Startup founders don’t typically launch a company as a get-rich-quick scheme. Most know that it will be a long, hard slog if they are to succeed. There will be lean years where the money is tight, and where they may personally struggle to pay their bills. They do it because they believe in the mission and they want to build a successful company, where, if all goes well, they could end up with a healthy amount of money.
But it takes a lot of hard work, long hours, tough times and a bit of luck to find your way through to a successful outcome, however you choose to define that. Early on every dollar you give yourself is money that’s not going into the business, and while you don’t want to starve yourself, neither do you want to run out of money, and those early dollars are especially valuable.
While the ultimate goal is a successful exit, not everyone gets there, and it begs the question, how much is fair to take out in the form of salary, especially in the early years when money is tight, and at what point is it reasonable to sell a bit of equity to take some money out of the business and live a more comfortable life. There are no hard and fast answers.
Removing financial obstacles
Ed Sim, founder at Boldstart, an early stage enterprise startup investor in NYC says as an early check writer, he doesn’t want to see founders living high on the hog, but at the same time, they need enough money to live on, and that takes a bit of cash, say $100-150K a year to live in places like New York or San Francisco, the cities where companies tend to launch.
“What you don’t want is founders worrying about the cost of living — living in New York and San Francisco is really [costly] — and you don’t want founders worrying about paying their bills and living under water. They want to be covering their expenses, especially if they have a family or a mortgage. So we want to remove those obstacles for the founders,” he explained.
Murat Bicer, general partner at CRV, says you could probably ask 10 VCs this question, and get 10 different answers, but he sees the range at the low end of perhaps $125,000 and at the high end maybe $200,000, depending on the location of the startup and the cost of living in a particular city.
Bicer tends to invest in the A round after the company has already received some early-stage investing and the salary has usually been set. He says when you invest in Series A, you are doing so because you believe in the founders, and it’s really a matter of trusting their judgment, that they are going to be doing the right thing, and in his experience, they do.
“I feel like this decision about how much they’re going to pay themselves, given that every additional dollar is reducing potentially their runway, is a very fundamental and very important critical decision that they’re making. So if I’m investing in them, it’s because I believe that they’ll make the right decisions, and I expect to respect that decision,” he said.
Taking cash out of the business
Once companies begin to move along in their startup cycle into the C or D rounds, founders may want to reward themselves by selling a small stake and making themselves and their families a bit more comfortable financially. Some companies can take years to reach an exit, and investors don’t want founders worrying about finances along the way, but they don’t want to take away the inner motivation to succeed either.
Dharmesh Thakker, general partner at Battery Ventures, a firm he calls stage agnostic, says you have to balance the needs of the companies and the individual founders when it comes to taking out some cash. “There’s a fine line between making the founders and the CEO motivated versus checked out,” he said.
At the same time, Thakker says that the time from inception to exit has gotten much longer, and it’s unfair to expect that the CEO incubating this idea has to wait nine or ten years for a big payout. “There are logical points to cash in some money along the way,” he says.
Determining when to do that is the tricky part, but Sim thinks it’s about aligning investor and founder interests, and that means keeping their eyes on the prize. He says that if this is a big idea, and the founder is struggling, he or she may be tempted to sell just to get some cash. By providing a way to sell a small percentage of the company to gain liquidity, while keeping their eyes focused on the bigger picture, everyone wins.
“I think that taking some money off the table is not a bad thing as these companies get bigger and bigger because it keeps them focused on the bigger goal. I think 10 years ago, this was seen as a negative, but now people have more empathy for founders, but also, I think in the long run that it’s better for everyone to go for something bigger,” Sim said.
Bicer says he warns his companies not to sell part of the company too soon, partly because it sends the wrong message, and like Sim, he wants the founders focused on building a bigger, more successful venture. If the company has that much potential, you have to let it grow before you take money out, but he sees some circumstances where it begins to be appropriate to take out money.
For starters, the company has reached a significant revenue milestone, and the founders want to reward themselves. In another scenario, the company only has so much equity, and if new investors are looking for more than is on the table, a CEO may offer a few percentage points of his or her equity to close the deal. In that case, it is more about the company than grabbing some money, necessarily, Bicer said. He also sees some sort of hardship, where the founders need money for a sick spouse or parent or some sort of family emergency. In these cases, he can see taking up to a few million, but not much more.
Thakker says the right time is usually around the C or D rounds with revenue in the $25 to $50 million range, but whatever the decision is, Bicer says this is something that would require more careful discussion than initial salaries.
When it comes to salary and taking cash out of your business, there are no hard and fast answers. Everyone wants to make a good living, but they should also be doing what’s best for the company and the investors who have helped it grow. That makes for some tough decisions sometimes, and while you shouldn’t live like a pauper to grow your company, neither should you live like a prince. It’s all a matter of understanding where the balance is, and finding a middle ground that’s best for everyone involved.
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