Tech founders can go years without remuneration in an effort to birth and nurture their big idea. Then, when funding finally comes in, it can be daunting to decide on fitting compensation. Experienced investors understand the sacrifices it can take to get a company to a point where it is attractive to them, but will look for a balanced approach. They know a reasonable salary allows a founder CEO to focus on running their business and ensures personal financial stress doesn’t lead to bad decisions at the company. But what’s reasonable? And going beyond the CEO, how should co-founders and early employees be compensated?
Determining Proper Compensation for Startup CEOs
Determining appropriate compensation for a startup CEO will depend on several factors:
- Cash flow and affordability – is there money in the bank?
- Valuation/stage of the business – CEO remuneration will typically increase as the company matures, obtains greater funding, and exhibits more evident exit opportunities for investors.
- Market – some industries have higher levels of remuneration than others.
- Location – physical location will affect a CEO’s cost of living, e.g., Silicon Valley CEOs will require higher salaries than their counterparts in more affordable parts of the country.
- Competitive salaries for the position and experience.
- Investor attitude, e.g., Peter Thiel passes on any startup paying its CEO more than $150,000.
What Does the Research Say?
As there’s no requirement to publicly disclose the executive remuneration in non-public companies, establishing a comparative base isn’t easy. Fortunately, the KRUZE 2022 Startup CEO Salary Report provides some guidance (and the website offers a calculator where CEOs can enter their industry and company stage for the results applicable to their situation). The report analyzes CEO pay at over 250 seed and venture-funded startups and makes data available by industry and funding raised.
Average startup CEO salary by major industry, in descending order, is as follows:
- Biotech ($147,000)
- Hardware ($135,000)
- Fintech ($129,000)
- SaaS ($121,000), and
- Ecommerce ($80,000).
And average startup CEO salary by capital raised, in ascending order, is as follows:
- $0-$2M ($120,000) – These companies must still prove product-market fit.
- $2M-$5M ($124,000)- These companies must also still provide complete confidence in a large exit for investors.
- $5M-$10M ($162,000) – These companies are on the path to a more significant exit.
- $10M+ ($173,000) – These companies have a proven model and a substantial likelihood of a large exit.
Determining the Equity of Founders and Early Employees
When it comes to equity, things can get a bit trickier. Here the founder must consider the relative contribution of those they have chosen to “go to war with.” Whereas, in mature organizations, employee stock schemes are formula-driven, in startups distributing equity between early employees can be more of an art than a science. The results can differ widely, but typically a founder-CEO will retain 5-20%, a founder-CTO from 2-10%, and other co-founders from 3-7%. Early employees can range between 0.5-5%.
It’s not always easy to distinguish founders from early employees. The reality is fuzzy and people fall on a spectrum. However, the Founder Institute provides these definitions as a guide:
- Founders are likely not paid for a long time and have a sizable equity percentage for early risk and the concept.
- Employees come later, have more significant cash compensation, lower risk, and don’t bring as much to the business concept.
- Early Employees – the first 25
- Later Employees – numbers 26-125
Keep in mind, however, that startup employees are a “different breed.” Generally, they are looking for something more than a salary. Even ownership is just one of the benefits they consider. They may place a heavy weight on a culture of transparency and collaboration. Or, they may prize autonomy over all else. The founder-CEO must make an effort to understand their true motivations, something that can require rounds of negotiations before arriving at the right package.
Traditional Approach – Who Brings What to The Party?
In determining the equity split between first people, it can be helpful to consider what each brings to the business. Qualities that are typically considered include:
- Experience – has this person run and scaled a successful startup before?
- Expertise – does this person have expert knowledge of the market or knowledge/qualifications specific to their role?
- Ideas – did this person create the idea or intellectual property for the business?
- Time – what percentage of time does this person dedicate to the company?
Y Combinator’s Controversial Approach – Equal Split
Michael Seibel of Y Combinator has a different and somewhat controversial approach to startup equity split. He believes that arguments for specific individuals having relatively more equity than others are generally flawed. Typically, they include factors such as who had the initial idea, who has worked the longest, who raised money or launched products before others came on board, and so on.
Seibel says these are all wrong because:
- Startups are about execution, not about ideas. It takes seven to 10 years to build a company of great value.
- More equity = more motivation. Almost all startups fail. The more motivated the founders, the higher the chance of success.
- An equity split is a cue of how CEOs value their co-founders. The quality of the team is often one of the top reasons an investor will or won’t invest.
“Equity should be split equally or close to equally because all the work is ahead of you. If you aren’t willing to give your partner an equal share, then perhaps you are choosing the wrong partner,” Seibel said.