If you're a startup founder, you might be wondering how much a CFO equity grant should be.
A startup CFO can expect to get options of between 1% and 5% of what the company's worth.
In this article, we’ll explore:
- What a CFO does
- How an equity grant works
- How much a CFO of a startup should make
What does a CFO do?
A Chief Operating Officer (CFO) is responsible for managing a company's finance and accounting divisions. In the financial sector, a CFO is the highest-ranking position. In other industries, it's usually the third-highest position.
Many CFOs have professional backgrounds in fields such as accounting, investment banking, or financial analysis. CFOs often have a CMA (Certified Management Accountant) designation. This signifies expertise in financial accounting and strategic management.
It used to be that a CFO focused on compliance and quality control. However, the role has evolved to include such things as:
- Business planning
- Financial forecasting
- Cost-benefit analyses
- Obtaining funding for corporate initiatives
The CFO reports to the CEO. However, the CEO relies heavily on the CFO for advice concerning its investments, capital structure, and how it manages its expenses and income. Therefore, the CFO is a strategic partner to the CEO.
Often, the CFO is responsible for deciding where to invest money, such as whether to proceed with new acquisitions or capital expenditures. Although the CFO is subordinate to the CEO in the corporate hierarchy, CFOs will usually be the primary decision-maker on all matters within their organization's finance department.
Besides the CEO, a CFO must work closely with the other senior executives of a company, such as the Chief Operations Officer (COO). These individuals are sometimes referred to as the "C-Suite" of the company and are its highest decision-making level.
One of the duties of a CFO is ensuring that financial reports are completed promptly and accurately. The CFO's financial reports must be accurate because important decisions are made based on the data contained within them.
A CFO for a startup oversees data collection and then helps make sense of it all. This generates the kind of data-driven insights that all businesses need.
Financial data can be a rich source of insights that can, among other things, shine a powerful light on consumer behavior. Because of new tools that allow for more granular data analytics, CFOs can make better financial decisions than they ever did.
Look for turnaround experience
When hiring a CFO for your startup, look for one with "turnaround experience." This is someone well versed in getting failing businesses back on track.
You never know when this expertise will come in handy!
What CFOs do in a startup
Small startups have some significant advantages over bigger, more established companies.
For starters, they’re able to react more nimbly to market changes. However, there's a downside. Having leaders who don't have a lot of experience running a business means there's a skills deficit.
This means there's no one on board who can take care of these essential tasks.
Provide necessary financial management
One area where a CFO can make a world of difference is in the area of financial management. Many startups put off hiring a CFO until they’re more established. However, waiting too long to fill this position can have devastating consequences on your company's future.
A skilled CFO can prevent costs from spiraling out of control, manage expenditures, and help ensure that the business remains solvent during its formative years. A CFO can also create strategies to help deal with rough financial periods.
Competent CFOs need to know how to put financial systems in place that allow for increased demand during periods of explosive growth. Otherwise, they risk losing momentum.
Establish a funding runway
When costs are high and revenues are nonexistent, organizations can blow through their initial capital before they’re financially stable.
CFOs can help startups to establish a funding runway, which is having the right amount of money for the company to “take off.”
Unless you're lucky enough to have immense personal wealth, you'll need to find investors if you want your startup to remain viable for the foreseeable future. This usually entails trying to get Series A funding from venture capital firms.
The CFO plays an essential role in this process by ensuring all the company's ducks are in a row.
Help ensure a smooth transition
A startup isn’t going to be a startup forever. If the business doesn't fail, one of three things will probably happen next: The organization stays private, issues an IPO, or gets bought out.
Part of a CFO’s role as a long-term strategist is to ensure a smooth transition by preparing for these contingencies.
How does an equity grant work?
It’s a creative way to compensate employees without using cash. Equity grants incentivize employees to help grow the company. This perk—owning a piece of a potentially multi-billion-dollar company—can be a powerful way to get someone to join a startup.
Although some companies award equity on a one-off basis, most formalize the process in a written plan approved by the board of directors. The plan specifies the types of grants that can be made, the maximum number of shares that can be granted, and other rules.
Some grants are milestone-based, which means they’re given to the employee upon meeting a predetermined objective.
Equity plans should be distinguished from employee stock ownership plans. The latter are tax-qualified employee benefit plans that buy and hold employer stock for participants' benefit.
In other cases, equity is granted in the form of an option, which is a right to purchase shares of employer stock in the future for a fixed price. This is known as the strike price, and it won’t change.
The organization must set the strike price at the business's fair market value when the options were created.
An equity grant is taxable even though it's not paid in cash.
One of the purposes of an equity grant is to give employees an incentive to stay with the company. Most equity grants are subject to what are known as vesting restrictions.
These restrictions help with retention efforts and mean a stock option can't be exercised until a team member remains employed for a specified period. Shares vest on a schedule in increments.
The most common vesting schedule is four years, often with a one-year "cliff.” This means an employee must be employed for an entire year to earn the first 25% of equity.
After that, 1/48th of the total is vested monthly. To retain employees longer, some companies are now moving to stricter vesting schedules. An example of this is five-year vesting or “back-loaded” vesting.
This is where a team member earns smaller percentages of the shares in the first two to three years and a more significant chunk in later years.
Stock that is subject to vesting restrictions is commonly referred to as restricted stock. The vesting schedule is usually contained in the award agreement.
How much does a CFO of a startup make?
The average salary for a startup CFO is $130,546 a year.
A CFO in a company below $100mm in revenue can also assume the COO's role. If this happens, base salary often increases 5% to 15%.
How much equity should a CFO get in a startup?
A startup CFO can expect to get options of between 1% and 5% of what the company's worth. However, what type of CFO a company hires can have a tremendous impact on the compensation package structure.
There are two types of CFOs: outward-facing and inward-facing.
Outward-facing CFOs do things like fundraising and dealing with the organization's board of directors. Inward-facing CFOs are hired for general financial management.
These kinds of CFOs are often able to negotiate more lucrative equity grants. Cash bonuses can be awarded for successful fund drives or other predefined objectives.
Need to hire a CFO?
Hunt Club can help you hire for all your C-suite roles, including CFOs.
We can even use our keen expertise and proprietary processes to take over the entire recruiting process.
Give us a call today and see what we can do for you!