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How do Investors Look Upon Founder Salaries?

How do investors (angels or VCs) look upon salaries for founders of start-ups? I'm hearing that it's a taboo subject for an early stage, pre-revenue start-up. I can certainly understand that if the founder(s) is/are not investing financially (with their own cash) and only contributing sweat equity that salaries ought to be deferred to an agreed milestone. Makes sense when the investors are taking all the financial risk. But what about a situation where the founder is putting up a considerable amount of the seed funding? It's OK to bring on people and pay them so why should founders work for free? They are the engine of the business. They are taking risk by removing themselves from the job market. When is it OK to factor in salaries in the budget? How does one come up with fair compensation for a founder?

16 Replies

Thomas Jay
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Thomas Jay Entrepreneur
iOS / Server Architect / IoT / BLE / iBeacon / Apple Pay
Very interesting question and I will be watching every ones responses.

My personal experience has been as follows:

When working in an Incubator I seen most "Founders" receive a stipend of about $5K per month per founder with a max of about $20K for the team, I have seen this in a couple of the big incubators. This gives the founders a small salary but a larger piece of the company, several founders have given up more of the company to get a little more income.

I have NEVER received any salary when being one of the founders of a company outside an incubator, it has not been deferred, it got paid when there was money coming in from profits or started getting a salary once the company was flush. As I have worked with VC's, they did not want to see me get a huge salary and have always made that clear upfront so there was never a discussion about it. I have received the "Rewards" when the company was sold or I sold more stock to new investors.

When I have received a large salary, its has been as an employee, I have been the first or second employee for a couple of companies, I received a larger then market salary because of the risk of the startup, its not like a normal job that might be several years but could be as short as a month if the numbers are not met. I've worked for several startups that had the funds pulled long before the money ran out simply because we were not making numbers, this could be because the product was not very good or could be from the marketing not being very good or simply that there is no actual market. Always hard when reality sets in.

I have done very well as an employee working for a couple of startups that were successful and were sold, this has been the best for me personally and I have received a good salary plus stock purchase.

I would not expect an Investor to put money into the company as well as pay me a salary if I'm the founder, I think it makes more sense to have a total commitment when working at this level.




Walter Biscardi, Jr.
2
1
Creative Director, Visual Storyteller, Video Editor, Post Supervisor, Documentarian
I think it's fair for the Founder of a company to get a small salary. After all, the investor is investing in you as much as the concept. So if this is your baby and you're supposed to give 100% to make it happen, you need to at least be able to pay your own personal bills. Not every Founder comes into this with a lot of money in the bank to just float for a few years while the company becomes successful.

If you put a salary of 6 figures in there, well that's a red flag and folks will not invest. But something between $25 - $40k seems perfectly reasonable. Allows you to pay your bills and devote your energies to growing the business.
Tom Maiaroto
6
0
Tom Maiaroto Entrepreneur • Advisor
Full Stack Consultant
I wish I knew the answer here, but I could never work for less than 6 figure income at this point in my life. Especially if I were living in Silicon Valley.

In fact, I challenge you to live on $25-40k/yr in Silicon Valley. Actually, go find me an apartment listing in the Bay Area for 25k/yr. We'll exclude taxes for now. Which you are likely paying more into because A. California wants a good bit, B. Federal and C. This lovely thing the US does when you start to get ambitious - called self employment tax. Forget all of that (which is going to take away 40-50% of your income in CA).

I honestly think investors who expect someone to work under these wages is simply not interested in people with years and years of experience. Their intent is to find people fresh out of college (or in college) and to make money on peanuts. This is likely why so many startups fail. It's that story that has been sold to far too many people I'm afraid.

Everyone involved gets hurt under these expectations. There are no winners I'm afraid.

But I could be wrong. I'm sure there's a few good stories out there for the discussion.

Taylor Dondich
2
1
Taylor Dondich Entrepreneur
Vice President of Engineering at MaxCDN
How is this a hard question? The answer is simple. You give salaries to the founders that still allow an appropriate growth engine when it comes to talent acquisition and speed of growth. If you're taking six figure salaries and have little to no cash to acquire new talent to speed up your development and growth, then you're doing it wrong.

Investors are looking to ensure you are spending wisely. If your salaries far out-weigh your potential spending ability to sustain growth, then you are going to look poorly. Investors are looking to fuel growth, not your wallets.

Further note. If you cannot sustain yourself without income for months on end and rely on a salary in order to survive, then you'll never put in the sweat and effort needed to make your startup thrive. If another potential founder is demanding a salary that you can't afford with your existing spend, then they aren't ready to put in the sweat. Drop them.
Richard Pridham
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Richard Pridham Entrepreneur • Advisor
Investor, President & CEO at Retina Labs
Good points. As a major cash investor in this start-up I think that budgeting in a comp package would be reasonable. Does't have to be at my full market value but it ought to reflect my experience and developing the concept behind the business. If the company has to hire a professional manager to do the things I would be doing for the company, it would spend a lot more. Another option would be to forego salary in lieu of the money that would otherwise have been invested.
Walter Biscardi, Jr.
0
0
Creative Director, Visual Storyteller, Video Editor, Post Supervisor, Documentarian
Tom, fortunately not all of us live in the Silicon Valley. I personally live in Georgia where you can live pretty well on $40,000 even in the Atlanta Metro Area. Additionally I have absolutely no desire in the least to live in Silicon Valley so I'm pretty safe there.

Richard, one thing you can look at is getting some sort of equity in exchange for a lower salary. So you're paid a little less up front, put in more sweat equity, but you're given some real equity in the company as a thank you for the work up front. It's in your best interest as well as the Founder for the company to do well so you both make more money in the future.
Tom Maiaroto
3
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Tom Maiaroto Entrepreneur • Advisor
Full Stack Consultant
"How is this a hard question? The answer is simple. You give salaries to the founders that still allow an appropriate growth engine when it comes to talent acquisition and speed of growth. If you're taking six figure salaries and have little to no cash to acquire new talent to speed up your development and growth, then you're doing it wrong."

-- Well said. The thing is, you're running a business. If you're making money (or there is money in sight --- and there SHOULD BE) then you not only can pay the employees (and founders ARE employees), but you should.

We often lose sight of the fact that we are running businesses here. It's crazy to think that we put ourselves through such hardships when you take a look around at other industries and don't see the same behavior. The founders/owners of most other small businesses get paid. I mean they simply don't go into business if they aren't able to pay themselves first and then their employees.

Tech startups often have it so backwards.

Walter, I don't live in Silicon Valley either =) (anymore) but I have to say...Take note of things around you, for other startup towns are starting to show the same film. Look at Austin for example. $40k/yr was once just fine. Now, it's increasingly more difficult to live on. It's pushing people out of the city. Memphis. Atlanta. They just might be next. You might find Silicon Valley coming to you.

We honestly can't be expected to not earn a living. Even if we're involved in a startup. That said, I think if anyone encounters investors who are expecting founders to not take a salary (or fair salary)...I'd say move on. There's plenty of investors out there and they seem to be investing quite a bit at the moment.
Ellen Raynor
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Ellen Raynor Entrepreneur
KeepOnMovin' Founder, Enterprise SaaS Product Exec
When an investor (seed or above, not F&F) determines that a company is worth investing in, they are expecting founders to dedicate their full attention to the company. Investors don't want founders feeling like they need to work a second job to make ends meet. That said, founder stock is a part of the overall package, so founders shouldn't expect a market rate salary as soon as the company is funded.
Rob Gropper
2
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
there's nothing wrong with taking a reasonable salary. If you are planning to bring in venture money the investors will expect the founding team to be paid 'reasonable' salaries - not market rate, but reasonable. Equity if of course your big win as a founder so you should expect to be paid less than market rate for your skill set and experience, not necessarily for you position, i.e. just because your title says "CEO" doesn't mean you should expect 80% of market-rate CEO comp if you don't have the experience. Investors want the founders to be focused and productive and not worrying about how to pay their mortgage/rent or their kid's health insurance.
Tom Maiaroto
2
0
Tom Maiaroto Entrepreneur • Advisor
Full Stack Consultant
The thing is, some founders do have mortgages and kids and insurance =) That doesn't prevent them from starting a business. I agree with "reasonable" salaries and understand that'll greatly vary from person to person...But one "myth" for lack of better word right now that I heard early on is about the expectation of living off ramen to do a startup. On top of that, here's the best part...Not having a full-time job because it then looks like you're not committed.

The reality is this. If I'm an investor and I see someone working for peanuts, slipping into massive debt, and not doing everything they can to put food on their table and feed their family...Well, then I have no respect for this person and likely would be regretting cutting him/her a check in the first place because they clearly can't make good decisions. It's really that simple.

We mustn't starve ourselves over this. That's unreasonable. Though that's the story and the hype. People are somehow proud of it even. All I'm saying is let's keep life in perspective =)
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