Should Start-Up Founders Make Six Digits?
As an entrepreneur you don't have to ask anyone for a raise. You set your own compensation, but you do so knowing that every dollar you take home is one you're not investing in the business. And if your start-up has investors, they will probably take a strong interest in how you balance your lifestyle preferences with the needs of your young company.
Finding the right salary isn't always easy as a question from a somewhat perplexed start-up co-founder posted on Q&A site Quora illustrates. Here's the entrepreneur's problem:
After 9 months of part-time work, my co-founder and I are about to start seeking funding to quit our jobs and go full-time. Our goal is to raise $500k. My co-founder says he won't accept less than a $100k salary. I think this will make it difficult to raise money and he should accept less. Are investors going to agree with me or will they accept him taking such a large salary? He's a software engineer/architect with a stellar resume, if that helps.
The founder's conundrum prompted a flood of response from some big names in entrepreneurship, including CEOs and top VCs, who illuminated in their answers plenty of points for this and other founders to keep in mind when setting their own compensation. In general, while the community stressed that the co-founder may have a particular and legitimate reason to ask for such a healthy salary, generally speaking a request for six-figure compensation raises eyebrows. Why? Many reasons, including this one cited by Michael Wolfe, the CEO of Pipewise:
As you start to hire more people, you will not be able to ask them to accept below market salaries in exchange for equity (way less equity than you guys have) if you aren't setting an example. Having a founder at a market rate salary means that everyone else you hire will have one, too. This could cost you many hundreds of thousands of dollars over the next few years.
Meanwhile, Sean Owen, who described himself as an associate at a UK technology VC firm, expresses the sentiment, shared by several others participating in the discussion, that such a high salary signals a less than optimal attitude toward entrepreneurship:
It is normal to draw a minimal salary, not market-rate salary. At this early stage, everyone needs to be investing in the business. Investors put in money; founders put in work. Someone drawing a market-rate salary is being fully compensated in cash and can't be said to be investing; this only makes sense if said person is not getting equity in the business. This person would not be a co-founder then.
Or as one anonymous user put it, the co-founder "is not an entrepreneur….it sounds like he's negotiating for a job, not making an investment. That doesn't make him a bad person or bad worker, just a bad founding partner."
The experts who weighed in also noted that the salary a founder can draw is usually proportional to the size of the investment, and such a high salary at such a relatively modest level of funding is unusual. Dave S. Rose, managing partner at Rose Tech Ventures explains that "100K for a seed start-up on a $500K raise is a bit high. Not insanely, walk-away high… but in my experience, that fact pattern (a pair of founders, $500K seed round) would typically see them each taking $50-$75K, at least until they either start generating revenue, or raise a larger round." Or as VC Brad Feld concisely puts it: "$100k salary is a lot if you are only raising $500k."
These are only some of the dozens of interesting answers arguing all sides of the issue over on Quora, so check the complete discussion for much more on the topic.
What would you say to this entrepreneur about his co-founder's salary demands?