I’ll never forget one of my investors, “Raul”, asking me how much I was going to pay myself after we closed our $12 million round of funding. I told Raul I was going to pay myself $200,000, well below the market rate of $250,000 at the time. This was significantly more than the zero salary I made for the company’s first two years of life.
Yet Raul said to me, “Sounds a little rich to me.” The reality is it didn’t matter what I was going pay to myself, Raul was going tell me it was too much.
You want your funding to last you long enough to get to your next set of milestones.
I’ll explain how I got my number later, but my goal was to make sure our funding lasted us at least two years, worst case (it lasted for close to three years). That would be long enough for us to get to our next set of milestones.
You’re not the only one who will sacrifice a high salary at the start. Your best talent will too.
“Here’s what we can afford to pay you,” I said to Greg, one of the best Analog IC design engineers in our industry.
Greg was making $400K/year working part time at Maxim Integrated Products. I had known and worked with Greg, 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 $400K/year. In fact, even paying Greg $200K would blow up our salary structure.
So, I told him we would pay him $180K/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?
This 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 $400K/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 20 by the end of the year. The cost of these engineers, fully loaded, is $2.55 million for one year. Add in your $400K/year salary and you can see the problem.
You’re out of money. Oops.
That money has to last you 18 months minimum because you’ll be in a perpetual cycle of raising money. Ideally, I’d like to see it last you at least 24 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 like I did, but prepare to be disappointed if you ask for too 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 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 structure.
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 cofounder(s) market rate. If you still have enough cash to last 24 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 24 months. Reduce your salary as needed if your funding will not last 24 months.
That’s how I came up with my salary. I was able to pay my co-founders market rate salaries, but I didn’t make market rate because we couldn’t afford it.
However, I was making enough money to pay my bills. More importantly when you do this, 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