A few months ago as we started venture capital business as Data Ventures we didn’t expect that the issue of salaries of the Founders would raise so many questions and even sometimes emotions.
We decided to make a research and write this blogpost to explain: our thinking about startup Founders’ salaries, key misconceptions and mistakes made by the Founders while discussing this issue and what best practices are.
· Hygiene and risk management – founders’ salary at seed stage is an element of hygiene. They should make enough to cover basic living costs but not enough to feel comfortable and/or cover lavish lifestyle. At the seed stage, the job to be done is very precise: to design and execute an optimal sequence of activities which will deliver product-market fit, in minimum budget, time, with MVT (minimum viable team) and maximum level of flexibility. If the Founders pay themselves too much, they increase business risk, reduce runway, sacrifice flexibility and reduce the odds of succeeding.
· Risk alignment – being an entrepreneur is all about risk taking. As a venture capitalists but also serial entrepreneurs, we believe in risk alignment. We believe that both sides (the entrepreneur and the investor) need to risk something to make a deal. For us 20% or 30% salary cut in relation to corporate job salary is not any risk at all. We believe that an entrepreneur needs to be prepared for a long run before starting a new venture, including multiple pivots and really tough times. What we can do for him is to hedge his cost of living risk. Otherwise VC investment would be just a risk-free call option for the entrepreneurs what doesn’t make any sense for the investors. Starting a new business is not the same as gap year of travelling to gain experience!
· Signalling effect – for Investors what is very important is how does the Founder communicate about his future salary. Just ask yourself a question: if someone is not willing to risk and leave corporate environment for less than “XXX” salary, what would he/she do if something goes wrong? We mean the company will run of cash, will be forced to pivot or the times would become tough? Would he stay and fight or leave sinking ship with investors’ cash burned and go back to save corporate environment? We prefer to work with fighters!
· Value captured in startup value – our view is that if we invest into minority stakes of shares, all of the value creation for the entrepreneurs should be generated by equity.
· Long-term thinking – in the long time we believe that the best managers should be paid a salary significantly above average to keep and retain top talents. But the organisation needs to be healthy enough to do this.
· “I don’t need any money in my startup, I will work for free” – we don’t believe that working for free is beneficial at all as it creates defocus and build wrong incentives for the entrepreneurs.
· “Salary negotiation is an important part of Terms Sheet negotiation” – we don’t agree with this statement, we don’t really care about this point of Terms Sheet negotiation and we ultimately think that by doing this, you negotiate with yourself. In our view the salary level of Founder should be reasonable and it should allow his/her project not to burn capital too fast.
· “I can’t earn less than my employees” – in startup environment this statement is a complete bullshit. As an entrepreneur, you have an opportunity to build a great multi-million business. You don’t have to prove anything to people and you should at early stages hire people earning more than you to guarantee the quality of the team.
· “My market value in corporation is XYZ, I would take 20% salary cut and that’s my investment in the project” – market value of work in corporation is not the same as market value in start-up. In a large organisation, your value is based on your competencies and a size of your organisation. Once you switch a corporate job you negotiate the terms upfront and then deliver value. Startup world is more brutal. Your value at the start is literally 0 and your job is to build something great and prove that you are the right person to do this. Very often top talent coming from corporate environment fail spectacularly in building a business, so their value in a startup world might be even lower than 0.
· According to our research in Polish/CEE environment a fair level of remuneration for the Founders at a seed stage is somewhere between 60,000 and 140,000 PLN a year
· In US it is somewhere between 50,000 to 75,000 USD a year (for organisations which succeeded it may be more, up to 100,000 USD a year before round A)
We believe that our post will help both entrepreneurs and investors to establish more cohesive communication about the issue of salaries and help them ultimately focus on what’s really important at the seed stage: achieving product-market fit and moving from 0 to 1! To conclude, paradoxically you should be focused on building enterprise value of your venture not on your personal wealth to maximize both.
*Note: this is dedicated to 1st time founders and/or those who have not previously generated significant wealth. Serial entrepreneurs or wealthy entrepreneurs are often asked to put skin in the game (via not taking a salary at all, or investing into the company, personally).
Some further materials to read on subject:
Piotr Smolen, CEO & Managing Partner at Data Ventures