Investors want to see two thing at that point:
1) A scalable business model. This means that as you add more users the cost of user acquisition goes down, and it is possible to see where the income per user becomes more than the cost per user.
2) Growth in the user base
Combine those two, and the lack of current profits doesn't matter (usually).
If a company is profitable then investors will want to know why that money isn't going into growing the company faster.
I don't see why the CEO of an unprofitable company should be making six figures, pulling out 7 figures and getting a ton of equity
Presumably they are being rewarded for that growth, and making a scalable business model work.
Aren't the employees taking a risk too?
If they are being paid market rates, then it is hard to argue they are taking much risk at all.
If they are being paid below market rates then yes, the deserve other forms of compensation.
Other times, it's simply a case of founders transferring investors' money straight into their own pockets.
It's a very, very useful skill as an investor (or employee, for that matter) to be able to distinguish the two.
At start-ups the concept that employees are taking no risk is just laughable on its face.
The founder has likely foregone salary altogether for some time and run up personal debts while doing so. They've probably tipped a lot (relative to their net worth) of initial capital into the company to get it off the ground. If everything goes wrong, they need to go find a job _and_ deal with the mountain of debt they're now in.
If the company is at a stage where it has paid employees, a significant part of the risk of failure has already passed. There's plenty more risk to come, but you cleared the first few hurdles; and they're big ones.
Source: Founder that did all that stuff.
However, I would caution you that "racking up debt" isn't something only founders have as a risk. What you've described in your second paragraph is where just about anybody who isn't rich or well connected and has to rack up debt going to college finds himself, at least in the US. I would also caution you that employees frequently cannot merely walk out the door of the failed start up and into a paycheck across the street (as it were). They have to spend time, and their own savings, looking for work, in most places.
Compounding this is that odds are said founder has accumulated something the fresh college graduate or now former-employee hasn't: connections and the ability leverage his 'failure' into lucrative employment or future business opportunities. This helps mitigate the risk significantly.
If a Founder is working for equity in a company for 18 months and it dies, it's an absolute personal disaster. There's no way to repeat that four times in a row and remain solvent and sane.
This simple example shows the fact that really it doesn't matter whether a company really guarantees an employee a paycheck or not. If it has enough money to pay you for a few months, you're good to start.
There are mergers and acquisitions in companies of all sizes, so to some degree no jobs are safe.
Are the VCs funding hoping that a company gets picked up by Google, FB, Twitter etc...?
Non-founding employee equity is driven by market dynamics, where "taking on risk" only explains how they got in the situation of having so much to begin with.
It's fair in the market sense, but it doesn't need to be fair in terms of risk/reward.
However, I have sympathy for the fact that founder risk in SV has declined dramatically over the last twenty years, while employee risk has not, but if anything employee stock pools are smaller than they were a decade ago. Yet every founder says "it's impossible to hire good people".
The compensation is market rate for the actual position currently held- eg. a CTO at a scaling startup makes $130K-150K, founder or not. This aligns incentives. A founder no longer working at their company does not/should not make any salary.
Re taking money out of rounds: This is for incentive alignment b/w the founders and investors. Mark Suster discusses this in much more detail than I can,
These situations are more complicated than they appear at first glance. You really don't know why things are structured the way they are until you get into them.
Fundamentally though businesses are designed around the risk of employees leaving, therefore you're in a pretty shitty point of leverage.
People will tell you whatever you'll believe in order to pay you less. It's not a VC thing, it's not a CEO thing, it's a people thing.
1. It's their company. They get 100% of the equity until they choose to sell some of it.
2. Founders loose control of the company when they no longer own a majority stake of the equity.
3. They must sell a significant percentage of the equity when they raise money.
VCs do care about how founders spend their money, but it is in the VCs interest for a company to occasionally need to raise more money (see point #3).
What rock have you been living under? The SV game hasn't been about having a normal profitable business model for the god-knows-how-long.
You gotta get "value" and traffic and buzz and hype! Then maybe Google of whatever will buy you.
It's basically a sort of bubble. And while you operate in a bubble you can make a lot of money!
The only guys in town making money are ad companies, enterprise software companies, and hardware companies
Everything you've mentioned applies only post a few rounds of mega-million funding.
If you're pre-funding, then you're taking a humble salary - if any salary at all.
So clearly, there's some kind of moral hazard post successful funding. That seems more or less unequivocal and it's somewhat gross but I'm not sure what should be done about it other than vitriolic twitter comments whenever people talk about meritocracies and how inequality isn't a big deal because you too can learn how to code.
The current way of thinking about it is golden handcuffs align vc and founder incentives re: exit timing. Which is why Snapchat turned down $3 billion; the founders were provided with fuck you money and were under no pressure to flip before they've extracted maximum value.
REGARDING RISK AS A WHOLE,
It's not clear to me that founders of VC backed companies - from the founder's perspective, and in this job market - actually incur any exposure to risk above and beyond opportunity cost.
Saying that you quit your job to slum it out for six months building a start up is a pretty good resume polisher, no? Doubly so if you actually investment and treble if you got acquired or otherwise exited.
The way I see it your worst case scenario is suffering reputational penalties by pissing off important investors when/if you a) run out of money or b) try to exit early from your commitment.
This is not to say that VCs should have higher equity portions or that all that hard work and sleeplessness should go unrewarded, but more that equity arrangements are like so because that's what everyone negotiated, and not because of some intrinsic "deservedness".
I'm not making any claims as to whether those investors are being smart or foolish.
Source: See second chart on http://www.mondaynote.com/2012/05/27/decoding-share-prices-a...
Year one salary was £4,800 per year.
Year two salary is £12k.
London, UK based start-up, very little revenue (working with a few test customers, opening the doors very soon as we're quite far down the road on seeing the output of our tests).
I suspect the wage will stay at the £12k level until our active users pass 50k and the revenue passes break-even. At which point we want to raise money to fund growth, but the salaries will likely rise to help us focus on that growth (rather than how the hell we cover the credit card bill).
We are seed-funded and haven't yet gone for the A round.
I get that question a lot, but it's possible so long as you're not spending on... well, anything. I've spent a lot of the last 2 years adjusting to not needing to buy things and disposing of luxuries (I wouldn't have called them luxuries at the time, but it's surprising how much isn't needed). What I do buy I find ways to acquire things very cheaply.
There are food blogs like this: http://www.theskintfoodie.com/ (Tip: Waste nothing, buy precisely what you need and plan how to use every bit)
You can get clothing from places like this: http://www.barone.co.uk/ (Tip: There's a huge supply chain from which you can purchase long before things hit shops)
I've turned off broadcast TV, cancelled the TV licence, and just watch on catch-up via iPlayer, etc.
Cycling cuts travel costs, though I keep a PAYG Oyster for when I'm with others and will make a journey with them.
And so on.
But even though I have a low rent, it's comparable to my friends who are living in shared accommodation in the South and East of London.
(Always feels improper to ask such things)
It will need to hit $100k once revenue can support it, for the sake of marital bliss. Worse, until there's revenue, I'm dayjobbing to make ends meet. I can live on savings for a while, but not pre-revenue.
I understand that many folks like to randomly vote on polls on HN: I remember several people explaining that they cast an incorrect vote on the last "how old are you" poll.
The fact that we have 267 votes in the first 45 minutes of this poll makes me more suspicious of the votes: I have a hard time believing that 5 founders per minute have read this poll and voted on it.
So I'm curious. Founders, how many of you truly take no salary? If you take no salary or close to no salary, how do you compensate? Is it via savings, tricky shenanigans where the business pays for things for you, or something else entirely?
I earned enough selling my last two companies to afford to live off of savings for a couple of years, fund retirement account, and fund two projects I'm currently working on. I also occasionally do consulting which pays very well by the hour, when need be.
Single-income family with no kids and minimal debt, small house in a working-class neighborhood, standard cars.
No funny tax stuff, because it doesn't really exist. That is to say, outside of re-investing capital gains offsetting when taxes are due (1202), and current deals on off-setting future capital gains (1045), there's nothing that the average employed person couldn't exercise regarding write-offs.
S-Corp is pretty much synonymous with "I have an actual payroll"
But, it still wouldn't matter in this case. There is no money, except that which I put into it. If I were to take a partner retainer from that same pool of cash, or pay myself a salary via an S-Corp, they would both show as income at the end of the year, even though I just moved money from one pocket to the next.
If one is in the same situation, observe how much you need to cover expenses, set that aside, and invest the rest - do not try to be funny with paying yourself out one side and looking for losses on the other.
Shows what I know when it comes to startups!
I currently take no salary. The company is profitable and we're looking to hire soon, but my co-founder and I promised to not take any salary for a predetermined length of time in order to gather some padding in our company bank account.
It's just an easy way to invest in your own company without actually transferring money.
Edit: We will be drawing salary eventually. Its just a transitional phase, and that is probably the case with most startups. You pay yourself nothing for a little while until you make money. Once you earn/raise some money, you pay yourself.
So in the meantime, how do you get by? Are you working another job? Did you save up before starting the company?
Edit: I also wanted to note that it really is important for a founder to take a salary eventually.
Specifically, its a risk to the company. You shouldn't be putting yourself in a place to have money problems, nor should you be putting yourself in a place to have to make decisions about the company through the lens of your dire financial straits.
What is that pricing in US dollars? That is a great idea you should bring it to the US.
Is this really a common phenomenon? What reason would you have for randomizing a poll vote? I can't think of a reason offhand to intentionally obfuscate meaningless poll results.
At the time I found this frustrating because I'm honestly interested in the age distribution of HN readers. It seems like cool data to have.
That is, a founder making $4,000-8,000 a year can easily survive in Asia, but that's quite far off $25,000 a year. So they might as well vote for 0.
$8000/year is about the same as our minimum wage, and I live in a Western European country (Portugal). Some families live on less than that.
I guess my post spends a bit too much time speculating about whether the votes are fake and too little time asking the question that I care about: I'm honestly very curious what folks who are making very little money and living in (presumably) very expensive places do to get by.
Makes it a lot harder to get rolling though. A lot harder.
My other thoughts were:
Where are you living? (Both geography and say "with parents")
How old are you?
How do you pay your bills (with "salary" = 0) and so forth.
What are your savings?
What is your safety net?
Many things play into whether someone can even begin
to afford to get little or $0 salary.
Do you have kids?
Are you married?
They repaid him from firing him from the job, although he is still on the board.
When I had coffee with him he seemed completely ok with it though... what a champ.
I just found out that in California at least, you will be shunted to Medi-Cal, i.e. the program for people living in poverty. (At least up until now it was.)
You do not have the option of getting a subsidy for private insurance if you qualify for Medi-Cal. It is not either/or. You need to exceed a minimum income threshold for that -- and they no longer look at assets/savings to calculate that, only your income.
So, if you want a doctor that only takes private insurance, you'd have to purchase it without a subsidy. And of course, the unsubsidized market price has shot way up now. (For my plan, it doubled.)
So... what are ya'll doing? Medi-Cal? Full-price private insurance? Uninsured and taking the penalty? Haven't thought about it yet?
- $9800 deductible/year
- preventative care no cost
- serve as safety net in case something gone very wrong
-> $1 - $25,000/yr
-> $25,001 - $50,000/yr
A salary of $0 is quite easy if your still making $150k from another job. If the startup is your only source of income...not so much
I later learned from a wise HN'er that you can also claim rent on your apartment as a business expense. Although I'd love to support social welfare and bureaucratic spending with my income taxes, I'd rather maximize how many jobs I can create for hardworking people with my business.
1 - you should weigh the tax implications of a personal car vs business leased vs business owned car
2 - if you manage to convert all of your personal expenses to business expenses and lower your salary to lower your personal taxes (which may not matter depending on the corporate entity you created in the first place) then you need to realize when you go for a credit check all anyone will care about is your salary, not your business income. So let's say I'm self employed as an hourly contractor and bill @ $150/hr, but I pay myself a 'lowly' $30/hr to dodge taxes. The mortgage company only cares about that $30/hr and may not loan me anything. (also, if you start a business you need to be solid for two years before anyone will loan you anything for the most part, just fyi)
3 - you can claim a portion of rent/mortgage/etc as a business expense if you have a legitimate home office or conduct business of some sort in it.
One thing to point out about this - if you use the space for any purpose other than for your business, it doesn't count as a home office. Additionally, you cannot claim shared utilities like phone lines and Internet as a business expense unless they are for exclusive use in the home office space.
That's not true in my experience. When I was looking for a mortgage a few years back, the lender was practically throwing money at me once I presented my business financials. Perhaps it depends on who you are dealing with?
Salaries alone are only marginally useful, it's also important to know what stage the company is in (earlier the stage, less the salary, yes or no? Would love to test that b/c that's our intuition). Its also important to know what industry. How much fundraising vs # of employees, how does that ratio effect the CEO salary. Also, equity %. Do founders who make more get less equity than sweat equity CEO's who take no salary? So many questions!
Plus you are not taking into account the age/maturity of the company.
Year 1: 0 + working old job (150K annual) for 6 months
Year 2: 0 + 38K consulting
Year 3: $19,000
Year 4: $38,000
Year 9: $97,500
Year 10: $137,000
Year 11: $182,000
Year 12: $465,000
Year 13: $415,000
I'm in a year 7 and by interpolation it looks like I'm following your path.
This is not really clear cut to use and make your own decision.
Year 1 Salary: $100k
Year 2 Salary: $600k-$1M (6 months in to Year 2. Estimated salary)
I am not trying to discredit either situation, it's just that I see one situation as a company where nobody is making any money. The other situation would have staff who are getting a steady paycheck, but the CEO has chosen not to pay his/her self.
(and to compare, the TNW article's chart: http://cdn0.tnwcdn.com/wp-content/blogs.dir/1/files/2014/01/... )
I made $7k in 2012 while running simplehoney. (me and my cofounder paid ourselves minimum wage so we could keep 3 people on payroll and get a group rate for health insurance)
Salary by itself doesn't really tell much.