Determining how much startup founders should pay themselves is a common conundrum faced by many entrepreneurs. Factors such as the amount of funding raised, the founder’s role, and the company’s industry can significantly influence the decision. An appropriate salary must strike a balance between personal necessities and maintaining a responsible budget to ensure the startup’s success.
Research suggests that startup founders’ salaries fall within a wide range. For those with limited funding, yearly pay may be as low as $35,529, while CEOs of companies that have raised between $5 million and $10 million may earn up to $62,150 annually. One notable example is the Y Combinator program, where founders pay themselves around $50,000 in salary from the seed investment provided.
It is essential to understand that there is no one-size-fits-all approach to determining the appropriate salary for startup founders. Careful consideration of various factors unique to each business is crucial to make an informed decision. As a startup continues to grow, founders may need to reevaluate their compensation to reflect their evolving roles and responsibilities within the company.
Factors Affecting Startup Founder Compensation
Funding and Investment Size
One of the key factors that affect startup founder compensation is the amount of funding and investment size the company has raised. Typically, founders of companies that have raised $1 million to $5 million pay themselves an average of $96,7001. As the funding amount increases, so does the founder’s compensation. For instance, startup CEOs with $7 million to $8 million in financing have an average salary of $130,0002. It is essential to strike a balance between taking a reasonable salary and retaining enough cash flow to grow the business.
A company’s valuation also plays a vital role in determining founder compensation. At a £2 million valuation, the average founder’s salary is £25,000. This increases to £52,000 and £80,000 at £4 million and £6 million valuations, respectively3. As the company grows and the chances of success and stability increase, founders can adjust their salary compensation accordingly.
Industry and Sector
The industry and sector in which a startup operates can also have an impact on founder compensation. For example, tech-based startups in Silicon Valley may have higher salaries compared to other industries due to the competitive environment and cost of living. Founders in sectors with lower profit margins, on the other hand, may need to pay themselves more modest salaries to ensure the company’s growth and stability.
Location and Local Market Conditions
Finally, location and local market conditions play a significant role in determining startup founders’ salaries. In areas with a higher cost of living, such as Silicon Valley, founders may require higher salaries to maintain their standard of living. Additionally, the local funding environment can impact founder compensation, as weaker funding conditions may result in lower average salaries4.
Roles and Experience of Founders
The salary and compensation of startup founders depend on several factors, such as the amount of funding raised, the founder’s role within the company, their experience, and the company’s industry.
CEO Salary and Compensation
The CEO of a startup often receives a salary that is influenced by the factors mentioned above. For instance, a 2021 survey showed that startup CEOs who raised $1 million to $5 million paid themselves an average of $96,700. This figure, however, could vary widely depending on the circumstances of each company.
CTO and COO Salaries
Similarly, the salaries of CTOs and COOs at startups are also influenced by funding levels, experience, and the company’s sector. While specific figures are not available, one can assume that their compensation would be somewhat similar to that of CEOs in the same range of funding.
Sales and Business Development
Sales and business development professionals at startups also receive variable compensation based on their role, experience, and the company’s financial situation. Some estimated salary figures are as follows:
- Sales director: $89,000 (range of $58,000 to $130,000)
Engineers and Technical Roles
Technical roles, such as software engineers and UX/UI designers, are also crucial for startups and have compensation ranges that depend on experience and the company’s financial situation. Some estimated salary figures for these roles are:
- Software engineering: $102,000 (range of $73,000 to $138,000)
- User experience design: $78,000 (range of $55,000 to $108,000)
It’s essential to remember that these figures are just estimates and that the actual salaries of startup founders and employees can vary greatly based on various factors, such as the company’s success and the individual’s experience and expertise.
Equity and Stock Options
Equity Distribution among Founders
When it comes to startup equity, co-founders usually divide company ownership based on their individual contributions, roles, and commitment. In general, founders can expect:
- Founder CEO: 5-20%
- Founder CTO: 2-10%
- Other co-founders: 3-7%
- Non-founder early employees: 0.5-5%
It’s essential to have transparent conversations among co-founders about equity distribution and to be prepared to negotiate as needed. Keep in mind that the market value for equity is dynamic, and the necessary points to attract individuals may vary.
A vesting schedule helps ensure founders and employees stay committed to the startup and its success. It is a predefined period during which equity or stock options are gradually earned by the stakeholders. A typical vesting schedule for startup founders would be:
- 4-year vesting period
- 1-year cliff (meaning the first vested equity or stock options become available after one year of service)
- Monthly or quarterly vesting after the cliff
This structure ensures that founders and employees have a vested interest in the company’s long-term success and discourages them from leaving the company prematurely.
In addition to a vesting schedule, startups may also tie equity grants to specific milestones. For example, founders and employees could receive additional equity upon reaching specific financial, product, or user growth targets. This approach provides additional incentives to stay committed to the project and meet these predefined goals.
Milestones can be customized based on the startup’s unique goals and objectives and should be agreed upon by all stakeholders to ensure alignment on the company’s priorities. It’s essential to establish clear, measurable criteria for achieving milestones to produce a fair and transparent process for all involved.
Determining an Appropriate Founder Salary
Balancing Personal Finance Needs and Company Growth
When determining an appropriate founder salary, it is essential to strike a balance between personal finance needs and the company’s growth. A founder must consider factors such as their living expenses and emergency savings, as well as the financial resources required for the startup’s operation and growth.
- Founders should pay themselves a modest salary to cover necessary living expenses.
- Prioritize the company’s financial needs, such as investments in product development, marketing, and hiring.
Venture capitalists (VC) and angel investors may expect founders to take a lower salary in the early stages of a startup in exchange for future growth and equity in the company. It is not uncommon for founders to pay themselves less than $100,000, with many opting for a $0 salary to reinvest resources in the business.
Negotiating with Investors and Board Members
When it comes to negotiating a founder’s salary, transparency with investors and board members is paramount. Both parties should have open discussions on the appropriate level of compensation, taking into account industry benchmarks, growth potential, and the founder’s personal needs.
Factors influencing founder pay negotiation include:
- Company stage: Early-stage startups often have limited resources, whereas established companies may have the capital to pay founders more competitively.
- Industry: Founder salaries may vary across industries.
- Location: Living expenses can vary between cities or regions, influencing the salary a founder may require.
It’s important for founders to be aware of the expectations of their investors, as well as understand their needs and the needs of the company. This involves being open to feedback and having a clear perspective on how adjusting founder pay will affect the company’s overall growth trajectory.
Notable Examples and Case Studies
Y Combinator Backed Companies
Y Combinator, a prestigious startup accelerator, has helped launch successful companies like Dropbox, Airbnb, and Quora. Founders of Y Combinator-backed startups typically pay themselves around $50,000 in salary according to estimates by 80,000 Hours. This is a modest amount considering the potential of these companies, but it helps founders focus on reinvesting resources into the growth of their startups.
Foundry Group and Brad Feld’s Perspective
Brad Feld, a co-founder of the Foundry Group, has a strong opinion on founder salaries. He believes that founders should not be paid more than $100,000 per year until they generate $1 million in annual net revenue. This conservative approach aims to ensure that founders remain disciplined and prioritize using their capital to scale the business.
Advice from David Rose
David Rose, a well-known angel investor, suggests that founders should take a salary that allows them to maintain their basic needs, typically around $60,000 to $80,000 per year. Rose emphasizes that founders should not experience financial stress, as it can distract them from making important business decisions.
Michael Wolfe, a serial entrepreneur and startup CEO, offers similar advice. He recommends that founders should pay themselves enough to cover their living expenses without distraction. However, they should avoid drawing too large of a salary that could deplete their resources, slowing growth and impacting equity dilution.
Sean Owen, an experienced startup founder, focuses on the idea of variable compensation. For example, if a startup generates $20,000 in monthly revenue, Owen suggests allocating a portion of that revenue (around $1,000) for variable compensation for the team, including the founders. By tying compensation to revenue goals, founders can incentivize themselves and their teams to strive for growth.
Funding Stages and Compensation Changes
Pre-Seed and Seed Funded Startups
During the pre-seed and seed funding stages, startup founders often pay themselves minimal salaries to keep costs low and focus on growing the business. It is not uncommon for founders to take no salary or a below-market salary during this phase, with some relying solely on equity stakes in their company for financial benefits. Here are a few insights from different sources:
- A 2021 survey by Pilot, an accounting firm focused on startups, showed founders of companies that had raised between $1 million and $5 million paid themselves an average of $96,700.
- Estimates by 80,000 Hours suggest that startup founders in Y Combinator, a pre-seed startup accelerator program, pay themselves around $50,000 in salary.
These compensation figures largely depend on factors such as the business’s lifecycle, industry, and funding raised.
Series A and Beyond: The Effect on Founder Pay
As startups progress through venture capital funding rounds and secure more substantial investments, founder compensation generally increases. By the time a startup reaches the Series A round, founders are more likely to draw higher salaries and potentially allocate additional compensation for their team.
- In 2023, Kruze Consulting estimates that startup founders will average around $148,000 per year in salary, which is slightly lower than the $150,000 from 2022. This decrease is mainly driven by a weaker funding environment and founders raising fewer late-stage rounds.
The compensation for the founders often increases with each subsequent funding round due to the growing maturity and stability of the company. Additionally, sector-specific differences, investor expectations, and individual founder performance can impact the salaries drawn by startup founders.
In summary, funding stages and the overall company growth significantly influence the compensation changes for startup founders. Pre-seed and seed-funded startups typically see founders taking lower salaries, whereas later-stage funded startups with Series A investments or beyond often result in increased founder pay to reflect the company’s progress and solidified position within the market.
How Founders’ Pay Relates to Company Culture and Employee Compensation
Founder salaries in startups can vary greatly depending on factors such as fundraising, location, and industry. According to a 2021 survey from Pilot, founders of companies that raised $1 million to $5 million paid themselves an average of $96,700. However, it is important to consider how founder pay can impact company culture and employee compensation.
When setting their own salary, founders should consider the implications it may have on employee morale and the company’s financial stability. A salary viewed as excessively high could deter potential hires or create friction among existing employees, while a salary perceived as too low might not attract the best talent.
In some industries, such as biotech, founder salaries tend to be higher due to the specialized expertise required in the field. For instance, a Berlin-based biotech founder that has raised a 2M seed might pay themselves $50k per year, while a San Francisco-based founder with two kids and a 5M Series A funding could pay themselves $171k per year.
Employee compensation in a startup often comprises a mix of salary, equity, and other incentives like commission or bonuses. Founders need to strike a balance between their pay and employee compensation to maintain a team that is happy and motivated to perform well. Careful consideration of employee compensation packages can create a positive and inclusive company culture in which employees feel they are treated fairly and have a stake in the success of the company.
Contrasting with established companies, startup founders usually set their salary below the market rate for CEOs due to the financial constraints startups face. This choice can convey a sense of solidarity and shared sacrifice, making employees feel more connected to the leadership and mission of the company.
To summarize, founder salaries and their relation to employee compensation in startups can significantly impact company culture, employee morale, and performance. By considering the needs of their team, industry standards, and financial stability, founders can foster a positive and successful startup environment.