This evening is finance evening. I am trying to create a financial picture of our company, part of this picture is compensation of founders and employees. Research suggests we have to pay the employees otherwise they will not work. Founders, though, the story appears to be different. We will work for free. Or at least the successful ones will.
In conducting my online research, there seem to be two different types of founders, those who want to get paid and those who want to build a company. Online, most of the questions asked are “how much should I demand to get paid, is $250,000 a year OK?” while most of the advice is “pay yourself the minimum to get by”. The type of founders that want to get paid either A) never get their idea off the ground anyway, or B) pay themselves so much that they starve the company of cash in a few months. The other type of founder understands that for every dollar they take now, they are loosing a compounded $10+ later on by not investing that cash in the company. In fact, a CEO/Founder’s salary is the best predictor of a successful startup.
That’s all very nice, but I need to write a number in my excel spreadsheet. Pre revenue, funded, with a small number of employees, what does a CEO get paid? What about a CTO? Based on excerpts from this 2006 Compensation & Entrepreneurship Report, this short answer from Sprouter, this Wasserman “myth vs results” article, and some more advice from Peter Thiel, I have concluded that this is what average/realistic founder salaries are:
- Seed stage, pre revenue CEO/CTO: $60,000
- Series A round CEO/CTO: $100,000
- Prrofit Generating: CEO: $250,000
I think the best advice I read online is this: As a founder, only pay yourself the minimum you need to get by. Don’t starve to death, but don’t indulge. Also, defer pay if possible until the company is healthier with more cash flow.
“Starving to death” might be a very relative term. Do I expect to get paid $60,000 once we get funding? Hell no. I’d be happy with $25,000 a year. In fact, those numbers seem very high to me, especially the early startup stage numbers. As for my co-founders, I don’t know. One is the CTO, he is equally if not more important than the CEO. Will he be happy with $25,000 a year?
One interesting point was that Founder/CEOs often, nearly 2/3rds of the time, were paid less than other executive employees. I think the idea is that founders (CEOs or otherwise) view the company more as an investment (deferred consumption) than as a job (monthly paycheck) and so were willing to take less pay in exchange for more equity.
As for Founder equity, we have the Rich vs King issue to consider. A founder can either control the company or get rich. By rich, I assume they mean “the company is successful” and by control I assume they mean “responsible for a failed startup”.
Employee Compensation, Cash and Equity
This part I didn’t focus much on as our CTO is responsible for determining what the market salaries of chemists and R&D lab assistants in Hong Kong are. Update: The CTO ended up not doing this, so I did it later. Story of the startup. Salaries are generally lower in Hong Kong while the hours are longer. Might as well work for a startup, at least you get the equity upside. Below I’ve listed out the monthly salary range (in USD) of scientists and engineers in Hong Kong, based on data from the 2011 Hong Kong Classified Post Salary Index (PDF), the 2012 Hong Kong Classified Post Salary Index (PDF) and recent data collected privately from HK university sources familiar with science graduate’s pay packages:
- Starting salary BS degree 0 years relevant experience: $1,800 (2013)
- Starting salary BS degree 1 years relevant experience (highly talented): $2,000 – $2,300 (2013)
- MS degree 1 year relevant experience: $2,000 – $2,500 (2013)
- Assistant Engineer 3 years relevant experience: $1,900 (2012)
- Chemical/Electrical/Mechanical 5+ years relevant experience: $2,500 – $4,100 (2011)
- Chemical/Electrical/Mechanical 10+ years relevant experience: $4,500 – $6,450 (2011)
- Chemical/Electrical/Mechanical 4 – 7 years years relevant experience: $3,700 – $6,700 (2012)
How to determine salary+equity pay package
Lets say the market salary for a chemist is $30,000 a year. We offer a chemist $22,000 a year plus 1% stock. He is risking $8,000 a year for a (hopefully) bigger payoff in the future. That’s called an investment, a calculated risk of something in exchange for a possible reward of something greater in the future. After 5 years we exit at $50,000,000. His stocks fully vested after 4 years, and over the 5 year period he risked a total of $40,000. Assuming his stock was diluted 50%, he earns 0.5%, or $250,000. Subtract the amount he deferred/risked, and he pockets $210,000. As a bonus, when he cashes out, he’ll pay a lower capital gains tax rate than if he earned the money via salary. I think, I’m no tax attorney.
So the point is, to determine what the break even salary/equity ratio is, you would have to determine what the most likely exit valuation is, and use that to come up with an equity percentage that would equal whatever discount is applied to the market salary. Any premium over the break even ratio is the reward that the employee would earn for their risk.
Here are the average non founder stock option percentages from Silicon Valley:
- CEO: 5-10%
- COO: 2-5%
- VP: 1-2%
- Independent Board Member: 1%
- Director: 0.4-1.25%
- Lead Engineer: 0.5-1%
- 5+ years experience Engineer: 0.33-0.66%
- Manager or Junior Engineer: 0.2-0.33%
I assume engineers are equivalent to scientists. At least in this regard.
I’d imagine bootstrapping should continue after seed funding, and possibly… forever. Just because your company has more money doesn’t mean you should get paid more. I must credit my dad who judges the value of things based on his experiences in 1976, and hasn’t adjusted for inflation since. In 1995 he would give me $5 to go out with my friends to see a movie, because that’s what it cost in 1976. Of course, in 1995 a movie ticket cost $6 and dinner cost $10. So I learned to bootstrap and raise capital at a young age.
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