How founders decide what they should get paid

Whether in a downturn or when things are flush, the compensation that startup founders give themselves always sends some kind of message.

The first thing Karen Cahn usually says to the founder of a new startup is "Congratulations, that's so great." Then Cahn, who runs a platform that helps fund startups, quickly gets personal: "Do you have savings? Are you wealthy? Are you keeping your day job?" It all leads to an important but sometimes awkward question for people starting businesses now: What are you going to pay yourself?

It's an especially challenging question as startups navigate a moment of layoffs, limited funding and uncertainty after months of riding high. After all, money founders pay themselves is money that isn't going back to the company to pay for things such as staff salaries and rent.

"Every founder is trying to make their cash last longer," said Jenny Lefcourt, a partner at Freestyle, a venture capital firm that typically invests in seed stage companies.

After a company in her portfolio recently laid off some employees, she said she was impressed and surprised to see that the founders volunteered to reduce their pay more significantly than did the remaining staff.

To her, that sent the message "We care, we're believers."

But founder pay - whether in a downturn or when things are flush - always sends some kind of message.

Fern Mandelbaum, a managing director of venture investing at the Emerson Collective, a social good organisation, and a lecturer at the Stanford Graduate School of Business, said that especially in this uncertain funding environment, it is crucial that founders consider whether their own pay is fair and equitable. "If you're getting an above-market salary, does it send a message to take a cut? 100 per cent," she said.

One school of thought on founder pay - call it the ramen noodle camp - errs on the side of extreme frugality. If you have only so much runway and want your company to be a success, maybe you should pay yourself a bare minimum, or even not pay yourself at all for a few years.

"There's sort of this game of chicken that you're playing as a founder," said Ethan Mollick, an associate professor at the Wharton School of the University of Pennsylvania, who studies entrepreneurship. "A lot of the reason why founder salaries are low is the symbolic importance of taking a low salary. It's kind of ritualistic at this point."

Others suggest that a salary closer to market rates for mid-level tech workers is appropriate and that founders at early-stage companies should be able to devote their energies to building the company without worrying about basic necessities. "You must take care of your needs," Mandelbaum said, even if you're optimistic about how the company will grow.

Lefcourt said founders always want to show that they are there for the important milestones, such as an initial public offering or a sale to a large firm. That doesn't mean going without until then. "You can show that you're here for the big win and still be able to eat and pay rent and not wake up in the middle of the night scared," she said.

Although some founders think paying themselves poorly sets a worthy example, others actually worry that the perception of drawing a low salary could backfire.

Cahn, who said she had built up her personal wealth in her tech career, didn't want to pay herself a salary when she founded IFundWomen, her startup platform. She wanted to put that money into hiring her team. But in 2019, she started paying herself a salary of US$75,000, which she reduced to US$45,000 during the pandemic. (She has since reinvested that money into product development.) "I only did it to actually show investors that this wasn't just some rich lady's hobby," she said. "Oftentimes, that's how investors will look at women who are starting businesses and that are not paying themselves."

A founder is generally not the only one deciding what he or she will be paid. The board and investors may weigh in, too. According to an analysis from Carta, a company that collects and analyses data on startups' financials, the median salary for a chief executive officer (CEO) at a startup with a valuation between US$1 million and US$10 million is about US$162,000. (A spokesperson for Carta noted that startups' CEOs are often, but not always, founders.)

A 2021 survey from Pilot, an accounting firm that focuses on startups, showed that founders of companies that had raised US$1-5 million paid themselves an average of US$96,700. Factors such as a company's size, stage, location and sector can all influence what founders pay themselves, as can the technical background of the founder.

Companies led by women, especially women of colour, often struggle to raise venture capital funding, which in turn affects how much founders can afford to pay themselves.

Maria Colacurcio, CEO of Syndio, a workplace equity platform, said it is important for company leaders to be transparent about salaries, and ensure that all employees are paid at market rate. Her perspective on low founder pay was hard-earned from when she helped found SmartSheet, a software company, more than a decade ago.

"We all took really, really small salaries to optimise the runway for the company," she said. At Syndio, she tried a different approach: Although her leadership took below-market salaries, "they were not as drastically low as the choices we made when we co-founded SmartSheet," she said. She added that it was a good idea for founders and startup executives to simply ask their investors about what an appropriate salary might be. (Mandelbaum is among her investors.) She said moments of economic uncertainty can exacerbate inequities.

Lefcourt said that, in general, she preferred to see founders use some of their funding to pay themselves a comfortable salary. An amount such as US$100,000, which is within the US$80,000-180,000 range she deems appropriate in most cases, would probably not "move the needle" on a company's overall financials, she said. That amount could move the needle on a founder's quality of life, however.

Mariam Nusrat, founder of Breshna, a gaming company, said she believed "there's an opportunity cost to every dollar" that comes from investors. At a conference this year, she moved hotel rooms every night to save money. She had recently received investor funding and she thought "this US$100 could go into more Twitter ads or something."

Reflecting on venture capitalists' role, Mandelbaum said: "I think we have a responsibility to make sure that people are paid fairly. I really do." She added: "I think it's also our responsibility to make sure that companies, regardless of who the founder is, are being financed at the same level so then we can actually pay people what they deserve to be paid."

As tech companies face layoffs - last month Cameo, a celebrity shoutout app, and On Deck, a career services company, were among those that cut at least 20 per cent of their staffs - and valuations plummet, it is possible that some founders will feel pressure to reduce their own pay.

"Maybe eating ramen in a small apartment will feel more normalised again," Lefcourt said, quickly adding, "I'm not recommending it." NYTIMES



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