How Do You Determine Your Co-Founder’s Salary?
“I think our salaries should be different,” “Jim”, my co-founder, said to me and “John”, my other co-founder, “You should be paid the most, but, I think we should all have the amount of equity.”
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That was not the response from Jim I was expecting at all. My head was spinning. What Jim was proposing made no sense to me. None at all. In fact, it seemed completely backwards.
“That’s not how I see things,” I said. “I’m okay with us making the same salary, but I’m not okay with us getting the same equity.”
Jim, for the moment, backed down. The three of us went back to the work we were doing.
You can be flexible about the salaries of you and your co-founders.
I didn’t know what Jim was up to, but I didn’t like how I felt. I felt like Jim was trying to play me for a fool.
Okay. A little back story here. Jim, John, and I had all worked together previously at a very successful company. We were all independently wealthy from the work we had done, so our salaries weren’t that important to any of us.
The play was the equity. That’s what mattered.
Usually, in a startup, you can be really flexible in what you pay anyone at the start. That’s as it should be because you have to consider the financial situation of anyone you’re trying to get to join you at an early stage.
Yet there was Jim, suggesting he should make the least of everyone else and I should make the most, but our equity should be the same because that was what was fair. It was backwards.
You can make all sorts of accommodations for early stage employees and co-founders. For example, Jeroen, who replaced John as our VP Engineering, really couldn’t afford to leave his day job until we got funded.
Instead of forcing Jeroen to do something he couldn’t do and losing a great talent in the process, I told him to keep his day job until we got funded. The result was I got a great VP Engineering who was instrumental in us getting funded.
In fact, you don’t have to make the most amount of money.
Flexibility, that’s the key. In Jeroen’s case, he couldn’t afford the risk of quitting. There can also be the case where, especially in the early stages, that you don’t have the money to pay everyone what they’re worth.
Let’s say you have $1 million that you can afford to pay your team of ten, including yourself and your two co-founders. That means you have a founding team of seven.
The market rate salary for these seven is $130,000. Paying those seven at the market rate leaves you with $90,000 for you and your co-founders.
What should you do? I’d pay the team at market rate and divide the $90,000 between the three of you. That’s how you retain top talent.
You, the CEO, should be the last person to make market rate. After all, you’re the one that usually has the most equity.
It’s a red flag if you and your co-founders can’t agree on a fair compensation package.
That brings us back to Jim and John. I know there are cases where the founders agree to split the equity evenly. And, I know that sometimes it works.
However, in our case, right or wrong, that didn’t seem fair to me. Now I didn’t want the split something like 70% for me and 15% each for Jim and John. That wouldn't be fair. I just felt I should have a little more than they did.
So, I would have never felt good about things if Jim felt that we really should evenly split the equity. That resentment would have bothered me forever. Maybe it would have bothered Jim and John too.
It was, perhaps to both of us, a sign that we weren’t meant to work together. Sure enough, Jim and John quit within a month of us having that conversation.
Fairness. You and everyone you add to the company have to feel the compensation package is fair. It’s the first sign that you’ve added the right people to your team.