Had lunch recently with the CTO of a growing lead generation company and as we talked, it became apparent that this question is a growing decision point for Founders. When do you need a CTO?
The question of whether you need a CTO and when, depends on three main factors:
– your company life cycle
– the type of product
– the developer count and profile of your current team.
Before delving into the details of the three factors, it is important to delineate the features of a basic CTO role:
– it's strategic
– can be a Founder/CoFounder but not necessarily
– is usually more hands-off than -on.
For early-lifecycle (eg before product/market-fit) companies, the need for a CTO is almost non-existent. Your best dollar is better spent on actual developers.
The idea around a CTO is to manage operations/growth. Usually that can only occur when you have a growing army of developers, some traction, and someone needs to guide the architecture and roadmap. From a VC vantage point, once you hit product/market-fit, it’s nice to have, but certainly not a deal breaker, if you already have a team of in-house developers.
Which leads me to the next point – type of product. If you are building a high-tech solution, then the Founder or lead developer can play this role. Entrepreneur.com notes in this article that the CTO of many technical startups was the original founder.
If it's a high-tech product led by a non-developer founder, then a CTO is critical not only to build credibility with future investors, but also to help recruit the right mix of developers to do the job.
If the solution is more service-based, eg traditional industry disrupted by Tech, (for example, marketplaces) then a CTO is not critical. In this case, you need a very strong product manager.
One of the popular trends for non-tech/non-developer founders is to be offered a CTO with offshore developers by agencies with an aim among others to complement the core business team. Joao Maia, MD of rails development agency, Runtime Revolution notes from his firm’s experience, typically small companies or startups already operating in the market selling their services use the agency combo of a CTO/developers when having an internal development team is not an core business advantage but a commodity.
In that case, someone in the startup's team is responsible to manage the link between the business/management and the offshore IT team. He further notes, though, that the more business-savvy startups prefer to have their own CTOs within their team, perhaps because of two main reasons: faster and closer control of the software project (e.g. changes in the startup strategy or business, fast understanding and hence fast reaction of the tech team), and for investment reasons, because it gives a more solid view of the team structure and of the organization itself bringing more confidence to investors.
So you looked through the scenarios and you need to consider one. What kind of incentives do you offer them?
Since you don’t really need one until product market fit, save your equity and offer cash on an as-needed basis.
If you must offer a mix of cash and equity because of cash flow, keep it under 2% with vesting a minimum of 2 years. That gives you enough time to evaluate them and/or replace where necessary.