One of the toughest questions a startup founder can ask themselves is, "Should I hire a CEO?" The earliest days of your own role as CEO in the company can seem pretty straightforward: You're knee-deep in sales, product development and financials. As your company scales, however, managing an ever-growing set of priorities can prove difficult, even impossible. If you do decide it's time to look outside for leadership, it's important to know what it takes to lure a proven executive into a startup.
After working with startups for over a decade, I have dealt with many founders who are presented with the tough decision of handing off the role of CEO to an outsider. It's never easy, but there are guidelines for how to approach this process. Typically, equity — a percentage of ownership in the company — is the anchor of a solid compensation package for a potential chief executive, so let's dive a little deeper into the details of what this may look like.
Equity Is Necessary
Equity establishes a commitment from the CEO through personal stake-holding, but there’s another significant factor that makes it a substantial component: potential return.
Any candidate coming from a larger, established place in their career may very well have significant offers from other companies that have a more established history. With that history comes the security of established cash reserves and proven markets.
Any startup that is either not turning a profit yet or just beginning to after a lengthy period of developmental costs simply cannot compete with that on a dollar-for-dollar basis. However, as a quickly growing firm, providing equity is the strong point to counter those realities with. So what factors do you judge your own position with?
Factors to Consider When Vetting a Potential CEO
Every startup situation varies. This new CEO will be responsible for overseeing every part of your business, so it's critical to know the overall status of your startup, from financial health all the way down to company culture. Having a clear picture of your company will help guide you in choosing the chief executive that is right for your situation.
How many rounds of funding have you gone through? This question factors in both how cash-infused are you currently and how close you are to looking at the next potential round. Be aware of your cash burn rate and how a significant hire such as this can affect your financials. Your investors will certainly be monitoring this as well.
Does your potential hire have VC experience? Reviewing candidates that have connections in the investor ecosystem adds great value to the hire. Have they worked as a placed executive on behalf of a VC previously? Have they led fundraising efforts? Have they had a successful exit in the past?
Would your potential hire be a good cultural fit? Finally, don't forget to size up your candidates for cultural fit within the company and executive team. Ultimately, the CEO you are considering should be a unifying and galvanizing force to the key players already on board, or they should be able to source any other needed talent to bring the company to its next milestone.
The Point of Points
In terms of actual percentage ownership in the company, 5% to 10% is a ballpark area to consider offering your potential CEO. Use the previously mentioned factors to choose which end of that range makes more sense.
In addition to an actual percentage, consider also vesting timetables tied to goals. You can start with 5% off the bat and add a point year by year. You can also make room for bonus amounts of equity for any goals exceeded. All this can be factored in and is influenced by the existing option pool set aside beforehand. Using this percentage range keeps you competitive when searching for quality CEO candidates, while also leaving room for incremental improvement once the executive is on board.
One thing to keep in mind, though, when considering how large of a slice the CEO gets is how much equity will remain in the option pool afterward for other key employees sought later. After all, cutting the greatest slice possible even for a superstar performer can be disadvantageous if it later deters their ability to make offers to needed players.
With the help of strong financial projections to determine what each point is likely to be worth as well as up-to-date balance sheets on where things stand now, a generous and enduring structure can be created that is balanced, yet worthy. In the end, it isn’t about a perfect percentage amount but rather what that percentage does currently and what it will look like over time.
