I worked 3 years at my last startup paying myself the absolute minimum possible. When the startup failed, this meant I didn't have any savings and immediately had to dive into consulting work. Part of the reason you take investors is to share the risk of the startup. In retrospect, I wish I'd paid myself more and hedged my bets a little better. Most startups fail leaving the founders burned out and broke. Now, I agree you shouldn't be making a fortune, but you don't want your personal finances to ever be a distraction from your business. You should be figuring out how to make your business successful, not worrying about finding money to eat or pay rent. You'll have plenty enough to stress over at work.
Norms are in a rapid state of flux on this. I was told by people I consider extraordinarily credible that in the last two years their best companies, whose angel rounds would have resembled Series A a few years back, offered founders salaries roughly approximating market value of eqivalently skilled engineers employed in the area. (i.e. $120k not $40k, in the Bay area.)
I will also report this observation: "You'll think this is crazy. I thought it was crazy. But the last REDACTED deals I did included a partial cash-out for the founders." (I.e. rather than selling 10% of the company for $800k deposited in the corporate account the deal was $600k for the Corp and a $100k check for each founder.)
A thought: Early partial cash-outs could in theory align founders' and investors' targets better. Once a founder gets enough money to get e.g. an okay apartment, he might be more willing to take riskier moves, target really big and avoid acqui-hire offers.
I'm not sure about in the US but in the UK that would be a tax efficient way to do it, as entrepreneurial capital gains are taxed at a much lower level than income.
My understanding is that this was not an achievable option in the solution set e.g. 2 years ago, but 2 years ago the solution set also didn't include "Waltz into a six figure job as a fresh graduate", "Bill mid five figures a month contracting for a funded startup", or "Get this deal offered by somebody on the other side of the street if I don't play ball with you because your startup will fill that round regardless and the only question is how much you extract from us to make it happen."
I'm totally agnostic on whether this is bubblicious or this is just the market finding a more accurate approximation of the true value of the time of anyone capable of launching a product people like, by the way.
1) Have an offering which is extraordinarily difficult to hire for at the moment which...
2) ... accelerates growth of the startup in ...
3) ... a demonstrable manner as evidenced by...
4) ... past successes which are identifiably associated with your name in...
5) ... the minds of people who have authority to cut checks.
That's really the most helpful answer I can give you. "Learn SEO, A/B testing, AdWords, viral acquisition, etc etc." is also as true as the last 47 times I said it but less complete as an answer. There exist few reliable ways to hire for these at the moment and they are, at least potentially, all worth $$$$$$. However, putting out your shingle doesn't get you $x0,000 on your first week.
Does that rule out almost all consumer market startups, because they aren't making anything and don't seem terribly interested in doing so ("We're focusing on growth")?
I don't know what to tell you about how to value labor in companies that don't generate revenue. They all have some metric by which they justify spending hundreds of thousands of dollars a quarter on salaries; presumably, the same metric applies to contract work?
Not "crazy". Crazy is multiple liquidation preferences, participating preferred, founders and early employees in 8-figure exits being unable to buy a house on what they actually get, and the fact that founders have to pay the VC's own legal fees. That shit is fucking nuts. Founders cashing out for less than the market value of the work they produced to get to a seed round? Not crazy.
That's crazy if it happens because VCs conceal the terms of their deal, or offer exploding deals that don't leave time for due diligence.
On the other hand, it's not crazy if the board knowingly accept those terms. If they do, it's because there weren't better terms to be had somewhere else. All of these terms have a dollar value. The more onerous the terms, the lower the implied valuation of the company.
I've never understood how cash outs are crazy. The founders own %100 of the stock before financing. After financing in both cases they own less than %100 of the stock. The company can sell stock and dilute the founders, which often makes economic sense. Or the company can sell stock and dilute the founders while the founders also sell some stock and turn it into cash.
The main argument for founders not being able to sell stock seems to be to keep the founders broke and thus more desperate to take investor terms.
I also think that all money is the same. $100k in sweat equity should be at least as valuable (if not more) than $100k in cash on loan from some teachers pension fund. Thus no liquidation preferences for investors or other special rights. You want my ownership which came from sweat to now suddenly start vesting? Fine, the shares you just bought with cash, start vesting too on the same schedule.
If anyone should have preferences, its those who put in the sweat, not the people who convinced a pension manager to let them invest their money.
Companies that are internet based don't need nearly as much money these days as they did in the past, meanwhile there's a lot of money chasing startups. Its about time that the terms got more equitable.
They're not "crazy", but under normal circumstances with an illiquid investment like a startup, an investor has no incentive to shell out money that's just going to go into the pocket of a founder. Ideally, an investor wants 100% of their investment to go towards increasing the value of the company.
If the company is (for instance) profitable and on a clear trajectory, the incentives are different; maybe the investor in that situation is totally fine paying to take over some of the exposure of the founders. But at an unproven company?
The words "should" and "argument" don't really come into it. Company financing is a market. Don't want to accept liquidation preferences? Fine; wait for the market to get so frothy that desperate investors will fund companies without them, or don't take investments.
Investors are savvy enough to realize that a large part of the value they bring is diversifying risk -- otherwise paying market salaries would be a point of contention. So the words "should" and "argument" really do enter into it. It's a debate over what is reasonable compensation for the equity on offer.
Considering that the market is generally non-frothy for companies without revenue and pretty damn frothy for those with cash and growth, this sort of thing is to be expected: there will always be companies that can't or don't take funding until the founders can insist on stronger terms.
It's almost not a moral issue (I pretty much don't care at all), but it's worth mentioning: both negotiating parties in a VC deal are presumed to be sophisticated, but there's a third party that isn't: the company employees. When founders of companies with many employees take cash-out financing, they are taking liquidity that their employees do not get to access, regardless of their vesting.
Posted mostly because I think Nirvana is dead on. There are lots of bootstrapped founders on HN and no reason for this community to perceive ridiculously onerous terms as social norms. The more people speak up against them, the more fair treatment all founders will get and the more pressure investors will face to get involved at an earlier stage.
Fully agree selective cash-outs can be ethically problematic if there are other stakeholders without the same option. That said, it's probably safe to assume the transfer is happening via a private equity sale rather than having the company issue new stock. And given the evidence this is a first round by a bootstrapped team it seems unlikely there are any outside equity holders. Maybe California is different, but the bootstrapped teams I've known don't tend to give out equity, in part because they only tend to hire when they can afford it, and in part because dealing with legal issues is a luxury before there are revenues.
Really depends on how big your angel round is. If you've raised 200k and you've got 3 founders who all require 60k salaries each you'll get a year of runway which isn't very long and that's not even taking into account the possibility or need for taking on more employees.
I recognised early on that 'end of runway' anxiety is very real for me, as it creeps up it really affects your decision making on product direction and how you spend your time.
I would prefer to work backwards and do whatever it takes to make the angel round cash last at least 24 months without sizeable revenue with the salary capped at somewhere between 60-70k if the angel round was big.
If that cuts your salary from 60k to 30k so be it, make the necessary adjustments, it might even include taking a part-time gig consulting/designing/selling or whatever it is your skillset allows you do. In the same vein that the cash you spend now is 'expensive', any cash you earn on the side is should be viewed as a necessary investment of time to help you reap the returns later if your startup salary can't stretch to cover all your costs.
Doubling your runway with part-time work only helps if it doesn't reduce your velocity by two or more, which it carries a high risk of doing.
That being the case, you're better off with the shorter runway in almost every respect (salary, time to market, quicker failure if it's going to tank anyway, less stress of juggling two jobs).
Then, you simply raised too little. I always thought that raising an angel round means "finally to be able to focus 100% on the start up". I'm not sure whether your investor would like it, if you spend your time doing other stuff than making this startup big (I sure wouldn't).
However you might not be able to wish more funding into existence. In that situation, the approach "we've got X money and we need Y runway so we're going to adjust our salaries accordingly" seems sensible. As per my other comment, totally agree that part time work is unlikely to be a good solution.
It's normal to take a livable salary. For the founders I've spoken to in the Bay Area the range is somewhere between 40-60k/year. The variance depends on your expense policy and how you've setup your work environment. For example if you expense all meals, coffee, and you live and work out of an apartment, it's easy to get by on less than 40k which can take care of things like car payments, student loans, etc.
I worked with a few venture firms last summer and got to meet a lot of the entrepreneurs they've funded. Most of them were working out of a angel or seed round and all were being paid.
The understanding is that you as the entrepreneur will put in 100% (more like 150%) of your effort & time into the company so, naturally, that eliminates other direct work for a source of income. The venture firm was providing them a salary but it was always explained as just enough to cover living expenses (rent, food, car, etc). In terms of numbers, this will obviously vary greatly depending on cost of living in your area but consider what would be just enough for a modest life.
Taking as little money as possible from the round for a salary is actually in the best interests of the entrepreneur as well. The money raised early on is very "expensive" in terms of equity given up for it. If you truly believe in your company and idea, you'll realize that the 40K or 60K salary you want now actually costs you $400K if/when you exit or IPO. Of course, this is just an sample, optimistic scenario but hopefully you see my point.
We pay ourselves $36k/yr. We wanted to do $24k, but our accountants said this would be an issue. $3k turns into $2.2k after taxes, UI, etc.
I think I want to bump this pretty soon; I spend more than my $2k/mo take-home on car payment + gas ($1k+), food ($500-$1k; I buy expensive/healthy groceries), exercise ($200-500/mo), (free rent), minimal toy/entertainment budget, etc. -- if I didn't have savings and credit, living on $2k/mo would be a big distraction.
Founders making $120-150k+/yr early seems like a distraction too, but I don't think $60-90k/yr is totally unreasonable in the Bay Area.
We were also told that paying any developer less than 82k/yr (who is not a founder) puts you at risk of him being considered a non exempt employee, and thus needing to pay overtime, etc.
in the USA if you do not pay more than $1600 per month salary for those who work overt time that computer engineer is an automatic non exempt employee by one particular Federal job act law and there are some more laws on top of that..
California is substantially more aggressive, hence the 82k amount. It varies based on job description. I didn't really dig deeper; this is what I pay out (excellent) law firm and accounting/hr firm for. I was totally unaware of any pay lower bounds other than hourly minimum wage before they brought it up.
I pay $42.50/mo for a 24h fitness membership, $80 per session 1-2 times per week with a personal trainer (same person the CEO of reddit uses, heh). I could probably do without the trainer but it has been a good investment so far.
I would like to join a rock climbing gym, maybe do crossfit, and krav magazine at some point, too.
I probably expend $250++ per month in ammunition, too, but I am drawing down a stockpile so I don't have to move it.
Same here at picplum. Enough to not have to worry so much about personal finances that it distracts you from building a company. My cofounder once said (half-jokingly), if you are a founder paying yourself enough that you can save money each month, you're doing it wrong. I'll have my out-of-state student loans forever..
As an other extreme - for my first startup, I raised $15k and only used up $13k over a year and a half. Though at that time my blog was a small stream of passive income.
You can't live without a salary, and you can't be productive unless you're alive. Putting money into a start up and expecting the founders to not take a salary would be like putting money into a bakery and expecting the owners not to buy flour.
As far as what is acceptable, it depends on your market, the idea, the investors, and the founders. I've seen as low as 40k (approx 50% market value for the founders if they were employees) and higher than 100k.
If you can swing it, don't take a salary at all. You'll thank yourself later.
Otherwise, anything between $50k-$90k (Bay Area) is reasonable depending on founders' personal situations. My current company has raised <$1m and there hasn't been any pushback from investors so far.
I'm sorry, but this is terrible advice. Unless you have considerable savings you should always take a salary.
When I was 27 I raised 1mil in an angel round. I was just out of college (I'm a vet so my college was delayed while I served) and was flat broke. I was 'advised' to take a minimal salary and proceeded to bring on 12 employees all who made most money that I.
2 years later when we ran out of money I had zero dollars in the bank (zero). I had no savings, I had no safety net. I was F'd. I spent 6 months homeless traveling with a circus to save enough money to move back to Chicago.
It is my personal advice that you take a minimum salary, rent, food, bills, and have the company pay you $500/month into a savings account that vests when you leave the company. Doing this one thing will give you some peace of mind that when this wonderful ride comes to an end that you will at least have some money in the bank to make your way again.
I am all for ramen-rich I think it is actually a good thing but I am here to tell you that if you don't take care of yourself financially you are setting yourself up for huge failure if/when the money goes away.
Personally, I would like ALL angels, VC's and incubators offer young entrepreneurs these 'bronze parachutes'. You don't have to pay them much right now but I do feel you need to make sure they, at the very least, don't crash and burn if the second round of funding doesn't come through.
If you live in a place like the SF Bay area (or anywhere with a state income tax), take as little as possible for your salary. 60k max, and if possible even less than that because whatever you take as salary you'll be losing 30%-40% of it immediately (which could better be used for your business).
You can expense your rent out of your company since you will likely work out of a home office. Car and (maybe) meals as well.
I would not recommend expensing rent. The best you can legally* do in the eyes of the IRS is get a smallish deduction/credit (I forget which) for however many square feet of your home are used solely as a workspace.
You can expense PART of your rent and utilities, completely legitimately, if you have a home office and use your home office solely for your business. You just calculate how much % of your home is dedicated toward your work, and deduct as appropriate.
You can expense your car if it is a business-only vehicle. You can also deduct business-related meals.
All of those things are completely within the bounds of the law.
There are some really good reasons to at least pay minimum wage to founders, including that it's really hard to get them health insurance if you don't. And, it's typically better to get enrolled in a health insurance plan early (when there are only a couple of employees) than later.
And there are lots of reasons (already mentioned in other comments) to pay them better than minimum wage.
Yes. I think worrying about how to pay your rent takes away from the value you can be adding to the company. I also would add, that I have seen my friends startup in which 1 founder took nothing, cause he was covered, another took about 60k, and the third took abut more cause he had 2 kids.
They should, and if one chooses not to take a salary because he can afford it, he should be getting equivalent equity.
I don't know why this "garage myth" gets so much romance. It works for rich kids who can fall back on their parents, for students, extremely well-established people who have lots of savings and connections to fall back on, and for people who can time-travel back to the time when rents were reasonable in Silicon Valley, Boston and New York. In practice, you cannot have long-standing (over 6 months) financial pressure and keep up the level of job performance that a startup demands. It does not work that way.
