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Peter Thiel: Best Predictor of Startup Success Is Low CEO Pay (techcrunch.com)
51 points by raghus on Sept 9, 2008 | hide | past | web | favorite | 53 comments

Is there a difference between a "startup" and "starting a company"?

I ask because, "In Startupland, everybody should be working towards the same goal: that big juicy exit," couldn't be further from my mind. I know what that means to me (as does my team) in terms of access to venture funding, but I'm not particularly interested in an "exit". I want to build a service that's beneficial and worth paying for and that is responsive to my customer's needs.

Am I missing something, or do I need to change how I think about what I'm doing?

That's TechCrunch editorializing - they're all about publicizing big exits. It makes for more page views.

startups => exits

company => provides services and products

Why not startup => company => provides services and products => exit?

Well one reason would be that the startup needs to be bought by someone in the right position to exploit it before it can become profitable.

So in that case, you could create a startup that in itself cannot be profitable, but when purchased by a larger company can become wildly profitable for them.

I don't think that's an unusual case.

haha which is why all companies were startups at some point but not all startups will be companies.

What he probably meant is that high CEO pay is a good predictor of failure. If the CEO of a startup that is looking for a big exit demands a high salary, that means he/she is not too convinced about the big payoff to come.

Thiel was definitely nervous, but what he did say was awesome and interesting. I wish Arrington wouldn't have interrupted him EVERY OTHER SENTENCE. Christ. I wanted to hear what Thiel had to say, not Arrington's cheap shots about Slide and Chess.

From pictures and hearing about him I thought he would be more of a jock, but he was more of a ultimate geek.

I wish I could find the link to the quote by him, but when he was at Paypal they actively tried to not hire jocks.

If the interviewee played pickup basketball in his spare time, he would be out.

I think the article either leaves out a critical part of the speech or Peter just didn't cover it. That approach may be the right approach for CEOs of new companies that haven't taken big investment (like the TC50) or for first or second time CEOs of low capital requirement companies. I know he doesn't believe that for VC-backed companies or for companies in which the CEO brings huge value to the table in terms of past performance/experience/contacts.

Bottom line: you aren't going to be able bring in a proven CEO for $100-$125k a year. I don't care whether you're in Cincinnati, Boston, Austin, Silicon Valley - you can't expect someone who has a $15,000/month mortgage (as a proven CEO would likely have) and expect him to work for $8k/mth. "Hmmmm - over the next four years of my life, I can make $600k a year plus bonuses/benefits working for ACME Corp or I can make $100k a year with the chance to take home a $3m-$5m payoff..."

Maybe the best CEOs for startups aren't "proven." I.e. first-time CEOs. I'm pretty sure I've read another VC saying that's exactly what they look for.

You are assuming a non-founder CEO. I think he would agree that founder-CEOs are also a good predictor of success.

If he's "proven" wouldn't he be wealthy enough to live off a measly $125k/yr for a couple years at least?

I think you didn't read this:

"Hmmmm - over the next four years of my life, I can make $600k a year plus bonuses/benefits working for ACME Corp or I can make $100k a year with the chance to take home a $3m-$5m payoff..."

Well, you're just making up those numbers. Here's some I made up:

"Hmmmm - over the next four years of my life, I can make $350k a year plus bonuses/benefits working for ACME Corp or I can make $130k a year with the chance to take home a $10m-$20m payoff..."

At least the made up numbers I proposed at least we in the double digits of probability lol. I put your numbers in the 0.0001% chance of occurence. In other words, I give you a 0.0001% likely that a group of founders+investors will bring in a CEO post-financing and give him (1) enough equity that he earns a $10-$20m payout, yet (2) only let him earn $130k/yr.

Except that the comparison is "$100k/year with a good chance to take home $10-15M or maybe even $50M".

BTW - $15k/month mortgage is around $2M borrowed. That's not a big deal in some places (including SV), but it's a huge deal elsewhere.

Stay Hungry, Stay Foolish! - Thats all matters I think.

Steve Jobs Speech: http://in.youtube.com/watch?v=D1R-jKKp3NA

In that case, I think I'm going to be the next Bill Gates.

By YC equation (5kn founders + 5k) 4 = 1 year bare minimum salary for founding team

$100-125k is pretty good for funded startup then i.e. as good as corporate salary

CEO pay is a very good indicator. You should also pay attention to perks. Not all compensation is in terms of pay.

A CEO to taking a lower compensation says to me they are taking the company seriously. It's another way they have skin in the game.

If they aren't willing to sacrifice a little for the end game, may mean they are either purely in it for themselves or don't have confidence in the company. Either one is not so good for the company.

I hope you're not suggesting you should sacrifice healthcare though... bad idea.

I really talking more about expense accounts and other fringe benefits that don't necessarily benefit the business.

Could always start the company is a country where healthcare is provided ;)

If your CEO requires a healthcare-nanny in order to stay healthy during a ~4-year start-up run, perhaps you should be shopping for a new CEO. IQ codes for both business-competency and self-healthcare competency. High-IQ individuals with little money and no health insurance tend to be healthier than the average person. Linda Gottfredson details this further:


I suspect the odds of a healthy person getting cancer are higher than the odds of a particular startup making it truly big.

"Tend to" is a nice statistic on a population level but has little relevance to you or me as individuals.

I live in the UK were basic health care is free so perhaps I don't have the experience to comment but healthcare wouldn't be somewhere I would be trying to save a few pennies/cent.

I live in the UK were basic health care is free

No, you like in the UK, where basic healthcare is paid for by taxpayers. It doesn't become free because the money is taken rather than given.

By that argument, it's not "free" to just walk down the street, because your tax dollars are paying to maintain that street - and reading a book at the library isn't "free" because you're paying for it through taxes. Heck, almost nothing's "free" by those criteria.

Lots of stuff is free.

Come couch surf at my place. I pay for it, but you enjoy it: it's free to you. Here's an ice cream cone. Once again, I paid, but you enjoy it.

To you, it's free.

Now -- use the powers of government to force people to pay taxes to buy you an ice cream cone? It's not free to you any more.

The danger is that you start feeling like I'm going to give you ice cream cones anytime. I can correct you of that assumption pretty quickly. But when the giver is some anonymous blob, starts looking like free money.

The marginal cost of walking down the street is nearly zero. Likewise, the marginal cost of reading a book is minimal. But since we're discussing an industry with very high marginal costs (doctors' time is expensive!), not to mention higher depreciation (libraries have plenty of books that are more than fifty years old; hospital equipment ages a little faster).

You're right. Almost nothing is 'free' by those criteria. Economists like to say that "There ain't no such thing as free lunch."

Absolutely. There's no such thing as a free lunch.

A fair point, I should have phrased that differently. What I meant to say was that basic healthcare as a cost is independent of salary.

Having only paid tax for one year of my life so far perhaps it is easier than I had imagined to adopt the notion that other peoples money = free.

It's a hell of a lot cheaper than the US in any event, and is something you never have to worry about.

Okay, so it has a cost, and you're encouraged to ignore that cost. I don't think this is a good thing.

It does reduce a source of friction in the economy, people aren't going to stick with crappy underperforming companies just because they have health care.

Social health insurance is a larger risk pool, and if managed correctly should be a lower cost overall; something which is borne out by the UNHCF numbers.

The essentially random and punitive nature of health care financing in the US means there are plenty of people who are foregoing entrepeneurial activities because the health risk is too high for them to do without the bargaining power of a large employer to restrain the cozily corrupt arrangement that makes health 'insurance' one of the most profitable businesses in the world.

By supporting private health insurance you are essentially supporting a barrier to entry in all industries...

So do most government controlled facilities. Everything you get "free" costs in the long run, but something as basic as health insurance should be something that is 'free' for everyone regardless of their circumstances. Also the idea of big companies profiting from illness is not good IMHO

In the US you pay a massive amount towards warfare - I don't think that is a good thing.

Also the idea of big companies profiting from illness is not good IMHO

Ah. You know, I never really thought about how when I buy food, I am helping big corporations profit from hunger; when I buy books, I am helping big corporations profit from ignorance; when I buy clothes, I help big corporations profit from the wrath of nature. Fortunately, I am more concerned with getting what I want than with worrying that someone might, as a terrible side effect, benefit from my actions.

something as basic as health insurance should be something that is 'free' for everyone regardless of their circumstances.

But it's only 'free' because the necessary resources are taken away from other people. Saying you are entitled to healthcare is saying that no doctor or nurse is entitled to their own time -- it's yours, until you declare yourself satisfied with the health care you've gotten. Similarly, no researcher is entitled to his own ideas, property rights dissolve when the property is something you want but for which you are unwilling to bargain, etc. That is barbaric.

In the US you pay a massive amount towards warfare - I don't think that is a good thing.

Neither do I. Unfortunately, the cheap kinds of war are unpopular.

Your argument is bogus. Food is an ongoing thing. We never stop being hungry. We always need food.

Medicine however, we need as long as we are sick. Therefore, there's quite an incentive for medical companies to keep us sick so we'll keep using their medicine.

Doesn't that worry you? Don't you see a sort of conflict of interests there between them wanting to cure you, and them wanting to make money?

If they develop a one shot cure that is cheap, and an ongoing vaccine that people need once a year, obviously they'll hide the cheap cure, and get you to sign up for once a year medicine, because it'll make them more money.

Golly. It's amazing that every single provider of healthcare would conspire to keep me sick, so I would never notice that customers of health care company A are healthier than customers of B. That kind of conspiracy would be a little bit totally unprecedented in all of human history and impossible to initiate, much less maintain. But I concede the possibility.

If that's true for private enterprises, why is it not true for the government? If a politician can make me reliant on him forever, why won't he do it?

If they develop a one shot cure that is cheap, and an ongoing vaccine that people need once a year, obviously they'll hide the cheap cure, and get you to sign up for once a year medicine, because it'll make them more money.

If there's only one 'them' (as in the government example) that is true. If there are many 'thems', and a new 'them' can be started for fairly little money, one would expect someone who developed such a cure to market it independently. Yes, a multi-million dollar lump sum from curing everything is less than the billions of dollars in revenue generated by health care companies. But 100% of that lump sum is more than this researcher could expect from the companies.

On a startup-related discussion site, it's pretty foolish for you to argue that nobody will ever market the cheaper, better solution, and that we'll always be beholden to the big companies. Nobody here believes that about software -- do you?

Another bogus argument... You assume that others know about the cheaper better cures.

Software is just building stuff. It's easy.

If you don't build X, someone else can. But if you hide cure X for an illness, there's nothing to say that anyone else will find that cure at all - ever.

The statistics speak for themselves. Countries with government provided healthcare pay less on healthcare, and have a higher life expectancy.

Whether it's a good thing isn't in the perception but the reality. The reality is that costs within the UK NHS are significantly lower than those in the US with its $50-per-mile ambulance rides and $10 aspirins.

While paying for medicine from tax money makes it look like more of a free ride, and potentially open to abuse, it seems that having a cartel of medical insurance companies and hospitals all jacking up the fees works out a lot worse for users in the long run.

Fooled again by the normal distribution I see. Too bad the outliers are what matter here. That is the whole point of health insurance. You don't get health insurance because you expect to get sick, you get it in case you get sick. Moreover the benefits far outweigh the cost. There are many non-sickness-related healthcare issues that may affect you as a startup founder. I know a number of people with really bad RSI and no health insurance who sure wished they had it right now.

It's quite interesting how this has morphed from a discussion on the pay rate of a CEO being a good predictor of the success of a start-up to health coverage.

One of the interesting ideas that many of the state-based health care systems have (Sweden for example) that the US should adopt is small out-clinic centers. The centers tend to have 1-2 doctors on staff and several nurses. People can either call in for a consult or walk in to the center. If they call in, the nurse will provide treatment options over the phone when possible or either ask the patient to come into the center or send a doctor out for a home visit. The centers have been very effective at reducing cost and giving people an alternative to going to the emergency room for things that do not require emergency treatment.

While I tend to believe that private industry can do things more efficiently (cost-wise and man power required) than the government there are some things that really should be available universally, like health care. Removing the need for all of the currently uninsured people from going to the emergency room to receive care would probably save the industry a large amount of money and bring down costs significantly. I don't see private industry stepping forward to find a solution for this issue anytime soon so we'll most likely need the government to step in.

Interesting that this is not a question on younoodle, a Thiel portfolio company (although previous salary is considered).

If the CEO sets the ceiling pay, and an acceptable range is $100-125k, what then constitutes acceptable pay for (non-CEO) founders? Is $60k too high (given reasonable funding, pre-profitability)? $80k?

Just curious at what the usual funding agreements end up at.

I don't know the answer, but if I were CEO, I wouldn't care if I wasn't the highest paid person - as long as I am happy with the % of the company I owned.

So if this view is reasonable, I don't think that the CEO's salary is a ceiling.

An aside, but I wonder what the stats are on the signal to noise ratio (as judged by upvotes?) vs. average indentation depth of a particular discussion thread....

What about performance related pay? For example, pay directly tied to profits?

I think this is probably pre-profit pay. If your startup is cash-flow positive, then by all means, pay yourself a market rate!

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