I was thinking about this recently and I had a bit of a question. People used to always ask "wow why do founders get so much equity and dish so little out to employees?" and the answer would always be "because the founders takes all the risk". In the last few companies I work for, none were profitable, all had founders making 150k+, and all took at least 1m from our rounds out for themselves. It made me wonder where this supposed risk comes from and why VCs don't seem to mind founders paying themselves so much?
You joined at a later stage. Those companies probably represented the top ~20% of outcomes, with a high probability of success for the investors. For every company like the one you describe there are several that didn't raise the round, where the founders took no salary and ran up debts with nothing to show for it. They took the risk and, while they are arguably being rewarded prematurely, it's clear they survived what killed most of their peers.
The whole notion that "employees have a guaranteed paycheck" or "employees are taking no risk" only applies to large, established corporations, or well-funded (in a meaningful, cash-in-hand sense; not the promises-and-notes sense) new companies. Even then it's only marginally applicable and tenuous at best, because office politics and other things beyond the employees' control makes their positions insecure (at best).
At start-ups the concept that employees are taking no risk is just laughable on its face.
Founders get so much equity because they started the company, and they can offer as little or as much to others as they want.
Non-founding employee equity is driven by market dynamics, where "taking on risk" only explains how they got in the situation of having so much to begin with.
It's fair in the market sense, but it doesn't need to be fair in terms of risk/reward.
Here are some ways to think about this:
The equity is for risk already taken plus the value of the IP- the two years at minimal salary (or none at all) plus opportunity cost of not having a highly paid position (many founders could be execs at larger companies), not being able to save, worrying about payroll, etc. Why else risk your financial future? On top of that, most of the value creation comes in the initial stages (ie. where the work is less commoditized). This implies a larger value capture.
The compensation is market rate for the actual position currently held- eg. a CTO at a scaling startup makes $130K-150K, founder or not. This aligns incentives. A founder no longer working at their company does not/should not make any salary.
These situations are more complicated than they appear at first glance. You really don't know why things are structured the way they are until you get into them.
Because the founders took all the risk, sounds so much better than you showed up late to the party, sorry all the good stuff is gone, we've got some PBRs left though.
Fundamentally though businesses are designed around the risk of employees leaving, therefore you're in a pretty shitty point of leverage.
People will tell you whatever you'll believe in order to pay you less. It's not a VC thing, it's not a CEO thing, it's a people thing.
I'm still making up my mind on how to think about these issues. I tend to oscillate between "fraud" and "well, that's what the market will bear".
Everything you've mentioned applies only post a few rounds of mega-million funding.
If you're pre-funding, then you're taking a humble salary - if any salary at all.
So clearly, there's some kind of moral hazard post successful funding. That seems more or less unequivocal and it's somewhat gross but I'm not sure what should be done about it other than vitriolic twitter comments whenever people talk about meritocracies and how inequality isn't a big deal because you too can learn how to code.
The current way of thinking about it is golden handcuffs align vc and founder incentives re: exit timing. Which is why Snapchat turned down $3 billion; the founders were provided with fuck you money and were under no pressure to flip before they've extracted maximum value.
REGARDING RISK AS A WHOLE,
It's not clear to me that founders of VC backed companies - from the founder's perspective, and in this job market - actually incur any exposure to risk above and beyond opportunity cost.
Saying that you quit your job to slum it out for six months building a start up is a pretty good resume polisher, no? Doubly so if you actually investment and treble if you got acquired or otherwise exited.
The way I see it your worst case scenario is suffering reputational penalties by pissing off important investors when/if you a) run out of money or b) try to exit early from your commitment.
This is not to say that VCs should have higher equity portions or that all that hard work and sleeplessness should go unrewarded, but more that equity arrangements are like so because that's what everyone negotiated, and not because of some intrinsic "deservedness".
Many founders work 50-60+ hours a week, they basically do not have a life outside of work. Further, many have worked for a company previously making $80k-$120k+ so $150k+ doesn't seem all that outrageous (to me anyways) because they want to keep their same quality of life.
It has been my experience that some founders can jump directly to a seed or A round without spending all that much time unemployed--or any time unemployed. This means they can draw a salary from day one. In this scenario I don't see a lot of personal risk on the founders' part--and, indeed, if they're able to get this level of funding, they can likely talk their way into a higher level at BigCompany even if the company goes belly up, netting a pay raise even in the failure case.
London, UK based start-up, very little revenue (working with a few test customers, opening the doors very soon as we're quite far down the road on seeing the output of our tests).
I suspect the wage will stay at the £12k level until our active users pass 50k and the revenue passes break-even. At which point we want to raise money to fund growth, but the salaries will likely rise to help us focus on that growth (rather than how the hell we cover the credit card bill).
We are seed-funded and haven't yet gone for the A round.
It will need to hit $100k once revenue can support it, for the sake of marital bliss. Worse, until there's revenue, I'm dayjobbing to make ends meet. I can live on savings for a while, but not pre-revenue.
At this point a salary of 0 is easily in first place for the poll with around ~45% of the votes(116 votes out of 267).
I understand that many folks like to randomly vote on polls on HN: I remember several people explaining that they cast an incorrect vote on the last "how old are you" poll.
The fact that we have 267 votes in the first 45 minutes of this poll makes me more suspicious of the votes: I have a hard time believing that 5 founders per minute have read this poll and voted on it.
So I'm curious. Founders, how many of you truly take no salary? If you take no salary or close to no salary, how do you compensate? Is it via savings, tricky shenanigans where the business pays for things for you, or something else entirely?
I don't pay myself anything because I'm currently the only one funding the company. As it's a C-corp, that would result in double-taxation of my own dollars in theory (and in an LLC it'd make no effing sense).
I earned enough selling my last two companies to afford to live off of savings for a couple of years, fund retirement account, and fund two projects I'm currently working on. I also occasionally do consulting which pays very well by the hour, when need be.
Single-income family with no kids and minimal debt, small house in a working-class neighborhood, standard cars.
No funny tax stuff, because it doesn't really exist. That is to say, outside of re-investing capital gains offsetting when taxes are due (1202), and current deals on off-setting future capital gains (1045), there's nothing that the average employed person couldn't exercise regarding write-offs.
From the other comments in this thread I think part of the problem is defining a startup. Some people are mentioning bootstrap startups that they do after work and that's why they take no salary.
> So I'm curious. Founders, how many of you truly take no salary?
I currently take no salary. The company is profitable and we're looking to hire soon, but my co-founder and I promised to not take any salary for a predetermined length of time in order to gather some padding in our company bank account.
It's just an easy way to invest in your own company without actually transferring money.
Edit: We will be drawing salary eventually. Its just a transitional phase, and that is probably the case with most startups. You pay yourself nothing for a little while until you make money. Once you earn/raise some money, you pay yourself.
I would assume many startup founders have other jobs (even full time jobs) that still pay. Or they have sizable savings. Lots of startups don't raise money, which means the founders are often putting their own cash into the business -- essentially a negative salary!
> I remember several people explaining that they cast an incorrect vote on the last "how old are you" poll.
Is this really a common phenomenon? What reason would you have for randomizing a poll vote? I can't think of a reason offhand to intentionally obfuscate meaningless poll results.
I take no salary. I compensate by continuing to work another job while building this company. Right now, I'm consulting part-time while bootstrapping our startup.
This isn't going to mean much: founder of what? A company that is only going to be lucrative if it has a major liquidity event in the future? Does the company have traction yet? How many employees at the company?
What really amazed me, was that CEO of our 10 Million a year income company was getting a salary of 0 dollars. He grew the thing form 0 dollars a year income to it's currently earning power too.
They repaid him from firing him from the job, although he is still on the board.
When I had coffee with him he seemed completely ok with it though... what a champ.
Here's a question: For those of you who are bootstrapping making <$25K or so and live in the U.S., what are you doing for health insurance now?
I just found out that in California at least, you will be shunted to Medi-Cal, i.e. the program for people living in poverty. (At least up until now it was.)
You do not have the option of getting a subsidy for private insurance if you qualify for Medi-Cal. It is not either/or. You need to exceed a minimum income threshold for that -- and they no longer look at assets/savings to calculate that, only your income.
So, if you want a doctor that only takes private insurance, you'd have to purchase it without a subsidy. And of course, the unsubsidized market price has shot way up now. (For my plan, it doubled.)
So... what are ya'll doing? Medi-Cal? Full-price private insurance? Uninsured and taking the penalty? Haven't thought about it yet?
I think this poll would have made more sense as a set of ranges instead. If I'm making $10k a year, would I answer $0 or ~$25,000/yr? The poll should have looked more like:
I run a bootstrapped education business, and was told by other bootstrappers that one should convert personal expenses into business expenses, like car payments (make your car a company car) and food (it's for the office, but sometimes certain employees take it home with them, wink wink). Then, pay yourself as little as possible to cover those impulsive purchases that we are all prone to, and focus on building the value of your company.
I later learned from a wise HN'er that you can also claim rent on your apartment as a business expense. Although I'd love to support social welfare and bureaucratic spending with my income taxes, I'd rather maximize how many jobs I can create for hardworking people with my business.
There needs to be more transparency / data around this to really reach any legitimate conclusions.
Salaries alone are only marginally useful, it's also important to know what stage the company is in (earlier the stage, less the salary, yes or no? Would love to test that b/c that's our intuition). Its also important to know what industry. How much fundraising vs # of employees, how does that ratio effect the CEO salary. Also, equity %. Do founders who make more get less equity than sweat equity CEO's who take no salary? So many questions!
The problem with just stating income is that it doesn't take into account living costs for where you are. For instance the cost of living in Sweden is very high, i.e. 500g loaf white bread is circa USD$2.69 and if you are on a budget you don't actually get to live cheaply as you can't get to the really cheap stores or take advantage of bulk buying.
Plus you are not taking into account the age/maturity of the company.
One important thing to consider is the tax benefits available to founders that are not available to employees. If the founder has a home office, then at least part of their living expenses can be paid by the company as office expenses. This makes the founder's effective income much higher than the raw numbers would indicate.
[+] [-] ryguytilidie|12 years ago|reply
[+] [-] danshapiro|12 years ago|reply
[+] [-] Iftheshoefits|12 years ago|reply
At start-ups the concept that employees are taking no risk is just laughable on its face.
[+] [-] rthomas6|12 years ago|reply
[+] [-] klochner|12 years ago|reply
Non-founding employee equity is driven by market dynamics, where "taking on risk" only explains how they got in the situation of having so much to begin with.
It's fair in the market sense, but it doesn't need to be fair in terms of risk/reward.
[+] [-] ianBlumenfeld|12 years ago|reply
The compensation is market rate for the actual position currently held- eg. a CTO at a scaling startup makes $130K-150K, founder or not. This aligns incentives. A founder no longer working at their company does not/should not make any salary.
Re taking money out of rounds: This is for incentive alignment b/w the founders and investors. Mark Suster discusses this in much more detail than I can, http://www.bothsidesofthetable.com/2009/09/02/should-founder...
These situations are more complicated than they appear at first glance. You really don't know why things are structured the way they are until you get into them.
[+] [-] fleitz|12 years ago|reply
Fundamentally though businesses are designed around the risk of employees leaving, therefore you're in a pretty shitty point of leverage.
People will tell you whatever you'll believe in order to pay you less. It's not a VC thing, it's not a CEO thing, it's a people thing.
[+] [-] stevewilhelm|12 years ago|reply
1. It's their company. They get 100% of the equity until they choose to sell some of it.
2. Founders loose control of the company when they no longer own a majority stake of the equity.
3. They must sell a significant percentage of the equity when they raise money.
VCs do care about how founders spend their money, but it is in the VCs interest for a company to occasionally need to raise more money (see point #3).
[+] [-] blah32497|12 years ago|reply
What rock have you been living under? The SV game hasn't been about having a normal profitable business model for the god-knows-how-long.
You gotta get "value" and traffic and buzz and hype! Then maybe Google of whatever will buy you.
It's basically a sort of bubble. And while you operate in a bubble you can make a lot of money!
The only guys in town making money are ad companies, enterprise software companies, and hardware companies
[+] [-] phillmv|12 years ago|reply
Everything you've mentioned applies only post a few rounds of mega-million funding.
If you're pre-funding, then you're taking a humble salary - if any salary at all.
So clearly, there's some kind of moral hazard post successful funding. That seems more or less unequivocal and it's somewhat gross but I'm not sure what should be done about it other than vitriolic twitter comments whenever people talk about meritocracies and how inequality isn't a big deal because you too can learn how to code.
The current way of thinking about it is golden handcuffs align vc and founder incentives re: exit timing. Which is why Snapchat turned down $3 billion; the founders were provided with fuck you money and were under no pressure to flip before they've extracted maximum value.
REGARDING RISK AS A WHOLE,
It's not clear to me that founders of VC backed companies - from the founder's perspective, and in this job market - actually incur any exposure to risk above and beyond opportunity cost.
Saying that you quit your job to slum it out for six months building a start up is a pretty good resume polisher, no? Doubly so if you actually investment and treble if you got acquired or otherwise exited.
The way I see it your worst case scenario is suffering reputational penalties by pissing off important investors when/if you a) run out of money or b) try to exit early from your commitment.
This is not to say that VCs should have higher equity portions or that all that hard work and sleeplessness should go unrewarded, but more that equity arrangements are like so because that's what everyone negotiated, and not because of some intrinsic "deservedness".
[+] [-] lettergram|12 years ago|reply
[+] [-] kin|12 years ago|reply
[+] [-] codex|12 years ago|reply
[+] [-] buro9|12 years ago|reply
Year one salary was £4,800 per year.
Year two salary is £12k.
London, UK based start-up, very little revenue (working with a few test customers, opening the doors very soon as we're quite far down the road on seeing the output of our tests).
I suspect the wage will stay at the £12k level until our active users pass 50k and the revenue passes break-even. At which point we want to raise money to fund growth, but the salaries will likely rise to help us focus on that growth (rather than how the hell we cover the credit card bill).
We are seed-funded and haven't yet gone for the A round.
[+] [-] seldo|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] TheAnimus|12 years ago|reply
(Always feels improper to ask such things)
[+] [-] ronaldx|12 years ago|reply
[+] [-] beat|12 years ago|reply
It will need to hit $100k once revenue can support it, for the sake of marital bliss. Worse, until there's revenue, I'm dayjobbing to make ends meet. I can live on savings for a while, but not pre-revenue.
[+] [-] Tyrant505|12 years ago|reply
[+] [-] eieio|12 years ago|reply
I understand that many folks like to randomly vote on polls on HN: I remember several people explaining that they cast an incorrect vote on the last "how old are you" poll.
The fact that we have 267 votes in the first 45 minutes of this poll makes me more suspicious of the votes: I have a hard time believing that 5 founders per minute have read this poll and voted on it.
So I'm curious. Founders, how many of you truly take no salary? If you take no salary or close to no salary, how do you compensate? Is it via savings, tricky shenanigans where the business pays for things for you, or something else entirely?
[+] [-] drone|12 years ago|reply
I earned enough selling my last two companies to afford to live off of savings for a couple of years, fund retirement account, and fund two projects I'm currently working on. I also occasionally do consulting which pays very well by the hour, when need be.
Single-income family with no kids and minimal debt, small house in a working-class neighborhood, standard cars.
No funny tax stuff, because it doesn't really exist. That is to say, outside of re-investing capital gains offsetting when taxes are due (1202), and current deals on off-setting future capital gains (1045), there's nothing that the average employed person couldn't exercise regarding write-offs.
[+] [-] dangero|12 years ago|reply
[+] [-] noodle|12 years ago|reply
I currently take no salary. The company is profitable and we're looking to hire soon, but my co-founder and I promised to not take any salary for a predetermined length of time in order to gather some padding in our company bank account.
It's just an easy way to invest in your own company without actually transferring money.
Edit: We will be drawing salary eventually. Its just a transitional phase, and that is probably the case with most startups. You pay yourself nothing for a little while until you make money. Once you earn/raise some money, you pay yourself.
[+] [-] FreshCode|12 years ago|reply
[+] [-] eli|12 years ago|reply
[+] [-] cperciva|12 years ago|reply
[+] [-] mbillie1|12 years ago|reply
Is this really a common phenomenon? What reason would you have for randomizing a poll vote? I can't think of a reason offhand to intentionally obfuscate meaningless poll results.
[+] [-] Smirnoff|12 years ago|reply
That is, a founder making $4,000-8,000 a year can easily survive in Asia, but that's quite far off $25,000 a year. So they might as well vote for 0.
[+] [-] smoyer|12 years ago|reply
[+] [-] baddox|12 years ago|reply
[+] [-] mindcrime|12 years ago|reply
[+] [-] tptacek|12 years ago|reply
[+] [-] larrys|12 years ago|reply
My other thoughts were:
Where are you living? (Both geography and say "with parents")
How old are you?
How do you pay your bills (with "salary" = 0) and so forth.
What are your savings?
What is your safety net?
Many things play into whether someone can even begin to afford to get little or $0 salary.
Do you have kids?
Are you married?
[+] [-] toblender|12 years ago|reply
They repaid him from firing him from the job, although he is still on the board.
When I had coffee with him he seemed completely ok with it though... what a champ.
[+] [-] ry0ohki|12 years ago|reply
[+] [-] abalone|12 years ago|reply
I just found out that in California at least, you will be shunted to Medi-Cal, i.e. the program for people living in poverty. (At least up until now it was.)
You do not have the option of getting a subsidy for private insurance if you qualify for Medi-Cal. It is not either/or. You need to exceed a minimum income threshold for that -- and they no longer look at assets/savings to calculate that, only your income.
So, if you want a doctor that only takes private insurance, you'd have to purchase it without a subsidy. And of course, the unsubsidized market price has shot way up now. (For my plan, it doubled.)
So... what are ya'll doing? Medi-Cal? Full-price private insurance? Uninsured and taking the penalty? Haven't thought about it yet?
[+] [-] matthuggins|12 years ago|reply
-> $0/yr
-> $1 - $25,000/yr
-> $25,001 - $50,000/yr
-> etc.
[+] [-] kapkapkap|12 years ago|reply
A salary of $0 is quite easy if your still making $150k from another job. If the startup is your only source of income...not so much
[+] [-] rexreed|12 years ago|reply
[+] [-] primitivesuave|12 years ago|reply
I later learned from a wise HN'er that you can also claim rent on your apartment as a business expense. Although I'd love to support social welfare and bureaucratic spending with my income taxes, I'd rather maximize how many jobs I can create for hardworking people with my business.
[+] [-] dmtroyer|12 years ago|reply
[+] [-] skadamat|12 years ago|reply
Salaries alone are only marginally useful, it's also important to know what stage the company is in (earlier the stage, less the salary, yes or no? Would love to test that b/c that's our intuition). Its also important to know what industry. How much fundraising vs # of employees, how does that ratio effect the CEO salary. Also, equity %. Do founders who make more get less equity than sweat equity CEO's who take no salary? So many questions!
[+] [-] timc3|12 years ago|reply
Plus you are not taking into account the age/maturity of the company.
[+] [-] tosser8398b9|12 years ago|reply
Year 1: 0 + working old job (150K annual) for 6 months
Year 2: 0 + 38K consulting
Year 3: $19,000
Year 4: $38,000
..
Year 9: $97,500
Year 10: $137,000
Year 11: $182,000
Year 12: $465,000
Year 13: $415,000
[+] [-] OoTheNigerian|12 years ago|reply
This is not really clear cut to use and make your own decision.
[+] [-] Tyrant505|12 years ago|reply
[+] [-] rplnt|12 years ago|reply
[+] [-] mightybyte|12 years ago|reply
[+] [-] lquist|12 years ago|reply
Year 1 Salary: $100k Year 2 Salary: $600k-$1M (6 months in to Year 2. Estimated salary)