“If you’re the founder of a seed-stage [company and] you’re worried about your electricity staying on this month, then your salary is too low. If you’re saving $10,000/mo, then your salary is probably higher than necessary,” investor Leo Polovets wrote in a Twitter thread.
This tweet is just one of many in a now burgeoning conversation about how founder pay needs to change. The startup and investor communities are beginning to realize that many founders can’t go without pay for months.
Founders of SaaS startups are at an advantage in this scenario as the sector now has many companies generating revenue almost from day one, sometimes without needing to raise any funding at all.
However, the success still doesn’t tell founders how much to pay themselves, or what others are doing. To help with this, we’ve gathered insights from founders and VCs and narrowed down the most important factors and benchmarks to guide your decision.
A framework for compensation
Founder compensation is often referred to as a “founder salary,” but anchoring the conversation around the salary framework can create the wrong expectation. For example, you could try to establish a correlation between what you plan to pay yourself and your past or current value on the job market. Instead, the data we gathered indicates that founders typically take a pay cut from their previous salaries.
Chris Sosnowski is an interesting example: Before he “took the plunge” at the beginning of 2020 to work full time on his water data management startup Waterly, he used to earn “well over” $100,000. But he says his previous salary wasn’t a key factor when he set his compensation. “I decided to pay myself based on what I thought it would take to keep the company running,” he wrote to TechCrunch.
That brings to mind deferred compensation, which will be familiar to anyone who owns equity. Having put his own money into the company and owning the majority of it, Sosnowski is set to be compensated for his efforts if all goes well. “For the record, I do hope to pay myself back [a] salary for the year or so [it is] reduced like this,” he said.
Like many founders, his current compensation is below his market rate. After a few months without pay, Sosnowski started paying himself the equivalent of $10 per hour, before raising that amount to $14 in 2021. “I wanted to start a 401(k) for myself and future employees, and my net take-home pay would have been negative,” he said.
Besides his willingness to talk openly and share numbers, we’re also highlighting Sosnowski’s case because he isn’t a single 20-something with few responsibilities — rather, he is married with three children. “We had saved money up for over a year before we cut out my pay,” he said. Despite these savings, he still had to make sacrifices. “I can live my life without entertainment … so that’s what we did for 2020.”
Sosnowski cut out the superfluous but not the essential, and his financial planning sounds reasonable while not being overly risky. This is a far cry from some of the tone-deaf or ill-advised recommendations that have circulated over the years, like the recurring talk of “maxing out credit cards.”
Indeed, putting yourself in a tough spot is bad for business. Studies suggest that financial worries impair decision-making, a founder’s most important responsibility.
SaaS benchmarks
German VC Christoph Janz came up with a useful calculator for helping SaaS founders decide how much to pay themselves. The accompanying blog post explains the key factors that Janz considered: Stage, the size of your family and location.
The locations include Berlin, San Francisco, Paris and London as default, with Berlin as the base level, but you can adapt it to your own needs. For instance, Iranian entrepreneur Nasser Ghanemzadeh recently noted that on Janz’s spreadsheet, he would give Tehran a 0.4 coefficient compared to Berlin. You can use resources such as Numbeo to compare the estimated cost of living for your city and get a corresponding coefficient.
One of the best parts about Janz’s calculator is its ability to combine the different elements. For instance, it will suggest a salary of $60,000 for the founder of a pre-revenue SaaS startup living in Berlin with one child, but that figure jumps to $207,000 for the CEO of a San Francisco startup that has $10 million in annual recurring revenue (ARR) who has raised a Series C above $25 million and doesn’t have any children.
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As a B2B SaaS investor, Janz knows that a company’s stage can be measured in many ways, which is why he considers the stage of funding as well as ARR or run-rate revenues. Janz feels the founder of a startup with ARR above $2 million could consider themselves in the same financial position as a someone whose startup has raised a Series A of more than $5 million. This can be helpful if your company is bootstrapped, or if the median size of your market differs from these reference points.
If you are looking for data points for even later stages, you may also want to check out this 2019 Crunchbase post by Sammy Abdullah on CEO salary at IPO time. However, not all of these CEOs are founders or focusing on SaaS, so it’s worth taking a closer look at some of them. For instance, Zuora co-founder CEO Tien Tzuo‘s compensation was $300,000 when the company filed its S-1 in 2018, not including another $102,060 in bonuses or other compensation.
Despite the median salary of $276,000 outlined in the post, outliers often attract attention. Abdullah emphasizes that “some of the best CEOs take the lowest salaries.” A VC at Blossom Street Ventures, his thinking reflects what you will often hear from investors: “[Venture capitalists] would much rather back a scrappy, frugal founder than one that spends gratuitously and the CEO salary tells you a lot about the CEO’s mantra.”
VC talk
It’s no accident that a lot of the writing on founder pay comes from VCs. They may not all agree, but the predominant thinking can be summed up by Peter Thiel’s declaration at TechCrunch50 in 2008:
The lower the CEO salary, the more likely [the startup] is to succeed.
The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.
In practice we have found that if you only ask one question, ask that.
However, we are seeing an evolution on this point for a variety of reasons. One of them may be an increased awareness that personal situations vary greatly, and that being unable to forgo pay isn’t automatically a sign of lack of commitment. “[F]ounder salary is a real issue that gets in the way of parents and anyone not in their 20s starting up,” New York-based VC Charlie O’Donnell wrote on Twitter. “TLDR: You don’t need to wear a barrel to start a company.”
Perhaps more pragmatically, the VC community’s newfound flexibility came about as they increasingly need to compete for deals. As our very own Danny Crichton pointed out in an episode of the Equity podcast, “There is just not a lot of supply for founders, so the old rule that post-Series A, a founder should not take more than a salary of [$125,000 or $150,000] … is dead.”
https://techcrunch.com/2020/07/31/the-iron-rule-of-founder-compensation-is-dead/
It’s not just VCs competing against each other. Founders have more options than they used to, especially in SaaS. For instance, solid metrics can unlock access to revenue-based financing (RBI) or the hybrid category of “flexible VC.” This can be a way to escape VC’s terms, but not necessarily to step away from all safeguards. “To avoid a situation where a founder pays themselves an enormous salary and never takes dividends, we determine a fair salary cap with the founders,” wrote TinySeed, an accelerator and fund for bootstrapped SaaS startups.
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All in all, there’s a sense that founders are placing less importance on what VCs think. That was the case for edtech startup ClassHook CEO Alexander Deeb — his financial model ahead of fundraising includes how much he and his co-founder will each pay themselves — $60,000 — but VCs’ opinions weren’t part of the equation. “If we have the right investors, they would trust that we’ve made the right decision for ourselves,” he said.
Back to fundamentals
ClassHook’s decision process reflects what many founders are going through. “When deciding how much to pay ourselves, we researched the average founder salary online and factored in what we’d each need to survive somewhat comfortably,” Deeb said. “We’re fine being a bit uncomfortable, but didn’t want it to affect our work. We also feel we can live comfortably on a lower salary but wanted to overestimate in our budget. Any extra leftover for the company is always a plus. We want to invest as much as we can into the company’s growth.”
This is still theoretical at this point because Deeb and his co-founder aren’t paying themselves yet. “We started seriously working on the idea for ClassHook in November 2014 and formally launched in February 2016.” They were both working on it part time, but Deeb left his full-time job in May 2019 to work on the company while tapping into his savings. “I’ve also moved to reduce expenses this coming year and am doing more cooking to live healthier and more frugally,” he said.
VCs used to be wary of startup founders who also held down other jobs to pay the bills, but it no longer seems to be the case. Some investors even recommend it. “Don’t quit your job until you’ve raised,” O’Donnell wrote in a blog post expanding on his tweet. “Sometimes, it’s not about having a high salary, but just having any salary that makes the difference for a founder. I can’t tell you how many times people quit their jobs first and then try to go fundraise, assuming you need to be full time on your company to raise. This is simply not true. … I would never fault a team for needing to keep working until they get a paycheck post a raise.”
If you want to jump in full time before raising money, you might want to use the reference point that Indianapolis-based entrepreneur Wes Winham suggested on Twitter. “Heuristic I like is to first ensure you have two years of personal runway (including what you can afford to pay yourself) before jumping in full time. That’s what I did for my SaaS company and it worked.” The company in question is the technical assessment platform Woven, for which he used the runway of selling a previous startup, PolicyStat.
“I did [approximately] 10 customer discovery interviews around an idea. Then got my team into a good spot after the PolicyStat sale, then did the math to make sure I had enough personal cash runway to make it two years with no salary. I used Jason Lemkin’s guidelines to arrive at the two-year number, Winham said, a reference to the SaaStr founder’s recommendation that “if you’re going to do a SaaS startup … you have to give it 24 months.”
Once the initial two years had gone by, Winham started paying himself a $60,000 salary. “Then after we raised our seed round, my co-founders and I bumped ourselves up to $105,000/year,” he told TechCrunch.
Milestones
Raising a seed or pre-seed round is a common milestone when founders start paying themselves. Using data from “hundreds of U.K. funding rounds” on its platform, British legal tech startup SeedLegals reported in a 2019 blog post that around half of founders raising rounds of £150,000 or below get a salary, compared to three-quarters of those who have raised rounds between £150,000 and £1 million (approximately $211,000 to $1.41 million). Its data also shows a correlation with company valuation: “For every £100,000 ($141,000) increase in valuation, founder salary tends to increase by roughly £1,300 ($1,834) per year.”
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Thinking in terms of milestones can be helpful, O’Donnell said.
“If you’re really confident in yourself, build in a step function of salary increases once you hit certain goals — a product launch, first revenue, etc. This way, you can address the motivation question and no one feels like the company is spending too much relative to the risk left on the table.”
Ultimately, a good test is to ask how you’ll feel if your startup fails: Will you wonder if your salary contributed to its fall? Or will you regret sacrificing more than you can recover? It is worth thinking about it, because no matter how hard you try, your startup might not succeed, so you’ll want to make sure you’ll be OK in the long term with whatever number you picked.
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