“Here’s what we can afford to pay you,” I said to Greg, one of the best Analog IC design engineers in our industry.
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Greg was making $400,000 per year working part time at Maxim Integrated Products. I had known and worked with Greg for years, so I knew getting him to join our company would be a huge win for us.
However, I knew we couldn’t afford to pay him anywhere near $400,000 per year. In fact, even paying Greg $200,000 would blow up our salary structure.
So, I told him we would pay him $180,000 per year and give him 0.8% stock options. It was at the top of our salary range for a senior engineer.
Greg happily accepted the offer. Over the life of the company, Greg contributed not only great designs, but he mentored many of the company’s engineers.
So, how should you think about your salary as a the founding CEO?
The analogy should be obvious, but if you’re in it for the salary, then you shouldn’t have founded your company.
In fact, I would say you’re likely doomed to failure if you want to get paid your previous high, big company salary. Let’s game-theory this one out.
Let’s say you were making $400,00 per year like Greg was. And, let’s say you’ve a raised $3 million round of funding.
You have a ten person team of engineers that you’re hoping to increase to twenty by the end of the year. The cost of these engineers, fully loaded, is $2.55 million for one year. Add in your $400,000 per year salary and you can see the problem.
You’re out of money. Oops.
That money has to last you eighteen months minimum because you’ll be in a perpetual cycle of raising money. Ideally, I’d like to see it last you at least twenty four months. The financial issue you’ve created is only the start of your problems.
Your investors aren’t going to be happy with you making a huge salary.
You may not realize this, but your investors set your salary as CEO, not you. You can certainly suggest what your salary should be (I did), but prepare to be disappointed if you ask for to much.
Not only that, your investors are going to question your judgement if you ask for an inappropriate salary. And once you start losing your investors trust, you are in for a world of hurt.
But it doesn’t end with losing your investors trust.
You’re going to lose the trust of your team if you pay yourself too much.
I know. You believe your team will never find out what you’re making.
Keep dreaming. Some how, some way, your team will find out. Salaries always get out.
Think of it this way. If you’re worried about what your team might think about what your salary is, then don’t you think that might not be a sign that you’re paying yourself too much?
The most important indicator of a startup’s success is its company culture. You’ve got another thing coming if you don’t understand that a fair salary structure is a key part of a an excellent company culture.
Hopefully, I’ve convinced you that you shouldn’t pay yourself your previously high salary as CEO. So, what should you do?
You, the CEO, should be last person in the company to make a market rate salary.
I convinced you of the error of your ways. You remembered that you’re in it for a big stock payoff several years down the road, not making a high salary.
The simple methodology for determining your salary as CEO goes like this:
A. Start by paying your team market rate.
B. Then make sure, with benefits added in, you have enough cash in your financial plan to last a minimum of 24 months.
C. Then attempt to pay your co-founder(s) market rate. If you still have enough cash to last twenty four months, great. If you don’t, you’ll need to reduce their salaries accordingly.
D. Now determine how much you can afford to pay yourself. If you can afford to pay yourself a market rate startup CEO salary, then pay yourself a market rate startup CEO salary.
But only pay yourself market rate if your funding will last at least twenty four months. Reduce your salary as needed if your funding will not last twenty four months.
Now, you’ve satisfied your investors, your future investors, and, most importantly, your team that you’re putting your company first, not yourself first.
For more, read; Why Your Startup Culture Is The Key To Your Company's Success