solid understanding of your business model, expected revenue streams, and customer acquisition costs will help in justifying and negotiating the equity distribution.

Moreover, a detailed business plan and financial projections will reduce the perceived risk for the tech co-founder, encouraging him to invest more in the company. A well-thought-out plan can make the difference between a co-founder who sees immediate value in the company and one who is more hesitant to commit.

The Importance of a Technical Co-Founder

When you’re looking to onboard a technical co-founder, the decision is often not just about the technol
ogy, but the overall business acumen and vision of the co-founder. Ensuring that the technical co-founder is committed to the venture and sees it through is crucial.

From experience, it is often observed that tech co-founders who are willing to take an equal share or even more equity than the non-technical co-founders are more willing to put in the necessary effort and resources to ensure the success of the venture. This commitment is especially critical when the app is in beta and still needs extensive development and fine-tuning.

On the other hand, it's also important to recognize that not all tech co-founders will be willing to take an equal share. An experienced CTO might want up to 90% of the company before the product is ready to market. This is because the CTO will likely have to work harder and longer than the non-technical co-founder to build and maintain a viable product. If the tech co-founder is unavailable or unwilling to take a higher percentage, the other founders should consider whether the opportunity and commitment of the tech co-founder is truly worth the risk.