How Much Should A Startup Founder/CEO Pay Herself?

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How Much Should A Startup Founder/CEO Pay Herself?

 

The following is a guest post by Chris Sheehan. Chris is a seed stage VC and angel investor at CommonAngels. You can follow him on Twitter at @c_sheehan and his blog Early Stage Adventures.

Back in 2008, Peter Thiel did an interview at TechCrunch50 in which he said one of the most important things he looks at before investing is how much the CEO is getting paid.

The lower the CEO salary, the more likely it is to succeed.

The CEO's salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It [a low salary] aligns interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.

In practice we have found that if you only ask one question, ask that.

What's the average salary for CEOs from funded startups? Thiel was hesitant to answer, but eventually said $100-125k.

An interesting perspective. I'm not sure that it's a leading predictor of success, but it certainly is a very important aspect at the seed stage because cash is so precious. The more a CEO pays herself, the less runway available to hit milestones.woman checkbook 2

CEO founders sometimes ask me for guidance on what is “market” for salaries in a seed stage startup. Some observations:

  1. Stating the obvious, salary needs can vary widely. A founder with no mortgage, kids, etc will have different cash needs than a founder that has a minimum cash hurdle to clear (in the absence of being very wealthy)
  2. The amount raised in a seed round has an obvious impact. I know a couple of cases where if bigger seed rounds had been raised, the founders would probably have bumped up their salaries a little
  3. The percent equity owned by the CEO post the seed financing varies as a function of not just the size and terms of the seed round, but quite significantly, by the number of founders and how equity is divided up between them. While not a direct driver of cash salary, the amount of equity owned can have a psychological impact on salary expectations.
  4. Another influencing factor is how long the company has bootstrapped prior to the seed round and how much were the founders getting paid during this time. I know of a couple of companies I am invested in where the founders didn't pay themselves anything for quite a while as they were building the foundations of their product
  5. If the company raises a Series A round, its typically to see seed stage salaries adjusted upward.
  6. As companies mature, its typical that a compensation committee is formed by non-management board members. In fact, the VCs will insist on this. The role of the compensation committee can vary, from making recommendations to the board on executive salaries, bonuses (and option grants) to having authority to set executive salaries

So what is the range of CEO salaries in the seed stage?

Based on what I see in the market, I'd say the range for founder CEO salaries after a seed round is between $60k and $150k, with the average/median in the range of $90k - $110k. This is based on an average seed round of around $900k with the expectation that the round will provide runway for 12 to 18 months. Salaries at the upper end of the range ($150k) are correlated with larger seed rounds of around $1.5 million.

While there is no correct answer to the question, here is my main take-away: it's so critical to be capital-conscious at the seed stage. Within what will feel like an incredibly short, stressful period of time, the startup needs to build product, figure out the market, and get some initial traction. Every month of cash burn is valuable.

By the way, to see some survey data on what other people think the founder/CEO salary should be, check out the OnStartups poll on founder salary.  

Posted by Dharmesh Shah on Tue, Aug 14, 2012

COMMENTS

I would say $60-$150K is about right, and I agree it's important that the CEO (as well as other founders) demonstrate that they have put at least some sweat equity in the game for a few months. A start-up needs to be very conscious of expenses, but it also needs to be able to operate in the market. Too often dedicated entrepreneurs go too long without pay, and too far into their third mortgage, or are very successful at finding successive teams to put in a little sweat equity. At the end of the day, whether CEO salary or an actual paying customer, if people aren't willing to support the effort with cash money perhaps the entrepreneur should consider plan B. 

posted on Tuesday, August 14, 2012 at 9:47 AM by Ken Smith


The Founders should pay themselves whatever it costs for them to live and pay their bills, but to go beyond that would be a waste of capital. I would pay myself increasing salaries as the Company reaches certain milestones. Otherwise I'd feel like I was stealing money from my investors.

posted on Tuesday, August 14, 2012 at 10:13 AM by Pavan


I couldn't agree more with Pavan. We don't hand out prizes at the beginning of the race. The time comes when you prove you're a winner.

posted on Tuesday, August 14, 2012 at 10:22 AM by Alan Miles


I've had to deal with this issue for almost 30 years across hundreds of companies. I'll add two points for consideration.  
First, I agree with Pavan concerning personal survival salaries, but I wold like to add a little context. Through bitter experience, I strive to provide a salary that enables a person to maintain a very modest standard of living. I want each individual devoting 120% of their effort building the company. Stress on the home front can negatively impact the person's ability to do so. 
In one case, I had two "equal" founders, one with a wife, three kids and a mortgage and the other single an living in an apartment. In terms of cash compensation the first entrepreneur got over twice what the single founder got, BUT in terms of life style, it kept them even. 
Just as a brief aside, in one of my earliest deals I didn't do a credit check on a founder. He had requested a small & appropriate salary to which I agreed. Several weeks after closing, I got a frantic phone call. The founder's car was being repossessed. I didn't realize his needs and he had been too nervous to bring them to my attention. 
The second observation I have about salaries is that the first outside hire that is paid "market" will ripple through an organization like wild fire and the self-sacrificing employees will no longer believe they are being treated fairly. It's essential that when that day comes for an organization that here be a program to be launched that will address how current compensation will be addressed over time to bring everyone to "market" levels.

posted on Tuesday, August 14, 2012 at 10:54 AM by Frank Demmler


I even think that's a little bit high. Most startup CEO's are younger guys in their 20's that should be able to get buy ok with 50-75K in my opinion. I'm a startup CEO and only getting 50K and living well in Palo Alto. Sure, I do share a house but still. I'm putting the rest of the money to what matters and back into my business.

posted on Tuesday, August 14, 2012 at 10:58 AM by John Rampton


I think to be fair to the investors it should be only the amount of money which is required by the CEO to live a decent life.  
I know about cases start up CEO's / Founders have been trying to screw their investors by acquiring products from their own / friends owned companies and taking a cut on it, in eCommerce startups but i totally believe at the end of the day it all comes back and Karma playa an important role in life.

posted on Tuesday, August 14, 2012 at 12:29 PM by Rank Watch


@Rank Watch: Nice link building technique. Also, I think what you described is called commission.

posted on Tuesday, August 14, 2012 at 12:35 PM by Pavan


I've done 2 start ups thus far. A CEO should pay himself just enough to pay his bills. Being a bit hungry provides additional incentive to build the business but paying too little and having to deal with the problems that go with that can take away from the primary mission - building the business. The pay should increase as the business successfully reaches the milestones they have set forth in the business plan. Reward growth and good management. In my case it was whatever could be afforded for the first company due to poor initial funding. The second was 40k to start then growing to 125k until it was sold.

posted on Tuesday, August 14, 2012 at 1:34 PM by darmyman


I'm shocked! Over in the UK we have a program called Dragons Den and they would be appalled if their investment were going to pay the CEO a salary. 
 
I for one, don't take any salary from my startup and to suggest that a CEO should put at least '3 months sweat equity' in is a little bit low to say the least. 
 
The CEO should live and breath the company and should be able to live off dividends until there's enough of a profit to support his or her salary on a permanent basis. 
 
It sounds to me like companies are being a bit wasteful with their money. 
 
Maybe I got the wrong end of the stick - I guess I'm thinking specifically of founder CEOs - if the CEOs you're talking about were head hunted for the role then I can see a salary being expected, although I still think a better option is to pay the CEO with shares + dividends for the first little bit. If he's really qualified to be a CEO at a startup, he'll have money in the bank anyway.

posted on Tuesday, August 14, 2012 at 1:35 PM by David Hilditch


Yeah, these seem to high. The only case I can see where salaries will be this high is when you're recruiting off the street. I've also heard of cases where a founder had to be replaced before serious traction was achieved and they had to pay closer to market as they couldn't offer the same level of equity to a non-founder.

posted on Tuesday, August 14, 2012 at 5:27 PM by <a href="activeconversion.com">Jeff Rouse</a>


I'm first-time founder/CEO in Boston. I recently was asked this exact question by a seasoned, public company CTO. When I told him myself and my co-founder are taking home $60k, he laughed, saying that everyone else in my position is making nearly double. 
 
For the first 6 months of our full-time existence, I didn't have a salary at all. I did contract work to pay the bills, and that was distracting as hell. The problem with contract jobs is they never go away. Even when you think you're done, the client always comes back 3-6 months later asking for more. 
 
We won a competition and we were able to make $50k last a while. We decided to setup payroll and start paying ourselves a $28k salary. At any time, I'm certain we both could have quit and taken a $100k+ engineering job in Boston (we're both designineers) or go full time on the consulting work and make $150-300k. But we're not doing it for the money. 
 
The reason you want to pay yourself is so you can "say no" more. You need to be able to pay your bills... it's just a fact of life. You can't truly succeed if you're stressing about how you're going to complete your side work in the shower, running out the door to a bartending job, or not getting enough sleep. Some people can pull it off or make it look like they can... I cannot. 
 
After the competition funding started to run out, we decided to raise some angel funding in Boston. It took a while to complete the raise. During this time, we stayed hungry and scrappy. We shut down all side work and got really good at saying no. We celebrated with a couple beers when we gave ourselves a raise to $35k. 
 
It wasn't until 8 months later (about 18 months after we got started) that we upped our salaries to $60k. 
 
Even when we do another, larger raise, I'd be surprised if I pay myself more than $100k. 

posted on Tuesday, August 14, 2012 at 9:13 PM by Alex


I agree with Alex. Unless you bring in an outsider through headhunting, I'd be surprised if investors would agree with you giving yourself (or your CEO) a 120k / 150k salary.

posted on Wednesday, August 15, 2012 at 12:51 AM by Michael Hendrickx


If you are a normal founder you would not take any more salary than you absolutely need for basic needs, ie, food and shelter, because you presumably believe that putting your time and money in your business is the best investment you can ever make and you want to take advantage of that to the maximum extent. It is indeed connected with capitalization, so it matters if you are seed level, series A, etc.

posted on Wednesday, August 15, 2012 at 4:54 AM by Maria


@Alex what's your start up?

posted on Wednesday, August 15, 2012 at 7:34 AM by Pavan


The first question is not "how much" but rather "why." Why does the company need to pay the CEO -- or anyone else for that matter? The answer is always the same: expenditures follow priorities. More specifically, what expenditures at any given moment of time best serve the needs of the company and enable it to proceed to achieve its objectives. For those engaged in the start-up process, thinking about CEO salary outside of this context leads to misallocation of a scarce resource: money. And, because each situation and each person is unique, generalizing is difficult.  
 

posted on Wednesday, August 15, 2012 at 9:12 AM by Andrew Ellis


A founder's pay should be based on a percentage of REVENUE. 
 
I would recommend structuring this like a licensing fee so the creator is paid even if the business doesn't turn a profit.  

posted on Wednesday, August 15, 2012 at 10:38 AM by Jacko


Has everyone forgotten that 9 out of 10 startups fail?  
 
This economy is a challenge. Creating a life to support your current self/family and have a place to live and means to retire someday is a challenge. If you devote yourself to a startup and if any one of your co-founders, employees, board members, advisors, or even the market lets you down, you have ZERO to show for it after years of sacrifice. Your nest egg will be gone, and it will take years and years to get back into the position where you can have a modest lifestyle, let alone do another startup. 
 
Of course there should be sacrifice. But those who want to invest need to pay close to market wages after a short period of bootstrapping. Sure, we all might like to have highly qualified people working for us for free, but is that fair? Or is it exploitation? 
 
Lifestyle is irrelevant. If you live like a monk or a mogul, that doesn't change the value of your work. Survival wage is total bullshit and insulting to the frugal. 
 
If you're going to work for free, do it for yourself. Don't indulge greedy capitalists who indulge in neo-slavery. Despite the hyperbole, is it really that far off? 
 
There is plenty of money in the investment world. They will not pay their founders only if we do not demand it. Don't be fooled--equity is incentive enough to work hard and be successful. Respect yourself.

posted on Thursday, August 16, 2012 at 2:47 PM by Slash Er


@frank demmler: very wise man, it's good to see that investors understand that people build companies, and that if you get them in a position to devote their time to this job, not worrying about ancilliary issues, your raise chances of success. 
 
@hildtich: your cow boy style is typical and even caricatural and i would like to compare your track record to franck's 
 
great discussion 
 

posted on Friday, August 17, 2012 at 12:23 AM by jen roux


im with some of the other commentators. 
 
i've been working for 2 years to develop my product. Without salary andinvesting my own money. 
 
Now i have a CEO (because im 22 and i want expertise and knoweledge running my company) and im the product developer. 
 
So, my point of view is, the company is little to have a CEO with a 100k salary, and im the product developer who does all the work, design...etc... 
 
who should have more salary?? 
 
My opinion is JUST THE EQUILIBRATE AMOUNT NEEDED for both.  
 
Need: just to keep a normal status of life,no luxuries my friend.(YET) 
 
If you excess that, your wasting money which one you could use to invest in your company. 
 
hugs and best wishes for all. 
 

posted on Friday, August 17, 2012 at 9:15 AM by Fer Rullan


I have a company I've founded and have a significant interest in and I'm not taking salary in it at all at flashpurchase.com as we're about ready to launch the site. My expectation will change if the market validates the business which I believe it will. I also serve as a fractionated CEO in several early stage companies so that we keep the burn rate low and put the $$ to either development or marketing.

posted on Friday, August 17, 2012 at 10:41 AM by Mike Sinsheimer


Difficult to generalize that kind of stuff. It depends on so many factors, including: location, size, stage, number of founders, compensation, etc. So salary range is 0k to multiple thousands.

posted on Friday, August 17, 2012 at 11:48 AM by Pierre


I'm with David Hildditch, to a large extent... 
If the venture is self-funding, or has already brought in revenue equal to the burn rate or more, then the founder's salary has a different code of measurement. But, if the venture is employing OPM, then the pay rate should cover the needs of the founders- and any difference in that pay will be recompensed later, as a bonus, when the firm has positive cash flow.  
It's how we worked in our five or six ventures and how we advise our clients now.

posted on Friday, August 17, 2012 at 1:55 PM by Roy A. Ackerman, PhD, EA


Roy, wise recommandation, pay peanuts, get monkeys. 
 
be decent.

posted on Friday, August 17, 2012 at 2:45 PM by jl


I have started a number of tech companies and the only thing I would add to the discussion : The founder is forgoing opportunity cost of the higher market salary. The founder(s) should BOOK that excess salary (sweat equity) as a loan to them. if I am getting 0$ for the first 12 months but market dictates that I should have been paid $100k then the company owes me that money. This is also VERY useful when the cash comes in because if I have not booked the value of my contribution ( REALLY INVESTMENT) then the incoming money writes it off as non-valuable or the price of start up. Now all of the founders investment can be used in the valuation discussion.  
 
I also think that David Hildditch (see above) is correct in that total focus is essential for success and starving the founders causes potential resentment and working unproductively. Fairness and equity and justice all the way around is the best way to build a company of value.

posted on Monday, August 20, 2012 at 7:57 AM by Tim Daley


I have recently pitched to two Angel groups here in New Zealand... if we had salaries of between $60- 150K in our model we would have been laughed off stage. New Zealand investors are not interested in paying the founders a salary at seed financing level. The amount here is $0. You put you sweat into it.. bootstrap... and hope you have someone else in your household who can pay the bills. It is not an easy road... and one we have been on for 12 months...

posted on Thursday, August 23, 2012 at 7:10 PM by Louise Donnelly-Davey


I think there will be no right or wrong answers to the question. It will depend heavily on your current priorities and where you are in the life cycle. But I am co-managing a start up realty company right now and I firmly believe the answer is ABSOLUTELY NOTHING! Ofcourse business expenses incurred must be charged to the companies operating budget but these should be kept to a minimum and it would be a sure formula for failure if the company were to pay the CEO anything dramatic even before the ball gets rolling. If the CEO partly owns the company, he should be willing to take on all the S--T , and see his company through as a sacrificial lamb and guinea pig. This is the tried and tested formula for success!

posted on Sunday, August 26, 2012 at 11:37 PM by


Pay yourself whatever it takes to pay your bills, invest the rest. Then when you're company is making 1 Billion+ and public, pay yourself $1.

posted on Monday, August 27, 2012 at 9:04 PM by Ryan Bradley


Am the founder of a new start up company. I still have a full time job and use my salary to sponsor development for the startup.It is tough considering huge development cost. We intend to go live sometime next year. My hope is to hang in to my current job until the business gets some traction and start bringing in some funds before I can quit my full time job. Just trying to play it safe as I have a lot of mouths to feed.

posted on Sunday, September 16, 2012 at 11:20 PM by Ike Natyre


I think people need to be aware of the fact that not every company is an IT start-up with a short runway founded by 20 somethings who can rely on a parents income to suport there venture. Some start-ups (i.e. biotech) usually need a multiple year runway to get off the ground with large investments in cap-ex. You cannot expect a founder to work for free during these years of work. Also, happy employees who do not have to worry about how they are going to support their families or themselves are much better workers. I have run a start-up for >4 yrs now. People need to be paid to survive with large incentives in options or salary should the company hit milestones and start to generate revenue.

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posted on Friday, October 05, 2012 at 11:55 AM by our company


We need a simple model to help us properly slice the pie. It needs to be flexible and fair. By fair I mean it needs to give each founder what they deserve. And by flexible I mean it needs to adapt over time to re-allocate the startup equity so that the distribution stays fair until the fledgling company takes flight. check out Mike Moyer's book slicing pie it talks about 50/50 share and how to divide it through his grunt calculator. 

posted on Wednesday, October 10, 2012 at 1:28 AM by sean


Surveys are fine but if you think there is some "formula" you are kidding yourself. There is nothing worse than a founder who can't concentrate 100% on the business and not paying bills is a very good way to lose concentration. If you can't pay your bills on what you can afford to pay yourself, you are in the wrong business. When someone invests, they should be willing to pay you at least enough to pay your bills. Any VC who says they pay less to "see if you're hungry enough" is FOS - do they use that some logic at the VC firm?

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