Ask Andy: How much money should startup founders pay themselves?

How much should you pay yourself as a founder, and how should your pay scale with the company?– A.L.

Here I have some inside information. I’ve seen a few compensation surveys over the years on founder and CEO comp, based on a startup’s stage, with some pretty big data sets. 

Without pulling from one specifically, here’s my rough sense of where a founding CEO could consider being at each stage in terms of annual salary:

$60,000: bootstrapping or friends & family round stage
$80,000: pre-seed
$100,000: seed
$140,000: series A
$175,000: series B
$200,000: series C
$250,000: series D and beyond
$300,000: max

Whatever you do, make sure your compensation shows a balance of humility, fairness with the rest of your team—and the fact that as a founder, you have a big equity stake. 

In the early years, your comp might be below your cost of living; if so, use this financial stress as an additional motivator to get to Series A so that you can get paid a solid mid-six-figures salary. 

Make sure you’re also being honest with yourself about your cost of living. If that cost is higher than it technically needs to be, the company shouldn’t bear the cost of that choice.

At my new company, Pie, this is a big part of why we rebooted the team in Chicago. Everything costs less here compared to the Bay Area and New York City, and we’re aiming to win bigger because of it.

I am about to make the jump to start my own company. For those of us at the very beginning of our startup journey, do you think we should have an eventual acquirer in mind already? If not, then at what point in the journey should we start thinking about an ideal acquirer? – Anu

I’m of two minds on this.

There is one school of venture capital thought that says: If a founder has a slide in the deck on what companies they could exit to, then don’t back the company. If you’re thinking of the end at the beginning, the terminal value won’t be that great.

On the flip side: Couldn’t some level of pragmatism on who the buyers might be show the right collision of fantasy and reality, in the founder’s mind?

I know when I co-founded Bonobos, I wasn’t thinking about the eventual acquirer. If we had, we might not have started the company! Menswear apparel exits are rare. The universe of buyers is small. It’s in theory better to start a company in a market where there are $100-billion -market-cap potential acquirers, rather than sub-$1-billion, cash-strapped acquirers that have their own issues. 

I remember thinking Gap or J. Crew might be logical buyers for Bonobos. Then, as we grew, I realized our success put us out of range for those companies. When we sold to Walmart, our relative valuation was 0.06% of Walmart. Had we sold to Gap, at the time, that would have been 5% dilution.

So in our case, it was good we weren’t thinking about it. Our angel investors made 16x their money. Our Series A investors made 6x their money. These were solid returns that might never have materialized if we had studied how rare–outside of athleisure and athletic—apparel exits are.

At Stanford b-school I was taught there are three reasons people start companies: making money, building a business, and changing the world. And the largest outcomes are generated by those who are motivated by all three.

On the other hand, a pure mission-driven founder is not always the most successful. The absence of a capitalist or commercial instinct can sometimes lead to downstream problems.

For private equity-backed companies, everyone has an idea of who the acquirer will be. For venture-backed startups, I think it’s better if the founders aren’t thinking about it for at least a half-decade or more. It’s important to remember that for some of the very best startups, new markets are being created where it would be impossible to predict who would emerge as a buyer. In still other cases, the eventual acquirers are startups of the same cohort.

And the best case of all? An IPO! In which case, who cares who would buy it.

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