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.
Sure, all of that makes sense, but I don't see why the CEO of an unprofitable company should be making six figures, pulling out 7 figures and getting a ton of equity. Aren't the employees taking a risk too?
In almost all circumstances, until very, very late in a companies funding cycle, a funded company is designed to be unprofitable.
Investors want to see two thing at that point:
1) A scalable business model. This means that as you add more users the cost of user acquisition goes down, and it is possible to see where the income per user becomes more than the cost per user.
2) Growth in the user base
Combine those two, and the lack of current profits doesn't matter (usually).
If a company is profitable then investors will want to know why that money isn't going into growing the company faster.
I don't see why the CEO of an unprofitable company should be making six figures, pulling out 7 figures and getting a ton of equity
Presumably they are being rewarded for that growth, and making a scalable business model work.
Aren't the employees taking a risk too?
Are they?
If they are being paid market rates, then it is hard to argue they are taking much risk at all.
If they are being paid below market rates then yes, the deserve other forms of compensation.
Employees are taking a risk. Employees can negotiate terms when they are hired. Employees can choose not to be employees and start their own companies.
In some cases, as nl points out, it's because the strong growth and expected future profitability means the investors are happy paying the founders for value they've created.
Other times, it's simply a case of founders transferring investors' money straight into their own pockets.
It's a very, very useful skill as an investor (or employee, for that matter) to be able to distinguish the two.
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.
The level of risk is significantly different. An employee bears the risk of losing their job. That's a bad thing, but you can go get another one.
The founder has likely foregone salary altogether for some time and run up personal debts while doing so. They've probably tipped a lot (relative to their net worth) of initial capital into the company to get it off the ground. If everything goes wrong, they need to go find a job _and_ deal with the mountain of debt they're now in.
If the company is at a stage where it has paid employees, a significant part of the risk of failure has already passed. There's plenty more risk to come, but you cleared the first few hurdles; and they're big ones.
I don't disagree that the level of risk is different, or even that the level of risk is within, say, an order of magnitude. There's no doubt that some founders risk more (in some cases, much more) than employees. Wouldn't argue otherwise.
However, I would caution you that "racking up debt" isn't something only founders have as a risk. What you've described in your second paragraph is where just about anybody who isn't rich or well connected and has to rack up debt going to college finds himself, at least in the US. I would also caution you that employees frequently cannot merely walk out the door of the failed start up and into a paycheck across the street (as it were). They have to spend time, and their own savings, looking for work, in most places.
Compounding this is that odds are said founder has accumulated something the fresh college graduate or now former-employee hasn't: connections and the ability leverage his 'failure' into lucrative employment or future business opportunities. This helps mitigate the risk significantly.
I would argue that within the Valley your second paragraph actually isn't true. I've found that most people coming out of startups have a very easy time finding a job, unless they choose not to (i.e. they start their own business, etc.). I can't speak to other locales.
There are many places where tech startups exist that aren't the Valley. I've lived in both places. Outside of the Valley I've never had a job search take less than two months (time to offer from start of search); most often it took four to six months. I haven't had to search for a job in the Valley yet, so I'll have to defer to the experience of those who have.
You're treating employees as though they had the same tenure requirements as founders did. They just don't. If an employee starts a job at market salary, 18 months later the company dies, so they start another one at market salary, then the same thing happens, so they start another one, and yet again the same exact thing happens, so they start a fourth job, and that's the one they can stay at for several years..... then they've received substantially the same number of paychecks as if they had stayed at the first company for 6 years. It just doesn't matter that they had to change jobs a few times.
If a Founder is working for equity in a company for 18 months and it dies, it's an absolute personal disaster. There's no way to repeat that four times in a row and remain solvent and sane.
This simple example shows the fact that really it doesn't matter whether a company really guarantees an employee a paycheck or not. If it has enough money to pay you for a few months, you're good to start.
The liquidation preferences matter a lot. The company can sell for a tenth of what the valuation is now, maybe even less, and the investors would still break even. There aren't a lot of new consumer companies with zillions of users to invest in so they might as well, because the downside isn't that bad and the upside is... who knows?
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.
Perfectly stated. Employee compensation is a contract freely entered into by the employee. If you think you deserve more, don't take the job.
However, I have sympathy for the fact that founder risk in SV has declined dramatically over the last twenty years, while employee risk has not, but if anything employee stock pools are smaller than they were a decade ago. Yet every founder says "it's impossible to hire good people".
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.
Maybe risk is an excuse, maybe it's a legitimate justification, but it doesn't matter. Why would you bother founding unless there was possibility of a real payoff, of some kind? With that in mind, it's basically a bribe from investors to someone they judge probably capable to please, please make us rich.
Profitability/revenue are not the only metrics that matter to investors. Remember that in order to take out $1M in cash you have to find investors who are willing to pay you $1M for your shares. To investors, metrics like user growth, retention, and engagement also matter (see: Snapchat).
I'm not making any claims as to whether those investors are being smart or foolish.
That seems like a poor example -- from what I've read (and vaguely remember) their revenue is huge (and they could easily be extremely profitable if they so chose) but they're choosing to keep re-investing all of their revenue into expansion, people, tech, etc..
Even if its a requirement of the VC's so that the cap table works out to what they want? i.e. the VC's want 60% of the company at a specific valuation but they can't do that without the founder selling 5% to them.
If the people who ultimately pay those founders (investors via company board) think it's ok, then it is ok. I'm sure investors aren't willing to freely give out money for no reason.
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.
I get that question a lot, but it's possible so long as you're not spending on... well, anything. I've spent a lot of the last 2 years adjusting to not needing to buy things and disposing of luxuries (I wouldn't have called them luxuries at the time, but it's surprising how much isn't needed). What I do buy I find ways to acquire things very cheaply.
There are food blogs like this: http://www.theskintfoodie.com/ (Tip: Waste nothing, buy precisely what you need and plan how to use every bit)
You can get clothing from places like this: http://www.barone.co.uk/ (Tip: There's a huge supply chain from which you can purchase long before things hit shops)
I've turned off broadcast TV, cancelled the TV licence, and just watch on catch-up via iPlayer, etc.
Cycling cuts travel costs, though I keep a PAYG Oyster for when I'm with others and will make a journey with them.
Cheap until to see the mooring fees, and various add ons, in London. Even on the outskirts in places like Kingston upon Thames, once you add in all the fees, boats are not that much cheaper. That said, given the choice between a boat and some poky flat in London, for me it has to be the boat every time.
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.
More than likely that is because you have a real business idea rather than Snapchat. I'll work on snapchat after I have heavy pockets and time to blow.
Yeah. In the world where people are LARPing the Betas tv show, creating a product that provides immediate value to paying customers by solving a complex yet common problem is kind of wtf.
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.
If you can get yourself another employee, becoming an S-Corp will allow you to take a meager salary, charge rent to the business, and use draws on any other cash you might need from the corp in a pinch.
S-Corp is pretty much synonymous with "I have an actual payroll"
An S-Corp is little different than an LLC in that sense in that it's a pass-through, and an LLC may make more sense in some situations. (And certainly cheaper to get rolling properly than an S-Corp.)
But, it still wouldn't matter in this case. There is no money, except that which I put into it. If I were to take a partner retainer from that same pool of cash, or pay myself a salary via an S-Corp, they would both show as income at the end of the year, even though I just moved money from one pocket to the next.
If one is in the same situation, observe how much you need to cover expenses, set that aside, and invest the rest - do not try to be funny with paying yourself out one side and looking for losses on the other.
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.
This is absolutely correct and something that I didn't think about at all. For whatever reason I had assumed that "0 income from my startup" meant "0 income" which is obviously not the case.
> 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.
Edit: I also wanted to note that it really is important for a founder to take a salary eventually.
Specifically, its a risk to the company. You shouldn't be putting yourself in a place to have money problems, nor should you be putting yourself in a place to have to make decisions about the company through the lens of your dire financial straits.
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.
From what I remember folks either did it "just for laughs" or because they had a problem with the idea of a poll gathering information about people on the internet. I can imagine both reasons applying for a poll about income.
At the time I found this frustrating because I'm honestly interested in the age distribution of HN readers. It seems like cool data to have.
For an avid reader of HN, I'm definitely very uninformed when it comes to the startup scene. It's entirely possible that I'm dead wrong about the poll and ~40-50% of founders don't take a salary.
I guess my post spends a bit too much time speculating about whether the votes are fake and too little time asking the question that I care about: I'm honestly very curious what folks who are making very little money and living in (presumably) very expensive places do to get by.
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?
If your small business pays average salary less than $50k the IRS will give a 50% tax credit on employer's share of premiums of a plan purchased on the exchange.
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.
Be careful. Just because you're a business owner doesn't magically make everything you touch a business expense. Claiming the apartment where you live as a business expense sounds like a great way to get audited. But what do I know? I'd strongly suggest talking to a good accountant -- they are worth the money.
Quick update - when I was writing this, I didn't realize the ambiguity of my wording. This isn't stuff I'm doing right now, this is just what I heard could be done. Although I do claim legitimate business expenses, I don't have the audacity to claim things like my rent and car lease. However, the people I heard this from have been doing the management game for quite some time and did bring up the possibility of an audit, but as long as you can provide a reasonable explanation for everything, there shouldn't be any issue. Obviously if anyone is reading this and considering taking their advice, do it at your own risk, because a wrong move could cost you a lot of money to the IRS.
1 - you should weigh the tax implications of a personal car vs business leased vs business owned car
2 - if you manage to convert all of your personal expenses to business expenses and lower your salary to lower your personal taxes (which may not matter depending on the corporate entity you created in the first place) then you need to realize when you go for a credit check all anyone will care about is your salary, not your business income. So let's say I'm self employed as an hourly contractor and bill @ $150/hr, but I pay myself a 'lowly' $30/hr to dodge taxes. The mortgage company only cares about that $30/hr and may not loan me anything. (also, if you start a business you need to be solid for two years before anyone will loan you anything for the most part, just fyi)
3 - you can claim a portion of rent/mortgage/etc as a business expense if you have a legitimate home office or conduct business of some sort in it.
> you can claim a portion of rent/mortgage/etc as a business expense if you have a legitimate home office or conduct business of some sort in it.
One thing to point out about this - if you use the space for any purpose other than for your business, it doesn't count as a home office. Additionally, you cannot claim shared utilities like phone lines and Internet as a business expense unless they are for exclusive use in the home office space.
> The mortgage company only cares about that $30/hr
That's not true in my experience. When I was looking for a mortgage a few years back, the lender was practically throwing money at me once I presented my business financials. Perhaps it depends on who you are dealing with?
I think that would make more sense. The majority of mine is in dividends, for example. I'm not convinced by stock as measurable compensation for pre-IPO companies though since they may never be liquid.
And how many other companies they are a founder of. Some people are chronic founders. They may be juggling multiple companies hoping one sticks to the wall.
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.
ScottWhigham is correct, in my case it was 'gain' not salary. But the income averaged around 40-50k USD for years. I bootstrapped it with personal funds and keystrokes. (Sites started around 1994. Sold out 2011.).
It would probably be interesting to know what type of companies these are. I see the majority has voted $0 salary. Are these companies that have employees, office space, payroll, etc? Or are these projects that one or two friends are working on together to try to get off the ground?
I am not trying to discredit either situation, it's just that I see one situation as a company where nobody is making any money. The other situation would have staff who are getting a steady paycheck, but the CEO has chosen not to pay his/her self.
I made $7k in 2012 while running simplehoney. (me and my cofounder paid ourselves minimum wage so we could keep 3 people on payroll and get a group rate for health insurance)
This poll isn't very useful. Given that you can't even get a cheap apartment for much less than $2,000 per month in SF I don't see how anyone could live on less than 36k per year in the bay area before taxes. There has to be more to these numbers perhaps they have a large stash of personal savings they are living off or a significant other with a good paying job.
I'm not a founder, but I spent something around 30k last year while living in SF. I have a roommate, don't eat out very often and take advantage of work food options, take transit/walk almost everywhere, and don't purchase much stuff. Unsure of the tax burden at those rates, but I think you'd have over 30k.
Since my persona on this account is public, I won't go into details, but I do view it as any other job....my investors want me to focus on building a company. That means competitive pay compared to what else I could be doing, which means a substantial salary.
This assumes that, as a founder, I have a "salary". Most of the solo and LLC founder members here will not have a traditional salary - the business' profits are your personal "gains".
