
If my startup makes it to a series A stage, am I rich personally? - menloparkbum

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danielha
No, you're not rich personally. The money belongs to the company and any sane
founder will put more money back into the company rather than taking
substantial salaries.

You can upgrade from ramen to TV dinners though.

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JMiao
Closing a VC round is meant to HELP your company take off, not settle. There's
a very good reason why it's often referred to as "runway."

The number one motivating factor for startups and the reason why they're able
to operate more efficiently than larger competitors boils down to one thing:
desperation. Having limited resources makes you desperate and hungry. Besides,
living in a cramped apartment and eating ramen is a good reminder of what you
get when you don't win (and having a roof over your head ain't too bad).

Paying yourselves $300K when you guys probably don't have revenue is a great
way to mislead your investors, create politics amongst employees, and, most of
all, make you complacent.

Now, (mis)using investors' money to live the life isn't unheard of. I once
interned at a company that basically lost hundreds of millions of dollars
every year and addressed this by systematic studio closures and layoffs. The
company's misfortunes resulted from poor oversight by the management team and
had almost nothing to do with those being laid off (they all went on the be
headhunted by competing firms). Following suit, every year, product-producing
employees were let go while executives maintained their $400K salaries. The
management team basically did whatever they could to keep the company alive
while they drew as much salary as possible. Interestingly enough, this
behavior actually began when they got funded in the late 1980s.

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pg
On paper you're close to rich, in the sense that your stock in the company is
worth a lot. But it's illiquid, and most of it may not legally be yours yet
because of vesting. On the other hand, after a series A round you'll be able
to pay yourself a decent salary-- maybe 1/2 or 2/3 of market rate, which will
probably be a great improvement.

In a startup you generally want to make your salary as low as possible. You're
not going to get rich from salary but from the company scoring, so why take
money out of it?

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menloparkbum
Let's take Loopt as an example. Y combinator gives the founders $10,000. They
code and live like animals for three months. Their hard work pays off...
another VC gives them $5M.

At this point, do the founders still have to share a crappy 2 bedroom rental
and eat ramen? Or, can they pay themselves $300K a year and use their salaries
to put a down payment on a decent condo?

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jward
Rich is a subjective thing, but in a short answer: no.

You are not rich. The money comes with strings and it will almost certainly
say what you can and cannot do with it. It is not your money, it is the
companies money. The company which you no longer have full control over. As
well, when and if a liquidity event occurs, conditions on the series A
financing may have the VC's taking several times their listed percentage. On
the chance that this doesn't happen and you go out of business, which you
probably will if you give everyone a quarter million dollar salary and a cushy
office downtown, the VC's will take several times their initial investment and
this time... this time you get nothing.

VC funding is not an end. It is only a step. And it is a step that can, and in
my mind should if possible, be skipped. Five million VC bucks in the bank
isn't cash in your pocket, it's debt. Holding debt doesn't make you rich.

~~~
me_jobs_r_u_woz
I beg to differ.

In the Bay Area, VCs expect and want the founder/CEO to make approximately
$150K to $175K per year after the VC round (i.e. Seies A). I have confirmed
this by asking VC panels here in Orange County during open-mike sessions.

What should be clearly understood is that you are actually financing a part of
that compensation via your significant equity dilution that would result from
the new vesting schedule put in place by the VC! You typically can't escape
this new vesting if you want VC money...which is why PG's question about how
much cash will you take to just walk away from it has real substance behind
it.

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npk
Ok:

This seems useful, but I don't fully understand it. Are you saying that the
VCs will force you to take a high salary, so that they can take a bigger chunk
of your company?

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Wintermute
No. They will not do that. No good VC would not force you to take a high
salary if you would rather the money went into the business. They'd probably
even like that. A founder should be setting the vision and culture of the
company. Compensation is one piece of that culture. You set a precedent by
taking a big salary and you set a message by taking a small one (i.e. Jet Blue
- CEO, COO, CFO each have a base salary of $200,000 / turned down bonuses
during bad years).

~~~
me_jobs_r_u_woz
It's not a question of forcing. It's the norm. All other things being equal,
why should someone take a lower salary?

And there are other factors. If your compensation becomes a benchmark for the
rest of the team, now your company is in real trouble. You can't expect to
hire key team members at less than the norm. It just won't happen. VCs know
that.

Also, a VC's main job is to put out as much of their committed capital as
possible into good deals. Allocating a large part of a preferred equity
tranche to fund the maintenance and creation of a solid team is the right
thing to do.

And comparing with large companies is not apples to apples. That's a different
world; here's an extreme example of that world:
<http://valleywag.com/tech/greed/the-grotesque-1-salary-251104.php>

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sharpshoot
Why do you ask such a question? Getting VC money is validation that what your
working on has the potential to solve a really big problem. Depending upon th
liquidation preferences the angel investors can cash out or retain a new class
of share. Its still ramen and hard work until you a) build a super sustainable
company (recurring revenue, cash, employees, scalability) or exit (being
bought by another company, trade sale, IPO etc) Then you've made it as an
entrepreneur...

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npk
All -

This is an important question, and one that may have not been answered. To the
people who say you can take a $150K salary: how sure are you? ($300K seems
wildly excessive to me, as CEOs of 400M corporations don't make that much in
salary, they usually get stocks + benefits to augment salary to the $500K
range)

This would have been great to ask at startupschool.

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kogir
Not at all, let me tell you ;)

And if you care about the business, you won't take a $300k salary either.

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Mistone
good question, most vc's will be ok with the CEO and a co-founders paying
themselves $150k salary. They do not want you to starve and salaries are a
component of every companies operating costs. $300k is a bit excessive. VC's
love frugality.

So while you won't be rich, you will be able to upgrade from a 7-11 diet to
Whole Foods.

~~~
danielha
Saying $300k is a bit excessive is like saying gas prices are only a bit
excessive -- huge understatement. I don't know how plausible a $150k salary is
after a Series A, but I can't imagine any good founder paying himself close to
that amount.

