Why Founder Compensation Is An Important Question
Founders are the engines in a startup. A founder can make or fail a startup. This has been seen and proven many times in Silicon Valley history. The startup folklore is filled with stories of heroes, daemons, and socially awkward leaders of unicorn companies.
An average startup will have a structure integrating investors, employees, and founders. Each group has different goals, targets, and daily operation milestones to achieve. But they collectively are seeking to create value through the building of the startup and definitely looking forward to a wildly lucrative exit in the long-term.
Another commonality between the three groups is that they need to be properly compensated while building the startup.
Compensation includes equity plus salaries. It is science and art to figure out the right numbers. Every startup is different and the dynamics between the founders, investors, and the employees are specific to each team. A startup reflects the founders’ priorities, ethics, and values and amplifies the differences when they exist.
In Search Of Goldilocks Solution
Finding the right mix of equity and salary for the founder(s) is extremely important. The reason for that is very simple – if a founder receives a salary that will help him fatten his bank account quickly, he might lose the motivation to move quickly and be aggressive to achieve the goals that would position his startup for a good exit.
On the other hand, if the founder doesn’t receive reasonable compensation, this could be serious destruction and may even drive the founder to quit.
To find a good balance, usually, the founders’ salary is big enough to keep them productive, but not too much to make them lazy and slow. Having the founders, who usually are the executive team, receive less pay helps bring more employees and as a result – achieve faster.
This also brings the question about the equity/salary ratio. This essentially is the question of how much should a founder receive immediately vs cashing out upon a liquidity event. And again, this needs to be chosen so the founder doesn’t feel like he is burning the midnight oil for nothing and allows him to sustain a reasonable lifestyle to survive the grinder.
Time-based vesting is one of the trusted approaches. It prevents the founder to walk away with a big chunk of money and shares after receiving funding. The way it works is stock rights ‘vest’ or are acquired with the passage of time. Rights on shares are acquired on an annual basis and contingent on the founder staying with the company for a given period of time.
Another good system is to allow the founder to sell off their shares incrementally over time. This may work well if new investment is needed and also staggering the pay to the founder, so no big chunks of cash are taken from the company account at once.
If you are looking for guidance and a range of accepted founders’ salaries, the accepted unwritten rule is that six-figure salaries are not acceptable. Depending on where the founder is located, this rule can be bent, but investors are usually not in favor of giving a big chunk of the investment round as salaries.
Founders And Eployees Equity Split
When we talk about building a startup we are talking about building a company. This means you as a founder need to work with other people, teams and essentially having employees.
The shortest way to ruin your company is to have unmotivated employees. And since startups are not famous for paying great salaries, it is expected that employees will receive fair compensation upon the company exit event.
I have witnessed multiple times the situation where employees are not well-compensated in terms of salaries and in addition the shares they receive are not enough to keep them motivated.
I remember in my early career working for a startup as a software developer, I realized that after 2 years working long hours, weekends and not taking vacations, even if the value of my shares increased 10x, I was looking to eventually get a check for somewhere around $15000, before taxes, which was not even close to compensating my investment in the company in terms of time and effort. At the same time, I could easily double my salary by crossing the street and joining a well-established company. When you are exhausted from the constant sprint and your compensation is not at par, it is very easy to lose motivation and look for more reasonable opportunities.
Not being generous with the shares will make your company and customers suffer from unmotivated work, high urn-overs, cutting corners, and overall low-quality product or service. Your employees may understand and agree with lower salaries, but the prospect of getting great compensation upon an exit event needs to be real and generous to keep them motivated.
How Much Should A Founder Be Compensated Is A Multi-Factor Decision
Making the right decision on how much to receive as a salary as a founder is a difficult question. It is as much science as it is art. It depends on your location, how much money you have raised, how big your team is. Every industry dictates a different compensation too.
In addition, you need to be careful not to drain your company from cash, needed for operations, employee salaries, advertising, growing your customer base, etc.
If you find yourself worry too often and too much about things that distract you and pull you away from your main duty and goal – building your startup because your bank account is too thin, then it probably makes sense to review your salary with your investors and negotiate something more reasonable, that will keep you afloat and more importantly – focused.