This is something I've always wondered about... When you take a VC round, how do you (as a founder) get your salary determined? Is it purely up to the board and investors? Is it up to you? How does it compare -- is it the bare minimum to live on, so that everything can go into the company? Is it comparable to an executive you'd hire? Somewhere in between?
I'm very curious about the calculus. I imagine it varies quite a bit by the type of investment made (e.g. angel vs. VC vs. institutional), but that's just a guess.
In general VCs and investors are looking for folks who want to take the minimum salary necessary to live off of, while pumping every dime into the product.
Of course most VCs are making $250-$1M in salary per year. That doesn't count their carry... that's just their base salary.
2. 30 something with two kids in private school: $100-250k
3. Profitable company having just completed a C round of $15-30m: $200k with a $200k bonus on hitting a huge milestone.
Also, the secondary market for stock has helped this... i.e. reports are the founders of Wordpress, groupon, facebook and digg got to selling a couple of million dollars in stock.
I think #1 is going to experience the most amount of scrutiny. I'll be more conservative if the pre-launch/pre-revenue amount is under 1m. It'll probably be closer to 40-60k
I think this approach can lead to kill start-up potential at the beginning. A founder is an entrepreneur and if a company has no money - because of it has insufficient revenues - than the founders must deal with the fact to not touch their company bank reserve except for eating :)
So for #1 I would say: no income except for eating and sleeping. For my company - as a founder - I would do that way.
Massimo Sgrelli
You pay yourself a reasonable living salary, based on location and living expenses. It usually has to be approved by the board, but so long as it's reasonable, you should be OK. The idea is that you're not getting rich off your salary, you should be focusing on growing the company to get rich off your ownership stake. At the same time, you shouldn't be starving, because that will cause you to spend more time focusing on your personal finances than working on the company.
You make a good point in your "You shouldn't be starving[...]" sentence -- One of the biggest productivity killers in my life is dealing with, or even worrying about personal finances. As a founder, if you decide you want to go get a few beers with friends and grab dinner, you shouldn't then have to worry about how you're going to recover the $30 you spent outside your budget. The key here, I think, is to pay yourself "enough to live in a manner that allows you to focus solely on your business and productivity."
When I was in the VC world, the founder's salary vs. equity demands were usually used to gauge how invested they were into the company's vision and concept. If the founders spent a lot of time penciling in $200K+ salaries, elaborate bonus and commission packages, and exorbitant perks (a $5K/month 'car allowance' was my personal favorite) for themselves, then it was a definite red flag. If instead they were willing to take modest salaries but fought hard for equity, you knew that they truly believed in their idea and were fully invested in the concept.
A lot of people seem to be saying "market". But for us, it was based entirely on need.
After talking to our families, each of us came up with the minimum salary required to maintain our current lifestyle. The idea is that a founder should not be saving any money, but they also shouldn't be forced to move into a smaller home or stop eating out.
What's interesting is that this produced 3 very different salaries, even though our "market" rates are roughly equal.
Our VCs were completely supportive of those numbers and did not push back at all.
Interesting--- salary based on need, while contributions presumably are based on strengths of each founder. I've heard that compensation strategy somewhere else... ;-)
Communism does often work well in small, close-knit groups, and I would certainly hope that the founders of a startup living on VC money would fall into that category.
Yeah, I didn't mean it as a criticism, just was surprised/amused to see it in a VC-backed company. My impression is that a more Randian spirit is somewhat more common, which views anything altruistic as being screwed. I don't have any survey data, but my guess is that a more common arrangement is based on some sort of swap, e.g. the young/no-dependents co-founder who can afford to take a lower salary might negotiate to work for 50% of the other co-founders' salaries, but gets something in return, e.g. an extra equity share--- as opposed to just taking a lower salary for the good of the company.
I don't actually have any problem with the principle the slogan represents, though. IMO the main problems with it are implementation, since there's no way to base a whole country's economy around it without an authoritarian government enforcing who gets what. That's obviously not an issue with voluntary arrangements in smaller groups.
I bet the above company does plan on some time in the future; having more "normal" and "market based" salaries; otherwise they could have worked anywhere for below market wages. They have to have a plan for making more money down the road that won't depend on their needs; but value.
Of course. If revenues begin to cover our own salaries, then we'll increase to market rates. But until then, we're all committed to making our seed round last as long as humanly possible.
Genuine question: Why shouldn't a founder be putting aside savings? Does savings include any accumulation of money, or just liquid cash and allows for retirement planning? I understand that the founder is being paid with venture capital, but what is supposed to happen if, even against the founder's every desires, the business goes bust, the founder is no longer able to work for some reason, or a myriad of unintentional-yet-plausible reasons why the founder might no longer be drawing that salary?
Granted, this comes from the perspective of a person whose entire life's income can be documented on a series of W2 forms, so I beg your indulgence of my ignorance.
The financial goal of a startup is (often) to generate a lifetime of wealth in 3-4 years of intense work. After 3-4 years, a startup will either succeed or fold. Because the timeframe is bounded, it's possible for a founder to forgo any personal savings without irreparably damaging their personal finances.
For example, speaking for myself, at my last job I was saving about $60,000 per year. Not contributing that money to my savings over the next 3-4 years isn't a huge deal. If my startup fails, I've only lost 3 or 4 years of savings.
However, it IS a huge deal for our STARTUP to save $60,000 per year. That's a full-time junior employee. If not spending that money increases the likelihood of a successful exit, then it's a prudent financial strategy for me. The effect is multiplied if the other cofounders forgo their savings as well.
Note that this is only my second VC-backed startup. Others with more startup experience may very well have different advice or reasoning.
"The financial goal of a startup is (often) to generate a lifetime of wealth in 3-4 years of intense work"
That's just one class of startup. I'm sure the founders of Balsamiq and 37Signals which represent two of the better known "Business as a lifestyle" startups would beg to differ with you.
We pay ourselves market salary for our field, but we're not VC funded.
When my other friends and I started Sonicity, we all threw money in to start the company, and then when we got funded we took better-than-market salaries out. In reality, unless you're being stupid, founder salaries aren't on paper going to make much of a difference.
(There's a whole separate argument to be made about the tone you set in your company with salaries, but that's between you and your deity).
That's true for UK companies too - there can be (and often are) multiple directors. In fact, unless there were a lot of founders, I'd expect all of them to be directors, at least initially.
My take was that the job of running a 30 person company was being equated with running Enron. Actually, someone who can successfully run a 30 person company is worth more.
Here is my experience: first 1.5 years, nothing. Then $60K for the next year. Then as profits went up, it reached $120K. Stayed there for several years. Then profits went up more, $200K. Now at $275K.
Off-topic from the OP's question, but if you're incorporating as an S (for example, although other pass-through entities are similar), you need to pay yourself a "reasonable and appropriate" amount as salary. That is, you can't just pay yourself $1/year in salary and take $500K off in K-1 distributions (thereby avoiding FICA and other payroll-only withholdings). The IRS will tag you for that in a heartbeat.
I would also like to point out that most Angel Investors/VCs won't invest in LLCs/S-Corps. I think this is because of preferred options... I'm sure someone else with actual experience could chime in.
Heh, and most LLCs/S-Corps won't bother looking for Angel/VC investment. ;-)
That said, AFAIK converts (which seem to be getting popular these days, at least among sensible angels) are perfectly compatible with typical S corp structure.
My company just converted from an LLC to a C-Corp. The result was delicious sausage, but the making of said sausage is not something we'd repeat if given a choice.
My co-founder doesn't have a salary (though he does get our health benefits). I'm on an H-1B so my salary legally required to be "market rate", as set by the US government for my job title and location (a fact apparently not very widely known).
I'm really curious. Imagine you were at a party, and engrossed in a conversation about food. Honey comes up, so somebody asks a question about bee raising. Would you tell that person,
"You're either trolling this party, or (may I politely point out) you risk coming across as a troll in this party"?
Clearly I missed the part of the social contract which states, "Discussions may never, ever branch".
It's an annual survey of private "high potential" companies (about 2/3 VC backed) executive compensation. You can find detailed data on base salary, target/actual bonus, equity and more for various stage companies.
It's the "Kelley Bluebook" of startup executive compensation.
Ya that's a lot of money. It makes sense that if you are concerned with VC backed executive salaries $999 is probably a minor expensive. Google had a link to an older one on scribd:
