How much should startup founders be paid?

This is a very sensitive topic which many startup founders grapple with whether they raise capital or not. I am sharing based on personal experience both as a startup founder and also as an investor. I am not saying it works perfectly or is the best. In fact, I found that I had to bargain a lot over the years and the key is to be transparent and open. So will be happy to hear how other readers do it.

1) Bootstrap Stage (Usually first year, up to $150K expenses)

At this stage, I feel founders should be paid a roughly similar basic wage. Meaning plus minus $500 of each other. In Singapore, that can range from $1000 per month to $3000 per month.  This is enough for food and transport. Anyway, this money comes from the founders themselves. My cofounder and I were paid $500 a month and later $2000 a month back in early days.

The reason for similar pay is because the roles are all mixed up in the beginning and if everyone works equally hard and full time, each key role of sales, marketing, tech and leadership all make and break the company.

One point of view I sometimes hear from founders is that they used to earn $5K, or $10K outside. So that is their opportunity cost. That is fine to say but should not affect the actual pay. Once you decided to come out and do a startup, your last drawn pay matters little, though it would be good if your co-founders appreciate your sacrifice. Also shareholding should not affect pay. If I put in $80K and you put in $20K, we should still agree to a roughly similar pay at this stage. Though if shareholding is very different, the basic may be closer to $3K whereas if the shareholding is similar, then it can be $1K.

The only time where it makes sense to me when a bootstrapped stage founder is paid >$4/5K or more is when there is a passive investor who joins the bootstrap round. Even then, I feel the various founder pay should be roughly similar.


2) Seed Stage (Year 2-3+, S$500K expenses)

Seed stage founders should be paid about $3000 to $5000. During our seed stage equivalent, we drew about $4-5K salary all in each. The thinking is somewhat similar to bootstrap round in terms of how founder pay should be similar to each other. Again, my logic is that the outfit is still small. Everyone has multiple hats and roles. So paying a similar value reflects that all founders are contributing on multiple aspects.


3) Series A Stage (Year 3-5+, $>1-3M expenses)

At Series A, it becomes necessary to have different pay for founders as roles get more defined and some roles start to be outsized in impact. For me, 3 principles are followed.

a) Pay does not exceed  and is usually below market rate for same role in similar sized company esp of outside money came in.

b) Founders are ok with the differential among themselves. Usually vesting is used to make things fairer. Founders are usually ok with differential once they agree what is the market rate for each role. Then from each role, take a fixed discount off it and build it up through a combination of base, incentives and vesting options. The biggest shareholder founder may need to be behave more generously at this stage.

c) Clear KPIs are written up for each founder role with bonuses tied to those KPI and overall company KPI.


4) Beyond Series A (Year >6, revenue 3-10+M and usually profitable)

At this stage, it really depends if the company is profitable and whether it took VC money. If the company is profitable and has not taken VC money, founders usually pay themselves up to market rate. Once market rate is hit, dividends are paid to founders based on shareholding basis. The logic is that we can always hire a market level replacement for a founder so there is never a need to pay more than market.

If the company took VC money, then there  are some controls on management pay but it is reasonable for  founder management to negotiate KPI based incentives and advocate to move towards market pay as the business grows according to plan. A good mgmt. team will ensure they feel aligned and balanced by discussing mgmt. targets and pay annually with their board.

To my knowledge, a fair market rate for a single country MD of about 50-100 staff in a dot com should be paid $200-$350K all incentives including options factored in. Base would be about 60% thereabouts of total. The CTO pay would be lower  at about $150-250K but with much higher base component. 

 

Start Up Journey - First 6 years summary.

Reading what i wrote back then about 7 years ago. Agree with most of it. Except the bit about Mentors. What i learned from networking is that fellow entrepreneurs (whatever the industry) are the best people to learn from. They can give us benchmarks and they can share what they did before and how it worked for them. In terms of specific functional knowledge, the best way is to just hire the right talent who has done it before. You will learn a lot just watching them work. As for bootstrapping, i think still very relevant today even with a much easier funding environment. ===================================================================== (Article below first posted on www.sgentrepreneurs.sg back in June 2006!)

After reading the various experiences of so many others, I thought I would share my own journey and lessons learned as an entrepreneur. Before writing about what I have learned, a quick overview. I graduated from NYPS, CHS, HCJC, OCS and then got a scholarship with a GLC to study EEE in the USA. Graduated with equivalent of 1st class honours and returned to work in the GLC for all of 8 months. I am a typical product of our rather elitist system. Quit and started JobsFactory in 2000. Aim was to be a job portal. By 2001 we knew we were beat and switched plan and focused on our current mission of providing effective career channels for students and professionals.

Over the past 6 years, we have grown from a 2 man show to a 20 man show. From just $20K capital to over 2M turnover. Here are some key lessons I have learned. Some are observations, others are business experiences.

1. Bootstrapping a business is good for you My partners and I started with just $20K as a startup capital. We paid ourselves S$200 a month salary for 6 months and worked out from my room. It was a very painful time. Even when some revenue flowed, our first office was at Golden Mile Complex. Up to today, I am amazed and grateful that our first few employees were willing to work there. What this tough beginning means is that we are extremely cautious with spending and watched our finances like a hawk. We also do not believe in spending unless the product or service has revenues coming in. This idea of bootstrapping to launch new services has helped us conserve our limited resources and ensured that we could survive through the downturn and SARs in 2003.

2) People, People, People For a service firm like mine, our people matter the most. From our staff to my management partners, the most important thing is that they are fulfilled and aligned with company objectives. Ego has little role to play in a startup. This is a common mantra of all businesses but few people actually do something about it. We do. We work 9 to 6pm latest Mon to Fri and we have implemented quarterly company outings. We also created a performance development system with a fixed review and bonus process. In addition, we have just started to institute training budgets for staff. We want our staff to love working here. I am also lucky to have a good team of management partners.

3) Mentors & Benchmarking The first years until 2003, we were blind and could not see how we can grow. But fortunately we had an incident which allowed us to be guided through a proper strategic planning process. I learned to look beyond my company and see what others are doing. This spurred my team to be more strategic in approach. With a vision and mission and objectives, we knew where we wanted to go and nothing was going to stop us. Now, we spend a lot more time benchmarking our performance with industry peers and alot more time planning ahead with proper budgeting and controls. A good source of benchmarking data is to buy them from bizfile. Buy your competitors annual audited accounts and learn from them. Mentors are harder to find. But speak to more experienced people and see if you can listen well and learn a thing or two.

4) Scholars Make Bad Business People This is a generalization. But being a scholar myself, I realize we are too sure in our thinking and too clear headed. Being intellectually correct has little meaning if your market depends on emotional purchases or when there are emotional variables at play. Or on a smaller scale, winning an argument during a management meeting may feel good but offending your key partner in the process over a small matter perhaps is a dumb thing to do. Esp if you are a scholar who has worked to the end of your bond. In the government , you are probably Deputy Director level or perhaps even a member of the admin service. You are in charge of a department and everywhere you go, people pay attention to you. What’s more you deal with smart people and vendors send their best to present to you. Someone like that would have hard a time putting down his pride and starting from scratch. Can be done I guess but tough