There's a weird set of assumptions in this piece that make me a bit nervous about the state of the startup ecosystem.
When I was first getting into startups (late dot-com boom to about 2009), the assumption was that your startup was your identity, and an expression of your power to change the world. You owned it, or a big chunk of it, and you got rich by growing the size of the company (and hence your share value). This is the Warren Buffett, Jeff Bezos, Steve Jobs, Page & Brin, and Zuckerburg model. Control and ownership stake are the forms of "compensation" that matter here - instead of you taking compensation as CEO, you paid out compensation as owner of the firm, and slowly gave away equity in exchange for deals that would make the overall firm worth more. The article alludes to this model with "your entire life and self-worth is wrapped up in the company".
But the whole premise of this article doesn't exist with that model of a founder's role. Founders don't take compensation; they own the company, and dole it out based on who increases the value of the company most. Founders put their allies on the board, they don't take orders from the board. Founders wouldn't consider an outside CEO, so that comparison would be moot.
It makes me think that the "change the world" phase of tech startup history is over, and we're now in the "fill in the gaps" phase, where a "founder" is a hired gun that slots into a VC's portfolio. Which I've suspected we were getting close to for a while now, but if true, it makes the job description of "founder" a lot less attractive. If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?
"For the last few months, I've been cautiously testing a radical-sounding hypothesis on smart people: entrepreneurs are the new labor. Or to put it in a more useful way, the balance of power between investors and entrepreneurs that marks the early, frontier days of a major technology wave (Moore's Law and the Internet in this case) has fallen apart. Investors have won, and their dealings with the entrepreneur class now look far more like the dealings between management and labor (with overtones of parent/child and teacher/student). Those who are attracted to true entrepreneurship are figuring out new ways to work around the traditional investor class. The investor class in turn is struggling to deal with the unpleasant consequences of an outright victory." (2012)
In my opinion, the relationship between founders and investors has changed with time. The role of “founder” has become much more of a structured profession, whereas it used to simply be a random person who started a tech company. In the modern version, I would argue that the role of the founder is to create high-performing investment vehicles for venture capital. This is explicitly understood by some founders and creates a different relationship with investors than “building a company” founders. Even though the activity is essentially identical, the perspectives and priorities are different because you are optimizing for slightly different things. Building companies is just a means to an end for investors.
The biggest implication is that the primary "customer" of the founder is different in these two versions of the role.
My experience is that founders who internalize that their role is to create and manage investment vehicles for venture capital have a different and higher leverage relationship with investors, including compensation, than founders that think their primary purpose is to build a company.
The size of VC funds exploded in the past 3-4 years thanks to SoftBank. Raising 5 mil A round used to be a big deal, these days most seed rounds are around that and it's not hard to see A rounds in the 50mil range. It's much easier to cut yourself a larger check with so much money in the bank and it attracts a different type of crowd.
> It makes me think that the "change the world" phase of tech startup history is over, and we're now in the "fill in the gaps" phase, where a "founder" is a hired gun that slots into a VC's portfolio.
I don’t think it’s over, but it has shifted into what was previously known as lifestyle businesses.
There isn’t much room left for “change the world” startups that have broad impact unless you come prepared with a massive war chest to outspend your competition. Most famous startups still have to buy their customers often through the IPO stage, which is why we still see companies like Uber or even Gitlab being cash flow negative when they go to market. If you’re not prepared to spend your way into the market, you’re unlikely to get very far (there are exceptions, but they are rare). So yes, this space is mostly a VC game.
However, I know of more small tech startups than ever before that are bootstrapped or have minimal investment. These small companies aren’t targeting highly competitive, broad markets like ride sharing or Git hosting. They’re playing into a founder’s personal passion or addressing unmet needs in their own domains. They won’t be the next unicorn but they’re producing good work and making a difference close to home.
In many ways it has never been easier to start a small startup. Working for a decade at a FAANG job or even a good tech job with an eye toward savings can give someone plenty of savings to coast for years while they start up. Tooling has never been more accessible for rapidly assembling prototypes and gathering customers. Even knowledge about starting companies and scaling software is freely available online.
> If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?
One of my unpopular tech opinions is that “just get a FAANG job” isn’t as easy as it sounds. I know many smart people, including some who went on to become successful entrepreneurs, failed to get FAANG jobs after years of trying. I know several more who got FAANG jobs and then burned out or failed out. If money is your goal and you can get in then it’s a good option. It’s not the easy button, though.
Your observation is very interesting. Mark Suster's article ("The Changing Venture Landscape"[1]) also discusses how today's startups raise significantly more early funding and how this is changing the venture landscape -- more money chasing fewer deals, raising valuations, but also non-angel investors having certain expectations of their startups.
Taken together, do these observations imply a structural change to how venture and startups work?
When I was starting my first company in 2012, your point on identity rang true -- I tied my identity to the startup and so did our early employees. Now, many of the startup CEOs (and venture studios, angel funds, incubators, etc.) seem more like money managers and financial engineers.
...and I guess this might be why compensation expectations are changing.
Thanks for sharing your thought. I've been bothered by the way startups seem to work nowadays and I haven't been able to fully articulate why. The above is helping me clarify that.
EDIT: as I try and clarify my thinking here, it sometimes feels to me like many startups today feel more akin to private equity (PE) projects. In such a scenario, you'd expect founder compensation to change (as per the original link). It'a also in line with Suster's post + observations of hedge funds and PE shops funding more startups[2].
This is less about founders not tying their startup to their identity, and more about the exponential growth of VCs and the power they wield over non-leveraged founders.
Take a first time founder for example.
You’ve been working on an idea for a while. You’re just now getting traction. You likely don’t make much, if anything at all. Either because you are pre revenue, or you’re putting everything back into the company.
Now, a VC comes by and says I’ll take 20% of your company in exchange for $2 million.
Another VC comes by and says I’ll take 20% for $2.5m.
And so on.
The founder now has a hard decision. Do you take the money, grow the company A LOT faster and be able to pay yourself a salary? Or, do you continue to grind away, hoping the business grows organically, which could take 10-20 years? Do you even have enough savings to wait that long? Are you killing the business by not taking the money?
Okay, so let’s say you take the money. If you’re a repeat founder you know what to do. Don’t do a priced round, or if you do, don’t create a board. If you do create a board ensure founders still have majority. Essentially put everything in place so you don’t get fucked. So the option for you to be replaced by a hired gun doesn’t even exist. This sounds reasonable right?
Well most first time founders don’t even know you have to do these things. Or even if they do know they still might have zero leverage and take the money anyway, knowing they’ve relinquished some control. Knowing they will likely be replaced in 3-5 years.
This is how VC works now. The leverage has shifted completely.
The feeling I get is that founders aren't looking to the long-term anymore, either because they aren't confident of their ability to make it on their own or they're only working toward an acquisition. I assume the latter is the dominant mentality in undergrad/MBA/GSB subcultures. Cowardice vs. greed, I suppose.
It does put you in a different club and give you a lot of credibility to successfully exit. You can replay the game on VC boards and other places and at a higher level. It is a small club and successful (e.g founders with a solid exit) just have more options. You can use a variety of skills to grow a business. You have to win the tech meritocracy in a FAANG and competition can be a lot more narrow.
From a market point of view, founder of a startup is unlikely to have lots of opportunities to be CEO at other companies. The kind of person who comes into an established company and takes the CEO spot has much more leverage because they are a generalist who could be CEO at a bunch of different companies. The founder is a specialist in their own venture, but doesn't have much market value outside of that role. And of course the founder presumably has a large chunk of stock and therefore has an order of magnitude more upside than anyone else who might run the company.
Finally, there's the fact that psychologically the founder often believes they know best, and has a higher level of expectation for the company's prospects than a cold-eyed third party who wasn't part of the founding story.
It’s extremely unlikely founders own the majority of the company post Series B. In fact, it’s closer to 10% by the time a company exits. So I would say the article applies in most cases.
Amazing that he goes into such detail about how unequal pay should be slightly less unequal.
People are always going to take advantage of other people if they can or if things are structured that way. It is traditional for VCs to take advantage of founders. It is harder for them to take advantage of people who know there is already funding and are coming in after.
And VCs will go into excruciating detail rationalizing all of this.
What about the programmers who are actually building the software and often getting a pittance in relative compensation even though the business is 100% reliant on them to solve most of the problems (which are technical).
The value of a programmer at a startup isn't their output... it's their value relative to the second-best person the company could have hired. Sometimes the employee is a critical component, and sometimes they are a replaceable code-monkey. If you are easily replaced, code-monkeying simple code that makes $1B doesn't mean you provided $1B of value.
My impression spending time with investors has been that they need productive assets for their portfolio of depreciating cash, and they need exposure to companies in markets where they perceive growth. To get that exposure, they're usually in a few companies in a space already, so as a founder, your company is just one of many. I'd like to propose what a more cavalier approach would look like.
The next piece is venture isn't regular value investing. The participants in a given fund (LPs) probably have a horizon of 5-7 years for the total age of that funds portfolio, where they are expecting one or two of upwards of 20+ companies to hit.
VC money isn't a loan, the equity a founder sells them is the ticket price VCs pay for admission to the market exposure they need. (Buy the ticket, take the ride.)
When you look at what founder/ceo comp should be in that relationship, just as one reference point, a technical founder can probably pick up a consulting gig for a quarter million a year. It has no equity, taxed as income, discounted to risk, no leverage, no scale, all opportunty cost against life and running a year of startup runway, and they're just running a one person time and ass rental business, but that's a founder's base BATNA in the comp discussion.
Founders typically pay themselves less before later rounds because of some conventions, but you can't moralize what makes a successful company. Myths about frugality and the protestant work ethic are uncorrelated to returns in venture portfolios. (PE is another story imo, because it doesn't invest in growth, it invests in ways to optimize existing cash flows)
So when it comes to founder comp, if a round gives a company 18-24 months of runway to get to their next growth stage, I'd measure comp against the value of that binary outcome. Either the founder gets you there, or they don't.
It's hard to imagine, but if you have a portfolio of cash and you need for it to grow, and you believe in a startup, you need as much of that cash working for you in that company as you can stuff into it. If you need one of your companies to have a 30x return and you can't predict which one it will be, any "savings" the founder provides back to their company with frugal comp that comes at the expense of any early stage growth trajectory at all, results in vast value destruction. e.g. If you put $10m into a company and then the one person responsible for all that capital is paid less than some random interchangeable consultant, I'd say you've earned that loss honestly.
If a founder took the money from a round and put half of it in a pile on a beach and set it on fire, it literally shouldn't matter to an investor because the investor now owns something better than cash, which is equity in something that is growing. Surplus cash is opportunity cost against growth runway somewhere else. I've seen a few companies who should have set half their cash on fire, because the money made them lazy, political, and stupid.
So in terms of what it's reasonable to mark founder salary to, the two co-ordinates I'd reckon with would be somewhere between their consulting opportunities they could just walk away to today, and just setting half your money on fire.
I write, am not an investor or founder, this isn't advice, but the conversation from the OP seemed too polite to be useful.
> If a founder took the money from a round and put half of it in a pile on a beach and set it on fire, it literally shouldn't matter to an investor because the investor now owns something better than cash, which is equity in something that is growing.
Come on now, do you really believe this? Investors absolutely should be extremely upset if the company is squandering the resources it purportedly requires in order to execute on strategy and grow.
> Some founders create structured equity that only pays out after the company’s stock appreciates significantly. Other CEOs have out-of-the-money options (Elon Musk is famous for this).
I looked up OTM options and it looks very similar to the first sentence. Basically, you (the founder) tie your compensation to the success of the company. You win big if the company wins big. Can anyone disambiguate the two situations in the quote further?
An option gives the right but not the obligation to buy (or sell) something at a given price (the "strike") in the future. Equity in this case is that thing. The equity can be structured such that it sits behind other investors in liquidation preferences etc meaning it doesn't have economic value until the share price/valuation hits a particular hurdle (similar to the strike price on an option).
So while they are similar in terms of economic impact, the equity can have other rights attached (eg voting, ROFR for dilution etc) that a founder might want. Also crucially you already have the equity so you don't have to pay up to buy it (as you would in the case of a call option).
Finally as always there may be tax implications which make the difference meaningful. Tax arbitrage is often part of the calculus for any kind of weird compensation package.
Funny when someone comes to the shocking realization of what's happening to the workers under them, only when it happens to themselves. "People are getting paid less than they're worth unless they renegotiate or leave! We must do something about this!"
I hear this kind of complaint so many times especially from individual contributers but honestly can you realistically imagine a world in which this wasn't the dominant form of compensation adaptation model?
For the most part, your salary is affected by supply and demand. As soon as you leave your job, the demand to fill your position goes up. If you don't leave, the demand stays the same. The demand to keep your position filled won't be as high as when a vacant position needs to be filled. Am I missing something?
Yeah I'm usually very anti crypto anything but DAOs sound like a promising concept. Might be a great way to get rid of VCs and run international workers coops with initial funding though ICOs. A DAO based startup studio / incubator would be interesting too.
nostrademons|4 years ago
When I was first getting into startups (late dot-com boom to about 2009), the assumption was that your startup was your identity, and an expression of your power to change the world. You owned it, or a big chunk of it, and you got rich by growing the size of the company (and hence your share value). This is the Warren Buffett, Jeff Bezos, Steve Jobs, Page & Brin, and Zuckerburg model. Control and ownership stake are the forms of "compensation" that matter here - instead of you taking compensation as CEO, you paid out compensation as owner of the firm, and slowly gave away equity in exchange for deals that would make the overall firm worth more. The article alludes to this model with "your entire life and self-worth is wrapped up in the company".
But the whole premise of this article doesn't exist with that model of a founder's role. Founders don't take compensation; they own the company, and dole it out based on who increases the value of the company most. Founders put their allies on the board, they don't take orders from the board. Founders wouldn't consider an outside CEO, so that comparison would be moot.
It makes me think that the "change the world" phase of tech startup history is over, and we're now in the "fill in the gaps" phase, where a "founder" is a hired gun that slots into a VC's portfolio. Which I've suspected we were getting close to for a while now, but if true, it makes the job description of "founder" a lot less attractive. If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?
bluishgreen|4 years ago
https://www.forbes.com/sites/venkateshrao/2012/09/03/entrepr...
jandrewrogers|4 years ago
The biggest implication is that the primary "customer" of the founder is different in these two versions of the role.
My experience is that founders who internalize that their role is to create and manage investment vehicles for venture capital have a different and higher leverage relationship with investors, including compensation, than founders that think their primary purpose is to build a company.
m_ke|4 years ago
https://news.crunchbase.com/news/bigger-checks-days-to-close...
PragmaticPulp|4 years ago
I don’t think it’s over, but it has shifted into what was previously known as lifestyle businesses.
There isn’t much room left for “change the world” startups that have broad impact unless you come prepared with a massive war chest to outspend your competition. Most famous startups still have to buy their customers often through the IPO stage, which is why we still see companies like Uber or even Gitlab being cash flow negative when they go to market. If you’re not prepared to spend your way into the market, you’re unlikely to get very far (there are exceptions, but they are rare). So yes, this space is mostly a VC game.
However, I know of more small tech startups than ever before that are bootstrapped or have minimal investment. These small companies aren’t targeting highly competitive, broad markets like ride sharing or Git hosting. They’re playing into a founder’s personal passion or addressing unmet needs in their own domains. They won’t be the next unicorn but they’re producing good work and making a difference close to home.
In many ways it has never been easier to start a small startup. Working for a decade at a FAANG job or even a good tech job with an eye toward savings can give someone plenty of savings to coast for years while they start up. Tooling has never been more accessible for rapidly assembling prototypes and gathering customers. Even knowledge about starting companies and scaling software is freely available online.
> If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?
One of my unpopular tech opinions is that “just get a FAANG job” isn’t as easy as it sounds. I know many smart people, including some who went on to become successful entrepreneurs, failed to get FAANG jobs after years of trying. I know several more who got FAANG jobs and then burned out or failed out. If money is your goal and you can get in then it’s a good option. It’s not the easy button, though.
cl42|4 years ago
Taken together, do these observations imply a structural change to how venture and startups work?
When I was starting my first company in 2012, your point on identity rang true -- I tied my identity to the startup and so did our early employees. Now, many of the startup CEOs (and venture studios, angel funds, incubators, etc.) seem more like money managers and financial engineers.
...and I guess this might be why compensation expectations are changing.
Thanks for sharing your thought. I've been bothered by the way startups seem to work nowadays and I haven't been able to fully articulate why. The above is helping me clarify that.
EDIT: as I try and clarify my thinking here, it sometimes feels to me like many startups today feel more akin to private equity (PE) projects. In such a scenario, you'd expect founder compensation to change (as per the original link). It'a also in line with Suster's post + observations of hedge funds and PE shops funding more startups[2].
[1] https://bothsidesofthetable.com/the-changing-venture-landsca...
[2] https://pitchbook.com/news/articles/how-hedge-funds-are-lead...
ryanSrich|4 years ago
Take a first time founder for example.
You’ve been working on an idea for a while. You’re just now getting traction. You likely don’t make much, if anything at all. Either because you are pre revenue, or you’re putting everything back into the company.
Now, a VC comes by and says I’ll take 20% of your company in exchange for $2 million.
Another VC comes by and says I’ll take 20% for $2.5m.
And so on.
The founder now has a hard decision. Do you take the money, grow the company A LOT faster and be able to pay yourself a salary? Or, do you continue to grind away, hoping the business grows organically, which could take 10-20 years? Do you even have enough savings to wait that long? Are you killing the business by not taking the money?
Okay, so let’s say you take the money. If you’re a repeat founder you know what to do. Don’t do a priced round, or if you do, don’t create a board. If you do create a board ensure founders still have majority. Essentially put everything in place so you don’t get fucked. So the option for you to be replaced by a hired gun doesn’t even exist. This sounds reasonable right?
Well most first time founders don’t even know you have to do these things. Or even if they do know they still might have zero leverage and take the money anyway, knowing they’ve relinquished some control. Knowing they will likely be replaced in 3-5 years.
This is how VC works now. The leverage has shifted completely.
rhizome|4 years ago
bitexploder|4 years ago
danbmil99|4 years ago
Finally, there's the fact that psychologically the founder often believes they know best, and has a higher level of expectation for the company's prospects than a cold-eyed third party who wasn't part of the founding story.
lumost|4 years ago
If a founder has been diluted down then they will have every reason to move on.
ryanSrich|4 years ago
ilaksh|4 years ago
People are always going to take advantage of other people if they can or if things are structured that way. It is traditional for VCs to take advantage of founders. It is harder for them to take advantage of people who know there is already funding and are coming in after.
And VCs will go into excruciating detail rationalizing all of this.
What about the programmers who are actually building the software and often getting a pittance in relative compensation even though the business is 100% reliant on them to solve most of the problems (which are technical).
bpodgursky|4 years ago
(I say this, as a software dev at a startup).
unknown|4 years ago
[deleted]
motohagiography|4 years ago
My impression spending time with investors has been that they need productive assets for their portfolio of depreciating cash, and they need exposure to companies in markets where they perceive growth. To get that exposure, they're usually in a few companies in a space already, so as a founder, your company is just one of many. I'd like to propose what a more cavalier approach would look like.
The next piece is venture isn't regular value investing. The participants in a given fund (LPs) probably have a horizon of 5-7 years for the total age of that funds portfolio, where they are expecting one or two of upwards of 20+ companies to hit.
VC money isn't a loan, the equity a founder sells them is the ticket price VCs pay for admission to the market exposure they need. (Buy the ticket, take the ride.)
When you look at what founder/ceo comp should be in that relationship, just as one reference point, a technical founder can probably pick up a consulting gig for a quarter million a year. It has no equity, taxed as income, discounted to risk, no leverage, no scale, all opportunty cost against life and running a year of startup runway, and they're just running a one person time and ass rental business, but that's a founder's base BATNA in the comp discussion.
Founders typically pay themselves less before later rounds because of some conventions, but you can't moralize what makes a successful company. Myths about frugality and the protestant work ethic are uncorrelated to returns in venture portfolios. (PE is another story imo, because it doesn't invest in growth, it invests in ways to optimize existing cash flows)
So when it comes to founder comp, if a round gives a company 18-24 months of runway to get to their next growth stage, I'd measure comp against the value of that binary outcome. Either the founder gets you there, or they don't.
It's hard to imagine, but if you have a portfolio of cash and you need for it to grow, and you believe in a startup, you need as much of that cash working for you in that company as you can stuff into it. If you need one of your companies to have a 30x return and you can't predict which one it will be, any "savings" the founder provides back to their company with frugal comp that comes at the expense of any early stage growth trajectory at all, results in vast value destruction. e.g. If you put $10m into a company and then the one person responsible for all that capital is paid less than some random interchangeable consultant, I'd say you've earned that loss honestly.
If a founder took the money from a round and put half of it in a pile on a beach and set it on fire, it literally shouldn't matter to an investor because the investor now owns something better than cash, which is equity in something that is growing. Surplus cash is opportunity cost against growth runway somewhere else. I've seen a few companies who should have set half their cash on fire, because the money made them lazy, political, and stupid.
So in terms of what it's reasonable to mark founder salary to, the two co-ordinates I'd reckon with would be somewhere between their consulting opportunities they could just walk away to today, and just setting half your money on fire.
I write, am not an investor or founder, this isn't advice, but the conversation from the OP seemed too polite to be useful.
sk5t|4 years ago
Come on now, do you really believe this? Investors absolutely should be extremely upset if the company is squandering the resources it purportedly requires in order to execute on strategy and grow.
umutisik|4 years ago
ryanSrich|4 years ago
chejazi|4 years ago
I looked up OTM options and it looks very similar to the first sentence. Basically, you (the founder) tie your compensation to the success of the company. You win big if the company wins big. Can anyone disambiguate the two situations in the quote further?
seanhunter|4 years ago
So while they are similar in terms of economic impact, the equity can have other rights attached (eg voting, ROFR for dilution etc) that a founder might want. Also crucially you already have the equity so you don't have to pay up to buy it (as you would in the case of a call option).
Finally as always there may be tax implications which make the difference meaningful. Tax arbitrage is often part of the calculus for any kind of weird compensation package.
supernova87a|4 years ago
usui|4 years ago
For the most part, your salary is affected by supply and demand. As soon as you leave your job, the demand to fill your position goes up. If you don't leave, the demand stays the same. The demand to keep your position filled won't be as high as when a vacant position needs to be filled. Am I missing something?
glitchc|4 years ago
k__|4 years ago
m_ke|4 years ago
jjtheblunt|4 years ago
glitchc|4 years ago