Seed-Stage Founder Salaries: How Much, and When?

I work with seed-stage companies both as an interim CFO and as an investor.

This is the first in a series of posts that will cover some of the most common early challenges for founders, both in their operations and as they raise funds. Today: founder salaries.

For funders of seed-stage companies, the issue of founder compensation is one of the trickier things to navigate. How to communicate expectations and importantly their basis. Industry standards and how they came to be. Investors understand that everyone wants to be paid fairly. Entrepreneurship tends to attract high-achievers with wild ambitions, some of whom may have previously experienced generous compensation and recognition in the corporate world. But the structure of compensation in a start-up is necessarily different. And so, dislocations occur, often between experienced funders and first-time, ex-corporate founders.

What follows is largely, but not exclusively, for them. Together, we can acknowledge the courage it takes to start a business, and the worthiness of those involved, while also grounding compensation in such a way that the probability of success is maximized.

Some tips, then, for the Compensation Conversation and why building generous salaries for your seed-stage team is a mistake.

1. Conviction. The pitch you’re making to investors is that the dollars they make available to you are going to compound at an eye-popping rate in the coming years. If you’re not telling yourself the same story, that every extra dollar you take out of the company today, is potentially many dozens of dollars of equity value down the road, then there’s a clear disconnect. It is not our place as investors to tell you how to live your life and perhaps your overhead is such that nothing less than $150k/year will do. If this is in fact the case and you haven’t the savings to float any shortfall for some time, then the startup life may not be for you.

2. Discipline. Investors want to know that you’ll be careful with the money you raise. Capital efficiency is a thing. Resources are limited. Don’t spend $100k on a build if you can get the same for $75k. If you can live as a founder on $70k for a few years yet choose to cushion that number with an extra $30 or 40k, for good measure, then that’s likewise a problem.

3. Resilience. Is this your passion, or your job? Your road ahead, when you embark on an entrepreneurial journey, is going to get dark. There will be times when you’re not sure you can make payroll. You’re going to lose a big client and spend an entire weekend poring through your CRM wondering how (if) that hole will be filled. Someone is going to badmouth your product, or your person. If in these moments your desire to breathe life into your product wavers, if your belief that the world is lesser without your business in it is not resolute, you’re going to fold. A potential investor is considering getting in the trenches with you. They want to know what you can bear, not just financially but emotionally, before you decide “it’s not worth it”. If you are too stuck to your ideas around what you’ll be earning while your company is in launch mode, if in reaction to the suggestion that you might earn less than you imagined is to inch toward the door, you’ve given yourself away. Founders for whom the work is a source of joy, tend to do better, last longer, and succeed more frequently. If you’re leaning hard on the money part of this endeavor, and specifically the immediate-money (salary) part, it’s generally not a good sign.

4. Long-term thinking. There’s a precedent issue here that Michael Wolfe covered well a few years back in Quora. If you pay yourself richly, it likely to distort the compensation schedule for your entire company, compounding the problem. Lead by example from the beginning.

5. Commitment. Another thing that investors really like to see is that you’ve put some of your own money into this enterprise. The reasons are alignment and conviction. We understand however that entrepreneurship ought not to be open only to those with independent means. And so, providing your own early seed funding may not be an available path. Your time effort and foregone salary can sub in here for your own cash investment. Not for everyone, and not at every point in life. But consider it where possible.

Generally, then, founders should aim to keep the share of their early spend that goes to compensation reasonably low. What’s reasonable is going to require some homework (check out comps for your region on angel list, ask around) and of course discussions with potential investors. Be prepared to make your case, and for investors to make theirs.

And finally, the edge example of early founder comp: the pre-seed, pre-revenue raise. Founders looking to raise capital specifically for the period before they’re generating revenue, and in whose use of proceeds exist a meaningful line-item for founder salaries. Companies that fall into this category represent a small portion of the total, but also the clearest example of the cart (salary) before the horse (measurable value creation).

6. Idea-stage. Some investors believe that founders should take no salary at all, until the company is generating revenue. This has, of course, been the rule by which small business owners have been bound for centuries. If your pub has no customers, your shop no receipts, you’re not taking anything at all home. Full stop. It’s not a matter for discussion, the till is empty.

Now, consider that startups are a very precious kind of small business, and we can acknowledge that some worthy ideas take time to bake. YC has made its name funding idea-stage companies and specifically notes living expenses as a legitimate use for the money it invests. They’re on board. Facing a long product development horizon, and perhaps a long sales cycle should not necessarily be disqualifying. If we adhere closely to the no-revenue/no-salary rule, some transformative technology might never come to be. But let’s all agree this is the exception rather than the rule, and if you find yourself in this camp (asking for money before you’re generating any) you have some very specific hurdles to overcome. You’re not looking for investors per se, but something closer to a benefactor. The ask is for something resembling a research stipend, fundamentally different than a seed-stage investment. Make sure you are pitching this round correctly and understand that your funders using a different set of metrics to consider you.

Remember: this discussion is directed at seed-stage companies. When you grow to Series A and beyond, the salary conversation is markedly different and will be mostly between you and your lead VC. This is likely to be less of a negotiation, and both parties by that point are well-informed. Seed-stage is by its nature something of a discovery process for all parties.

You’ll also have noticed that a key pillar of the above is that you’ve done the work around what your base cost of living is, what you can survive on for a few years without putting yourself on the street. There are massive regional variances in these numbers. To some extent your local investors will have taken that into account, but even then, lower cost of living areas tend to offer a wider margin of error for early stage founders. And, folks like Steve Case believe, a better risk/return.

Again, investors understand that you want to be paid fairly for your efforts. We also believe that the market will ultimately make that determination and that if what you foresee in your pitch (hockey-stick growth, flawless execution, massive market opportunity) does indeed come to pass, you will be handsomely rewarded. And you in turn will understand that our asking you to temper your near-term expectations in favour of this long-term outcome is both reasonable and fair.

Ultimately, may we stand together, and together and build something amazing. You can have your new Tesla then.

For more on my work in as both contract CFO and investor, please check out my website, subscribe for updates, and follow me on twitter @carleejprice.