The average equity a COO should get in a startup is 2% to 5%. This average percentage depends on the COO’s contribution to the company regarding his experience level, ability to bring or raise cash, and salary expectations. This equity percentage should be vested over 4 years minimum.
This question comes with a lot of arguments and opinions. Startups are often divided regarding equity sharing among founders and C-level executives. Many high-profile executives have had to leave startups they partnered with to establish and scale because they felt cheated during equity sharing.
For a startup to get to the highest height of relevance in its industry, it must solve the issue of equity sharing and funds for running the establishment.
Not all companies and startups require the services of a Chief Operations Officer (COO), but when you figure your company needs one, understanding the right amount of equity to offer him or she is a very important issue.
When you give a COO the right percentage of equity, they can be motivated to work to grow the company or become uninterested in seeking the greater good of the startup, knowing they can cash out big time if the company tries to crumble.
I will discuss in detail how much equity a COO should get in a startup and why it is important to get the numbers right. Other details that will be discussed include why a COO should get equities and how equity sharing should be calculated for founders and C-level executives.
How Much Equity Should a COO get in a Startup?
A COO leads a functional area and has responsibility for managing the overall operations of a business or organization. The equity percentage you should offer your COO depends on their experience, salary expectations, duty responsibilities, and more. As a rule of thumb, try offering your COO at least 2% to 5% equity.
It is important to understand that there is no set amount of equity you should offer. Establishing an equity budget will help you make informed decisions about giving equity to employees when adding new hires to your team.
The COO is responsible for the efficiency of a business, while the CEO is responsible for the strategies and plans needed to achieve those goals. Hence, their role can determine how fast a company scales or whether it winds up after a couple of years.
Should a COO get Equity?
The Chief Operations Officer (COO), sometimes called the Chief Operating Officer, should get equities for his contributions and services to the startup. As a COO, you are one of the highest-ranking officers in a startup, and if the startup has the head as the CEO or Chairperson, you are probably second in command and should be getting equities for playing that role.
One of the misconceptions about business and roles is seen in the case of COOs. Their roles in startups are often misunderstood, making it difficult to decide whether they should get equities or just a salary range.
In summary, the role of the COO is to look within the company to implement the vision, strategies, and guidelines imposed by the CEO. It is like the relationship between the legislative and executive arms of government, where the legislative (the CEO) makes laws and the executive (the COO) implements laws.
When employing a COO, there are a couple of things to consider. A COO is unnecessary when your company is starting or has just 100 employees. For better optimization of roles and structure among the C-suite executives, a COO should be employed only when the company has exceeded hundreds of employees, and the company’s running workload has become too enormous for the CEO.
Choosing a COO early in the company and offering them equities will unnecessary ego gratification and burden the company’s finances. Make sure your company has grown considerably before you appoint a COO or convert one of your staff who fits the role to one.
Factors that Determine How Much Equity a COO Should Get in a Startup
A couple of factors determine how much equity a COO should get. They include:
- How important do you think the COO is to your company?
- How many are other high-level executives in your company?
- How much equity are you willing to give up for your COO and other C-level executives?
- What is the average equity COOs get at your company’s level and size?
COO’s importance to your company
I see COOs as some of the most important people in a startup. A company is only as good as its team. If the founding team consists of a bunch of people who don’t get along or don’t work well together, then that will be reflected in the product and service that’s eventually delivered to customers.
A COO can help you solve problems and make better decisions faster than working independently. It’s much easier to delegate tasks to someone else when you’re busy running around trying to do everything yourself (and trust me, I’ve been there). The more people you have working on your business model and strategy, the better off you will be in the long run.
The number of high-level executives in your company
The COO is typically the second highest-ranked official in a startup. However, the amount of equity they should get depends on the number of C-level executives in the company. If there are three or fewer high-level employees, the COO should receive between 3% and 5%. If there are four or more high-level employees, the COO should receive 1% or 2%.
How much equity are you willing to give up for your COO and other C-level executives?
Considering your company’s financial state and the salary structures already imposed, you should be aware of the percentage equity to give a COO or other C-level executives. Do not be motivated by generosity or a desire to keep the best to yourself. If your company is not financially capable of shouldering a 5% equity for the COO and other high-level executives, reduce the bar.
What is the average equity COOs get at your company’s level and size?
To determine how much equity a COO should get, find out what other startups are giving their COOs. Study companies in your industry and those on the same funding stage and size as yours. It will give you an idea of how to bargain with a COO on equity percentages.
When you are settled on having a COO, it is time to decide his or her salary structure.
COO Salary Structure
When taking a COO, your startup must be able to adequately meet the average COO salary structure. According to ZipRecruiter, the average salary of COOs in the United States is $122,000. Still, the structure varies depending on factors such as the COO’s experience level, equities, and startup funding. You should expect to pay your COO around $60,000 to $220,000.
The following factors can determine your COO’s salary structure:
Years of experience
If you are hiring a COO who has been COO for years with several startups and has a lot of skills and influence for his position, you will expect him or her to demand a higher salary range. When people know what they bring, you can expect them not to downsize their salaries.
A potential COO hire can decide to take a lower salary range if they want to share a percentage of the company’s equity. You can expect your COO to demand lower pay for higher equity stakes in your company.
Level of funding
People charge higher salaries from companies when they understand the company’s financial capabilities. Depending on the level of funding your startup is at, either at the seed, series, A, B, or C stage, you can expect that to determine your COO salary structure.
As a founder, you may wonder how much equity you should keep. You do not want to take too much equity or too little, just enough to be comfortable and keep your company on its feet. I have provided a breakdown of how much equity founders should keep in their startups.
How Much Equity Should a Founder Keep
But how much equity should a founder give away? It depends on how much money they have raised, In the early stage you are not going after any revenue, “The only thing that matters is growth and building an audience.” This means keeping at least 15% of all shares in your company — no matter how big or small it becomes — and making sure that this percentage is locked up so nobody else can buy it from you.
Mark Zuckerberg, the co-founder of Facebook and CEO of Meta, owns just about 13% of the company’s equities. The founder of Amazon, Jeff Bezos, owns 11.1% of the company. These founders barely own 15% of the equities in their companies, but it has not caused problems or frictions. After keenly observing the trend among founders.
The percentage of ownership you keep in your company can have a big impact on your wealth and success. On the one hand, taking More equity lets you keep control of the company and makes it more likely that you’ll achieve long-term financial stability. On the other hand, giving up too much equity means you might not be able to get a good return on your investment.
So how do you know what percentage of ownership is right for your business? Here are some guidelines:
Take enough to feel secure in your position
If one founder takes all of the company’s equity — 100% — then they could easily get pushed out by other shareholders if they wanted to remove them from power. Even if they don’t want to do this, other shareholders may try to force their hand because they feel like they aren’t getting their fair share or because they’re worried about losing money if something goes wrong with the business.
In general, you should offer your COO less equity than you would offer a CEO but slightly more than you would offer a product manager. You should expect to give your CEO anything from 1% to 5% equity. The equity percentage is dependent on a lot of factors. At the end of the day, though, it is going to come down to:
- How important do you think a COO is to your company
- How many other high-level employees are there?
- How much equity do you want the COO to have?
- What does the average COO get at your company size and industry?
As startup founders and co-founders, you must find the right person for the job. Relying on any “rule of thumb” can be dangerous, but I would advise that you offer equities to a COO based on the scope of work required and how critical his or her function is to your company’s success.