OnStartups

How Much Should A Startup Founder/CEO Pay Herself?

Posted by Dharmesh Shah on August 14, 2012 in guest funding 33 Comments

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.