For a startup business, founder is the one who runs the show. He or she is the one who takes a lot of pain and stress to get everything right about the business. Most of us think that we someone runs a business, everything they earn goes to their pocket. But that is not the case. Determining the salary of the startup founder is a tricky one. It is common for most of the entrepreneurs to fall under two extreme categories – they get no pay or they get paid close to fair market value.
Compass has collected salary data from 11,160 startups around the world that has its benchmarking tool. In Silicon Valley, 75% of the founders get paid by themselves less than $75000 per year and 66% pay themselves less than $50,000 per year, says the data. Average salary range between $30,208 in developing countries to $74,363 in developed countries. The founder’s pay is not something to be decided just like that. Employees, investors and business situation have to be considered before deciding the pay. There are some aspects that would help in deciding the amount to be paid for a startup founder. They are:
1.Setting the pitch of the company:
Money is the greatest of all resources for a startup founder. Setting up a high percentage for a salary means finishing off the company’s earning faster, that can set a wrong tone of the company. It is important for the startups to realize that burning money as such fast pace does not help the company earn the badge of pride.
It is vital to set a character or the culture to the company. A company at any stage even at the initial stages, it has to understand the value and the worth of resource allocation. It would be at advantage to have an open environment where the team members or the employees can open up their ideas and suggestions that would work to improve the functioning of the company. Money need not be sacred but it has to given the respect it deserves. There are some founders who pay themselves less than they pay to their employees to show their commitment to the company. Founder is the one who sets the tone and sculpts the right culture of the company.
Dino Vendetti, general partner at Seven Peaks Ventures in Oregon said, “As a founder, if you are very conservative in what you are paying yourself, you are setting a standard for better alignment with your investors, and maximizing what all parties/shareholders are getting out of each round of investment, and thus – less dilution for all shareholders.”
2.Setting up the scale:
One of the most difficult part is deciding the scale or the metrics through which the salary will be determined. Forming the right salary equation is not all that simple. One cannot simply borrow or copy if from the other companies. Each case is different and unique, which make it a tough task for the founders to come to a conclusion.
A founder with no loans or family to support will have different cash needs than a founder that has some personal commitments. Salary has to be considered keeping in mind lot of factors. The basic things to consider are rent, food budget, insurance and dependents if you have any. Another handful of variables like location, experience and role are also considered.
Apart from the above, the founder has to be asked two important aspects when the salary is in question.
– The money needed by the founder for is life outside the office. Startups can generally tie down the founders to the business and could make him work no matter if it’s weekdays or weekends. It is important for anyone to have an identity outside his/her workspace and have quality time with family and friends. So it is important to ensure the salary allows it.
– The span of period to live with the decided salary. It is important to take into account the savings and the current budget to manage the personal finances. The needs and the budget may be different from the previous years and could change in the future so the same stipulated salary every year would not be enough to for the personal needs. But in the first year, if the personal expenses are very less, then it could help in building the business.
Aaron Harris, a partner at Y Combinator said, “You do not want to pay yourself too little that you can’t focus on work because you are trying to figure out how to put food on the table and you do not want to pay yourself anything extravagant. You are not supposed to be getting fat off the salary such that you are no longer hungry for the equity.”
3.Salary and Equity:
For any founder of a startup in its early stages, the reward is in equity. Equity is nothing but a financial output of the investment into the dream, that makes the founder part of the company and makes its success part of the success of the founder. It is vital to prepare equity distribution much ahead of bringing in the other employees into it.
According to Harris, “An important consideration is the equity structure of the company and the founder’s strategy for the team – for instance, if you are someone who plans to keep all of the equity, then you better be prepared to pay higher/market rate salary. Bottom line: Pay = Salary/Equity balance. You need to make sure your key team members are brought in and engaged, committed to the overall business you are trying to build with their help.”
It is important to talk about the equity to the employees when hiring them. Because many know they would get paid better in a bigger company but still come to a startup on an expectation for the equity. It is in the hands of the founder to show how worthy it is to be owning a part of the company. So it is in hands of the founder to do the balancing act between the salary and the equity.
4.Revising the salary:
The founder should revise or reevaluate the salary as and when the company grows. The revision can happen when the company hits a milestone, raise extra funding or when the team grows. The founder has to take a bit of credit for it.
Vendetti said, “Founders actually can be overly frugal for too long, so it is a good idea to periodically review salaries and also take into account unforeseen circumstances that could impact the business.” Revising the founders’ salaries by 10% to 15% can have a vast difference. It can get them relieved of the personal stress and would be able to attend to business matters better and be more effective. It is important to change the bonus or salary scale when the company reaches its Series A or Series B funding round.
Salil Deshpande, managing director at Bain Capital Ventures said, “For bonuses, I like it if it can be arranged that the entire management team has the same measurable objective and has different bonus amounts but a common payout percentage, which is based on what percent achievement there was of the common measurable objective.”
Startup founders should be on regular lookout for the changes that happen in the company and evaluate the resource allocation to be done effectively. The company should be always prepared to work for the company’s best interest even if it’s to cut down the salary or fire someone.
Apart from these aspects, there are other factors that could affect the compensation of a startup founder. They are:
When the startup has been funded from angels or VCs, one cannot be surprised when the salary of the founder are to be managed to some extent by them. Investors try to safe guard their interest and hence to do so, that management does not do anything to arbitrarily increase the salary and extract high levels of cash from the company.
Things get trickier when a company has more than one founder as each founder’s salary will be influenced by the other. In that case, the salaries are determined by calculating the fair share on the basis of market value. Their roles, responsibilities, geographies and experience matters a lot in determining the salary.
It is wise of the founders to allot a portion of fair market value salary when then to plan to get external funding and to consider it as deferred expense on the book of accounting. This amount is considered as liability for the company. When the external funding is raised it is either paid off or continue to stay as liability. One good point is that to make a loan to the company and pay some salary to yourself from that. It can be fully paid when the cash is available or can even be converted into equity when there is enough money. This is an interest technique of getting salary from the company without actually getting it.
*Cash investment and salary:
The salary of the founder does not have anything to be influenced by the amount of investment in the business. Investment and compensation are two different matters that cannot be clubbed. The investment should be seen as a form of debt or equity and does not entitle the founder to get more salary. It is always better at the start of the business to have a clear agreement in written form as what can be done with initial seed investment by founders.
The time spend by the founder in the business should also be counted to calculate the salary. Often, entrepreneurs calculate their burn rate to be very low and they miss out to calculate their efforts when calculating the expenses of the business. It is an opportunity cost, whether or not the company decided to pay themselves. Time is valuable and is expensive, to be left unconsidered.
The above discussed factors are to be taken into consideration, which calculating the salary of the founder. On an average, the founders pay themselves $50,000. If they go on a raise more money through funding, that salary can double. If the startup is not doing well, $50,000 could be a big amount for the founder’s salary.