How do Investors Look Upon Founder Salaries?

Richard Pridham Investor, President & CEO at Retina Labs

February 15th, 2015

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?

Tom Maiaroto Full Stack Consultant

February 15th, 2015

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.

Joe Emison Chief Information Officer at Xceligent

February 16th, 2015

Most of the answers here seem to be about what founder salaries should be, not how investors look upon salaries (which is what the question actually is).

The answer to the question is that investors are looking for a return on their investment, and founders salaries are one of many signals to investors about whether the company is poised to deliver a significant return. One of the reason that many incubators have caps on salaries is that the investors running those incubators generally believe that at a certain salary (or higher), a founder may be content enough with the income that he or she isn't "hungry enough" to grow the company quickly or effectively enough. So, explicitly: any investor who puts a cap on founder income is purposefully trying to use an inadequacy of income to drive behavior.

Not all investors are like incubators. If you bootstrap your way to a successful company, and you're looking for additional investment to help grow the company, than your salary may not matter at all. I'm pretty sure that a16z didn't care at all what the salaries were at imgur when they invested.

If you're pre-revenue, do not have significant adoption, do not have a significant moat, and you're an unproven founder, then the salary signal probably matters to most investors: if you show that you're starving yourself, and that you will really only be able to afford to live properly if the company is successful, then you're presenting a strong signal that your interests are strongly aligned with the investors. However, if you have some of those things (revenue, adoption, moat, previous successes), then you can likely be taking a decent salary for most investors.

Rob G

February 15th, 2015

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.

Greg Merril CEO at YOST Labs

February 17th, 2015

It's not as much of an issue related to burn-rate - although that is always a concern. My experience is that early investors want to know that the founder demonstrates that they have 'skin in the game'. 'Skin' has different meanings depending on the situation. The investors see their investment as a commitment to the entrepreneur - and they don't mind paying what is necessary (even $100K+) to make sure that founding CEO is 100% focused on the business. An experienced founding CEO with a previous successful exit would be expected to either participate with some capital and/or defer pay. The founding CEO needs to figure out how to demonstrate to that they are as committed to the success of the venture as the potential investor is.

Tom Maiaroto Full Stack Consultant

February 15th, 2015

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 =)

Scott Brittain CTO Snap Kitchen (We're hiring!)

February 19th, 2015

I've been in the "founding exec" chair 3 times here in Austin and each time our institutional investors DEMANDED we pay ourselves a "market rate or close to it" salary. They were very clear why - we don't want you distracted by other opportunities looking to lure you away with big comp packages (or our spouses asking when we'll be saving more for the kid's colleges).

I also remember the first bubble days when the pattern was the team all getting paid $100k flat and working for the upside only. Frankly, even though I hit 1 out of 2 of those IMO that strategy is more heroic than smart.

Tom Maiaroto Full Stack Consultant

February 15th, 2015

"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

February 15th, 2015

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.

Taylor Dondich Vice President of Engineering at MaxCDN

February 15th, 2015

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.

Walter Jr. Creative Director, Visual Storyteller, Video Editor, Post Supervisor, Documentarian

February 15th, 2015

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.