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How Much Should a CMO Equity Grant Be?

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April 23, 2021

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If you’re running a busy startup, you might be wondering if you need to hire a Chief Marketing Officer (CMO). If you do, you'll have to adequately compensate them, including granting them equity. This might cause another question to form in your mind:

“How much should a CMO equity grant be?”

The answer is “An equity grant for a pre-Series A non-founder CMO with a salary commensurate with what similar companies would pay should be between 5 and 10%.”

In this article, you also learn:

  • The duties of a CMO
  • Whether you need a CMO
  • How equity grants work

What does a CMO do?

A chief marketing officer (CMO) is a corporate executive who oversees a company’s marketing activities. The primary function of a CMO is to help the organization boost its revenues by developing a marketing plan that provides the company with a competitive advantage.

According to Peter Drucker, a chief marketing officer (CMO) is the most crucial company officer other than the CEO. Additional terms for a CMO include Global Marketing Officer and Marketing Director. 

CMO role and responsibilities

Brand management

Brand management is forging a psychological connection between customers and a company’s products and services. This naturally boosts customer loyalty. Brand management elements can be intangible (consumer experiences) or tangible (pricing, packaging, or the product itself).

Market research

Market research is the process of gathering critical information about the company’s target market. This includes identifying market needs, understanding the competition, and figuring out if a particular product resonates with customers.

Techniques used to conduct customer research include:

  •  Focus groups
  • Customer surveys
  • Social media listening
  • Interviews
  • Experiments and field trials
  • Competitive analysis

CMOs and their teams analyze the data they collect using rigorous statistical methods. The results are then organized into graphs and charts so they can be easily interpreted. CMOs then present their findings to the CEO and other C-level executives.

Marketing communications

Marketing communications is how companies communicate essential information to their target audience. A CMO will work tirelessly to ensure that the message is clear, consistent across all marketing channels, and laser-focused on the intended segment.  

CMOs must ensure that the message communicated in one channel is congruent with the message conveyed in another.

Product management

Product management encompasses both product marketing and product development. These two complementary functions help maximize both market share and revenues.

Product development is creating new consumer products. A CMO will conduct feasibility studies of proposed products during the product development stage and identify consumer needs.

The objective of product marketing is to drive demand and usage of the product. It means launching new products, keeping an eye on the competition, creating promotions, and deciding on the best positioning. CMOs are acutely aware that product marketing doesn’t end once the product is on the shelves.

They realize the process of marketing a product lasts well after its launch. CMOs must make sure people are aware of the product, individuals know how to use it, and users' needs are listened to and met over the product's entire life cycle.

Chief marketing officer qualifications

A CMO will need a bachelor’s degree in marketing or a related field. Most organizations also want their candidate to have an MBA in business or marketing. On top of that, companies want applicants to have managerial experience with direct supervision of seven to ten marketing staff.

Here are some other qualifications:

  • Exceptional leadership capabilities 
  • Excellent communication abilities (both written and verbal)
  • Data analytics experience
  • Website development ability
  • Proven ability to create and execute marketing campaigns
  • Expertise in digital and social media marketing

How much does a CMO of a startup make?

As of Apr 8, 2021, the average annual pay for a Chief Marketing Officer Startup in the United States is $143,692.

CMOs in the context of startups

In a startup, CMOs are responsible for driving growth. They’re tasked with expanding an enterprise’s customer base, improving consumer engagement and retention, and developing brand strategies.

Do you need a CMO?

Onboard a CMO ASAP if you want to grow your startup and boost revenues. That’s because what consumers are looking for is constantly changing. A talented CMO can cultivate the kind of brand awareness that grabs your target audience's attention.

How do equity grants work?

Equity is what startups use to attract team members and get them to stay for the long haul. Early-stage startups often don’t have the money to hire an all-star team. That’s why they offer equity instead of salary to their initial hires. 

After cutting themselves a slice of the equity pie, founders compensate employees for the salary cut they take when they join a startup.

Giving out equity also serves to motivate people to join a startup. That's because having equity means employees are invested in the company’s future. It’s probably why team members who own equity work eight hours more per week on average than those who don’t. 

Equity options

There are three ways of granting equity: stocks, stock options, and warrants. Each has its advantages:

  • STOCK GRANTS: A stock grant is the number of stock shares an employer gives to an employee in the form of compensation. Because you’re giving an employee a percentage of your company, you're also giving them decision-making power.
  •  STOCK OPTIONS: If you give an employee a stock option, you’re promising they can purchase stocks from you in the future at a fixed price. This price is usually better than they could get in the market.
  • STOCK WARRANTS: A significant difference between stock warrants and stock options is how they come into being. You'll see stock options listed on exchanges while companies issue stock warrants. When a team member exercises a stock option, the stock shares are taken from one investor and given to another. When a stock warrant is exercised, the shares are received not from another investor but from the organization itself.

If you want to grant equity in the form of stock options, you’ll need an employee stock option pool. This is a clear and smart way to allocate equity. 

The shares that comprise an option pool typically are drawn from founder stock in the company rather than the shares set aside for investors.

Creating a stock option pool may dilute founders' shares in the enterprise because investors often demand it. The option pool size will invariably decrease with each round of funding because of investor demands. 

The size of your pool depends on how many people you plan to hire in the next 12 to 18 months. After a seed round, your pool should be between 10 and 20%.

The pool specifies the stock price (otherwise known as the grant price) and the period during which employees can exercise their options. The period is defined by a vesting date and an expiration date.

The vesting date is when a team member can exercise their options according to the terms of an employee stock option pool.  The expiration date is the time by which an employee must exercise their options. 

A team member can’t exercise their options before the vesting date or after the expiration date. During the vesting period, the employee receives a percentage of the stocks every month or quarter until they’re fully vested.

The usual options vesting package is four years with a one-year cliff. A one-year cliff means an employee won’t get any shares vested until their first anniversary with the company. 

On this date, they’ll have 25% of their shares vested. Following a cliff vesting schedule ensures that the people you hire are committed to your startup's future growth.

How much equity should you grant?

Equitably allocating equity is something many first-time founders struggle with. How much you should grant each employee depends on a host of factors, including skills, contributions, and seniority. 

However, which part of your startup's life cycle an employee joins is vastly more important than seniority or experience.

Base the amount of equity you grant on the following factors:   

  • ROLE: Decide which positions are most important for your enterprise and assign a percentage value from 0 to 1. For example, if your startup creates lab-grown meat, you'll probably want to give your head of research and development a 0.8%.
  • RISK: Consider how much risk each employee is assuming when figuring out the amount of their equity grant. Team members who arrive earlier in the life cycle of your startup should get more equity. That’s because the earlier someone commits to your startup, the more risk they take on.The more people who join your startup, the less risk there is. 
  • SENIORITY: Although you might have a flat hierarchy in your enterprise, there are seniority differences to consider when carving out an equity grant. Therefore, add a value number to each seniority level. For example, 0.1 for senior, 0.2 for lead, and 0.3 for director.

How much should a CMO equity grant be?

An equity grant for a pre-Series A non-founder CMO with a salary commensurate with what similar companies would pay should be between 5 and 10%

The more risk, the more equity a CMO should get. If your startup has raised seed funding, and the CMO is joining post-money, a lot of the risk has been removed. This means the company’s valuation will be higher. For a CMO joining at that stage, it should be about 1.5%.

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