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How much should a start-up CEO make?

I was asked this question at a talk I gave to the recently graduated TechStars Boulder class and thought it deserved wider dissemination than to just the group in the room at the time. This is a loaded question and while there are many variations I do actually think there are some general norms that are followed in most cases. So here goes with some guiding principals and then below that some numbers. Keep in mind that I’m talking about Seed and Series A stage businesses.

- Pay yourself as little as you can. Cliché, of course, but true. At the seed stage the modest amount of money you have raised is best spent on product and attracting initial customers than it is on paying yourself. This advice is generally true across the organization. It’s also true that generally founders and early employees own a large portion of the business at this stage and as a result, business progress at this stage disproportionately benefits founders. So the trade-off is most beneficial to the founders and employees – including the CEO.
- Don’t starve. There’s no sense in paying yourself so little that you can’t live or will be overly stressed about paying your bills. Seed stage investors are sympathetic to varying life conditions and you don’t need to tighten the belt so much that it ends up distracting you from your focus on building a great business. Some founders are happy to live in their parent’s basement and take almost no money; others have families or student loans, etc. and can’t work for minimum wage.
- Have an open conversation with your investors about what you need. As is typically the case, you should be as transparent as you can with your investors on this topic and have a open dialogue about compensation.
- Map out a plan. As part of this open conversation be clear about what your expectations are going forward and what milestones might trigger incremental compensation (raising a larger round, getting product into the market, hitting a certain revenue target, etc.).

So what does this all translate to? I think market (and this seems to be true whether you’re in San Francisco, New York, Boulder or somewhere else) is that companies that have raised $1M or less tend to pay their CEO between $75k and $125k (skewed very much to the low end of that scale – companies that have raised less than $500k tend to top out at $75k for CEO comp). Companies that have raised between $1M and about $2.5M tend to pay their CEOs around $125k. Companies who have raised above that amount skew up from there. Not science, but these observations are based on a sample size in the many hundreds.

August 22nd, 2012     Categories: Company Creation, Fundraising, Uncategorized     Tags: , ,
  • austinknight01

    a simple, yet incredibly helpful post. i have always wondered about what is “normal,” especially when helping some friends plan out new businesses. thanks, seth!

    • http://www.sethlevine.com sethlevine

      Thanks Austin!

  • http://seanstoner.com maslowbeer

    Seth – great information. My next question is how do company revenues impact this? For example, let’s say you’ve raised $500k and after 12-18 months the company is doing $1MM revenues annualized with 15% EBITDA, and is on track to double that or more the following year, with an employee count hovering around 20. How does executive compensation get adjusted? Also, how to bonuses and options plans impact the compensation mix? Quasi-related question: how much equity after 24 months of operations should be set aside for an ESOP/employee option pool? 5%? 10%? Thanks!

    • http://www.sethlevine.com sethlevine

      Definitely. This analysis assumes 1) little or no revenue and 2) no profit. Once you hit some revenue scale and certainly once you’re profitable the numbers move up (and good for you if you can do it on a small amount of investment). Virtually none of our portfolio companies have meaningful bonus plans until they are profitable.

      • NMSBC

        The other dimension HAS to be that the quality of life issue (that you DO point out in your post).

        The point is: if you want the entrepreneur to be a marathon runner then don’t create conditions which fatigue him / her (financially, emotionally, family-wise) quickly. Otherwise your investment will fail. The entrepreneur needs to be able to live for years on end on the salary / bonus and in reasonable comfort.
        I suspect you know this well but worth repeating.

        • http://www.twitter.com/rohamg Roham Gharegozlou

          seth is qualifying his posts very well by “funds raised”. by definition if the entrepreneur has raised less than $500k he should be sprinting – or hunkering down for a long winter. either way the money’s best spent elsewhere.

  • Ricky

    How much should a VC make in salary? I say $75 is fine, because they should be in the same frame of mind as their CEOS. And because they have a balanced portfolio, surely one of them will hit. They shouldn’t be overly stressed, but clearly $75 is all they should need.

    • http://www.sethlevine.com sethlevine

      Should I also then get a prorated equivalent of a founders share in every company (outside of the ownership of the investment that we buy)? See my comments to Steven below. Given the tone of your comment I don’t expect you to agree, but there is more alignment than you realize – as companies raise more money and grow profitable CEO (and comp in general) increases as well.

    • NMSBC

      I agree with you, Ricky! At the macro level, I think that Seth is basically right in that startups should work hard to cut burn rate. However my big beef is that VC’s rarely follow this advice themselves. It’s easy to dish out such advice. Very hard to follow it.

      How many of you have visited some of the VC offices on Sandhill Road and marveled at the plush interiors? Why? Does that make them a better VC? Why not spend that money instead on resources that they can provide their startups to improve chances of success?

      The typical VC advice appears to be: cut burn rate, now cut some more and keep cutting – make the family sacrifice for years on end as you work 7×24 on a startup that by definition is risky while we (VC’s) take $1M annual salary while diversifying risk across many startups.

      • http://www.sethlevine.com sethlevine

        I don’t expect that I’m going to win this argument (I’m probably just digging myself into a deeper hole), nor frankly can I disagree that some of the VC offices around are overly lavish.

        But hear this one idea out. I started a business (a VC fund) from scratch. My partners and I took no salary from Foundry while we raised our fund and put money into funding the business. With no guarantee that we’d successfully raise our fund (this was 2007 – very few funds got raised that year). We did and now run a small business (we have 7 employees plus the four of us). And that business is profitable and that profit is what we use to pay ourselves.

        Can you enlighten me a bit on why you (and others) seem so frustrated with the whole arrangement. Do you feel like this is all rigged in our favor (i.e., businesses *need* to raise capital and as soon as they do they’ve somehow written themselves into a bad deal?)?

        Here’s a post I wrote on why many companies should not take venture money: http://www.sethlevine.com/wp/2005/06/thinking-of-taking-venture-capital-dont

        • http://twitter.com/NickC1188 Nicholas M. Cummings

          You should pay yourself market value. If you keep picking winners, then you also deserve wealth proportionate to the value you created, no?

          It’s tough because the two things are not entirely mutually inclusive, but I have to imagine the best seed/angel investors are the ones who help their entrepreneurs the most. Conversely, the best investors are the ones who pick entrepreneurs who need the least help, but they still needed funding, so the investor made the right call.

          So maybe at first bootstrapping as a VC is important, but with enough success everything should be commensurate, including facilities and salaries.

        • http://www.justanentrepreneur.com Philip Sugar

          Raising money is the start not the end for the entrepreneur, all entrepreneurs go through the same process. You are saying its the end for a VC.

  • Ricky

    I forgot to say thank you to Seth for being such a mensch and helping out the world with his wisdom on how to make money of the sweat and hardwork and risks that other people make. Thanks Seth for an insightful post!

  • http://www.facebook.com/brent.burghdorf Brent Burghdorf

    Awesome post, thanks for sharing!

  • http://www.facebook.com/michael.sinsheimer Michael Sinsheimer

    A CEO of a start-up really isn’t involved for the salary although obviously bill-paying shouldn’t be stressful. Low burn rates are critical in the early stages of an enterprise and should be focused on product development and building the customer base. If money is spent on extraneous things, burn rate will go up and likelihood of success will go down. Good for entrepreneurs to build validation themselves and be able to grow organically. VC money should be used for scale and not to seed an enterprise. Today, it’s easier to boot strap in the beginning and then fund with alternatives to VC money until scaling is required.

  • http://twitter.com/papamiltiadisk Konstantinos P

    How about the rest of the team, CTO, Head of Product, etc? What happens with co-founders (one is the CEO the other the CTO)?

    • http://www.sethlevine.com sethlevine

      When a company has limited (really limited) cash, all positions skew down on the pay-scale. Of course the trade off is equity (and finding people that are passionate about what the company is doing). If they are true co-founders (and have equity commiserate to that) they’re on a similar scale. If they’re early employees they’ll still be ~ 30% down from market, but depending on circumstances may be a bit higher than the CEO pay.

      • http://www.charliecrystle.com Charlie Crystle

        commensurate, not commiserate, but that can work too if the equity is low enough :)

        • http://www.sethlevine.com sethlevine

          just because this comment is so funny i’m going to leave my embarrassing grammatical error alone. well played!

          • http://www.charliecrystle.com Charlie Crystle

            I suffer from years of work as a proofreader. Can’t help myself.

    • http://www.sethlevine.com sethlevine

      Agreed. I think there are many benefits to a CEO (founding team) tightening the belt as much as possible. Especially if they’re working on a convertible (because the price will be determined by the next round, which will be determined by the progress that the company makes). It’s basically an investment in the business, but since they own the majority of the company they’re the major beneficiaries of that investment.

  • http://www.twitter.com/stevenkane Steven Kane

    Great advice.

    If only VCs themselves played by these rules!

    • http://www.sethlevine.com sethlevine

      They actually do to some extent (although to be very very clear, most VCs who have raised funds are perfectly well paid). We spent a year raising our first Foundry fund (more than that if you include the time we spent preparing the PPM, etc). During that time my salary from Foundry was $0. We also funded the legal, travel and incorporation costs. Many VCs who have raised a first, smaller fund (I’m making an analogy to a seed round here) take pretty modest salaries (in the range I’m suggesting for CEOs and founders). If they later raise a larger fund they increase their take-home.

      • http://www.charliecrystle.com Charlie Crystle

        right, but I’m guessing all of you had significant savings/earnings from other activities prior?

        • http://www.sethlevine.com sethlevine

          we all made it work, but speaking for myself, i didn’t have a nest egg and has Foundry not come together i would have lost a sizable portion of my savings (i.e., most of it).

          • http://www.charliecrystle.com Charlie Crystle

            been there :) glad it’s worked out!

  • http://twitter.com/NickC1188 Nicholas M. Cummings

    If I get funded eventually, I imagine paying myself minimum wage to make the burn rate just a little lower, or to afford another employee. I like that you support living comfortably enough to truly focus on your work. Maslow’s pyramid.

  • http://www.facebook.com/castro.alexander Alex Castro

    I generally agree that paying yourself as little as you can in the early days. If you own a significant chunk of equity then you want to use the capital to increase the value of your equity. This becomes challenging for slightly older founders who might have families and live in the bay area (very expensive rent/housing + childcare). There needs to be a balance between investing in the company and ensuring the founder isn’t stressed about his kids and/or mortgage (which will likely impact risk taking and business decisions in a negative way).

  • Ciprian Patrulescu

    Beans and rice five days a week

  • http://www.facebook.com/richard.rodman.71 Richard Rodman

    This is such a rough question due to all the variables of both the entrepreneur and investor.

  • http://twitter.com/kraemer_tweets Andreas Kraemer

    This is a great post. Very helpful. As often is the case, companies initially do not have employees, rather they pay the team as consultants. When do you typically see the switch made from consultant to employee? Series A? Do the numbers in your blog include the 30-35% overhead for taxes, social security etc?

    • http://www.sethlevine.com sethlevine

      It really varies on funding, Andreas (whether people start out as consultants vs. employees). Typically the switch is made (if it needs to be made) when there’s money available to actually pay people some kind of regular salary. The numbers in my post do not include overhead for benefits, taxes, etc.

      • http://twitter.com/kraemer_tweets Andreas Kraemer

        Thanks for the answer, Seth!

  • http://www.justanentrepreneur.com Philip Sugar

    This is a great post. I think your numbers are right, and I love that you give them.

    There will always be some conflict about VC salaries versus Entrepreneur salaries because of Management Fees. It is what it is, because those fees allow one party to really make some good coin without being successful, but guess what?? Too bad. It is what it is.

    We both would agree that raising money is not the definition of success. Its returning that box of money in a much much bigger box. Therefore anybody that has a problem with carry is an idiot.

    However, because of management fees a partner that has allocated approximately $50mm-$100mm under her management gets $1mm-$2mm a year in management fees. Figure that each partner has a staff of 2 and a bit of overhead and it doesn’t take a genius to figure out that is some coin $500k to $1.5mm a year. Understand the partner has not been successful yet, they could fail to return a penny. Also understand with that coin, people spend it. The entrepreneur sees the cars, the houses, the vacations.

    So when somebody is pushing for a sub $100k salary which they should because if you were to pay yourself VC type salaries you would burn up your money the “management fees” (in quotes but its an analogy) would be in the high double digit range of what you raised.

    Again it is what it is and if you don’t like it don’t play the game, just understand its a bit awkward when somebody is beating you down and being sanctimonious about it on salary that makes five to ten times what you do, again you might argue that you don’t have the upside, but that is offset by diversification. In any case its the LP’s issue. You’d be an idiot not to charge what the LPs expect to pay. It would be like a pro athlete not taking what they’re worth, but you can’t sit there and say “I have to feed my family”, because that just doesn’t fly. So when I’ve hear: “I have a fiduciary responsibility, you need skin in the game, etc” I call bullshit. Just say that’s the way it is.

    • http://www.sethlevine.com sethlevine

      Phillip – I think of management fees as a loan against cary (so raising money isn’t the end – it’s returning a multiple of the fund). That said, recognize that your point is correct – most VCs pay them selves pretty well and that fee income is essentially guaranteed (following my example before, the loan is non-recourse). Now, there are plenty of VCs who start with smaller funds and pay themselves much less. And/or fundraise for their first fund for months or a year w/o taking any salary (the “startup phases”). Years later when they’ve shown themselves to be great investors they raise larger funds, increase “revenue” and pay themselves more. I’m rationalizing here, but there is some analogy to building a business that becomes very profitable and upping the team’s pay. But your main point is simply unavoidable. Most VCs make more than the portfolio execs they work with.

      • http://www.justanentrepreneur.com Philip Sugar

        No tears, it is what it is. Understand that almost all (not just first timers) entrepreneurs “fundraise” we call it. building MVP for months or a year w/o any salary. Then they get to make $75k on the first round, and their loan is recourse it’s called preferred shares.

        Again, no issue, its only one when people don’t call it what it is. Its like if I say: “I’m asking somebody to leave” Bullshit. I’m not asking, nope you’re off the boat. Your last sentence is spot on and doesn’t need to be apologized for.

        Same as “its a marriage with no divorce”. Total crap: http://justanentrepreneur.com/?p=100

        Best regards!

      • http://twitter.com/BWEnwall Tim Enwall

        And the successful portfolio execs make far more than the partner upon exec…. Just sayin’…

  • Guest

    Why would any professional work for such peanuts, and subsidize investors?

    Once investors are in, employees should get paid market rates. That includes the founder and the CEO. If investors expect employees to subsidize them by taking below-market wages, then that should be reflected in the deal. Frankly, the CEO should find enough money to pay himself properly, and the rest of his team too.

    Stock in a startup is a lottery ticket. You can easily work three or four years and get zero outside of your paycheck. So get paid!

    • http://www.sethlevine.com sethlevine

      The concept isn’t that simple. Say you raise $250k in a note with a $5M cap. As a founder, you still own the vast majority of the company, so while some “benefit” goes to your investors the founders are still the largest beneficiary. I think most founders actually calculate the trade-off (which they should). They’ve effectively investing the delta between what their market salary might be and whatever draw their actually taking. This happens across the life of a company. Many businesses make offers with a range of salary and equity and let prospective employees decide which is most important to them. To some extent this is no different. And certainly I’ve seen founders decide to raise less money, take a smaller salary to enable that, with the goal of making more progress on less money so their next round is less dilutive. Like I said, it’s a complicated equation.

    • http://twitter.com/BWEnwall Tim Enwall

      “Why would any professional work for such peanuts?”

      Well… most people who found companies, while 100% professional in their approach, aren’t “professionals” used in the sense above. Seth points out the fact that almost all founders are more investors than they are workers. So, true, if you work for a profitable, large company where you’re not a material investor — no “professional” would take “such peanuts”. That’s why it’s called market rate.

      If you’re fortunate enough to be able to talk investors out of enough cash to pay you market rate when you have a powerpoint AND you are a material investor, then you are part of the truly unique.

  • John T.

    Thanks so much for this helpful post Seth. I was wondering if you had any thoughts, based on your experience, about overall equity percentages that might accompany this sort of salary range? Thanks in advance.

    • http://www.sethlevine.com sethlevine

      Typically the CEO is a founder, so their ownership is based on the fact that they started the business (and that ownership % varies with how many co-founders they had). If you bring in a CEO at an early stage (say $1M in funding or less) you should expect to give them a founders share (and treat them as a founder). Depends a bit on how many founders you have but probably 15% or even higher.

      • John T.

        Thank you very much Seth! I really appreciate you sharing your perspective.

  • http://www.facebook.com/jack.jobe Jack Jobe

    Seth – I’m an Aurora lad of 67+ and I have started a business. With no ‘business background’, I don’t know the language of finance & investors. Successful Giants in their field, master the languaging of that topic. Do you know of a ‘free’ site that teaches the Basic of ‘what will an Investor ask me?’ Survivor Jack, Inc.

    • http://www.sethlevine.com sethlevine

      Hi Jack. I applaud your taking the entrepreneurial leap. I’d suggest checking out http://www.askthevc.com as well as picking up a copy of Venture Deals (written by my partners Brad Feld and Jason Mendelson).

      sent from my iphone-sorry for any typos

  • http://twitter.com/jimfranklin Jim Franklin

    These scales haven’t changed in 15 years. So when you here about exec comp increasing, I don’t think that has been the case at early stage, venture-backed companies (and appropriately so.)