You’re In Charge!

Which means n = (i - 1)/i. For example, suppose you're just two founders and you want to hire an additional hacker who's so good you feel he'll increase the average outcome of the whole company by 20%. n = (1.2 - 1)/1.2 = .167. So you'll break even if you trade 16.7% of the company for him. That doesn't mean 16.7% is the right amount of stock to give him. Stock is not the only cost of hiring someone: there's usually salary and overhead as well. And if the company merely breaks even on the deal, there's no reason to do it. I think to translate salary and overhead into stock you should multiply the annual rate by about 1.5. Most startups grow fast or die; if you die you don't have to pay the guy, and if you grow fast you'll be paying next year's salary out of next year's valuation, which should be 3x this year's. If your valuation grows 3x a year, the total cost in stock of a new hire's salary and overhead is 1.5 years' cost at the present valuation. [2] How much of an additional margin should the company need as the "activation energy" for the deal? Since this is in effect the company's profit on a hire, the market will determine that: if you're a hot opportunity, you can charge more ...»