This may not be the answer you want to hear, but it may be the answer that you should hear.
I wrote this answer while answering the question:
“At what point should founders be allowed to get a market salary?”
My general answer would be when the startup is no longer an early-stage startup, and becomes a business.
A startup stops being an early startup once it has proven its business model and business idea. This happens when you have sustained positive cashflow, or even better sustained positive net income.
Once you reach this threshold, you have free cashflow to reinvest in the business and grow, as well as pay your early believers, like founders, a higher salary. When you have positive cashflows, you can also more easily raise future rounds of capital to further accelerate your growth until you become a big corporation, which is believable enough, or big enough, for the stock market.
Another way to “cash out” bigger sums of money earlier would be to sell equity to investors, in a funding round, while the investors would happily take some of your equity. Or use one of the many services that match buyers and sellers of startup stock.
While you are a startup, it’s still not clear whether it can exist profitably, grow, or make it big. So, most startups should try to just stay alive by extending their run way and experimenting as much as possible while they are trying to make it fly on their own. During this testing period, it is common to not get paid a lot, or even the market average, or even get paid at all as a founder or early employee because you are working for equity because you really believe in the future value of the company.
If you want a more specific answer, like a number, then it could be USD 100k a year as a maximum. A famous billionaire VC once told me that seeing over $100k cash salaries in a startup he is investing in is a red flag in 2016.
The right amount is really what you are able to negotiate with your investors, but usually, they will simply see your expenses and your numbers and use those variables to invest in your startup or not. So, often, you won’t have a salary negotiation before they invest in your startup. They will simply add up the state of your startup and give you funding or not, salary alone is usually not a reason to invest or not, but it can put off some investors, which could ignore everything else.
I would say a safe, survival salary should be the median (not average) salary in your country. In the US, it’s $19k a year (Source: Median Income by Country 2022).
$19k is low for a complex profession such as being a founder, but your equity compensation is probably making up for it, since your startup is probably being given a high starting valuation if you are raising from good VCs, and they are making the founders the majority owners, which usually own 90% or more of their startup on their first check. This means that many investors will make you wealthy or even millionaires on paper, in reality, though, you could be earning $19k a year with the possibility of being worth what your investors paid, and hopefully much more.
Receiving a $1M to $5M valuation is normal for a startup in 2022 if your investors are good, anything that deviates too much from these valuations is probably not a great investor, and they may be taking too much equity for a small investment, or giving you too much of a starting valuation.
I’m a bit hardcore on this, but my personal recommended caps for the annual salaries of founders or first employees paid in cash, would be as follows:
- Seed: Median salary ($19k) to average wage as a maximum ($55k) in the US. Sources:
– Median Income by Country 2022
– List of countries by average wage - Round A: Up to $100k in 2016 dollars.
- Round B and beyond: You can probably start negotiating a higher salary at this point, and even get a market salary, or above.
In all cases, as a founder, your interests should be very aligned with your investors, so you shouldn’t be looking to have a good salary but a good EXIT via the stock market or other liquidity event. If your incentives are different from your investors, you and your investors are in trouble.
If you want to hold onto your shares forever, even after a liquidity event, to get dividends, or just to own the shares, that’s a good mindset to have too.
As a startup founder, you should want to be part of a big thing and own a percentage of that big thing.
To achieve this abnormal, extraordinary result, you are willing to sacrifice the present and future while you take the risk side of running a startup, the risk is not being paid a stable or high salary and having losses if your startup fails (which is the most likely outcome).
Startup losses include things like having worse health, a worse financial situation after you failed, etc. The good thing about failure in startups is the learning, there is usually a lot to learn at a high pace, and those memories, unlike a classroom, you will never forget. Nor will you ever forget the people.
Some failed startups even have liquidity events like being acquired because a company is trying to hire the team, or trying to buy their technology, so sometimes you do get failure + learning + good money, but these are only the happiest of failures.
True startup founders will fail as many times as needed and do almost anything they possibly can before they happen to build the big thing, in some cases, the big thing will never happen, and they will settle for something smaller or a regular life.
But if your mindset from the beginning is having a good or stable salary, or making money soon, or having a normal life, in my opinion, startups won’t do it for you.. There are easier ways to make good money to achieve other objectives in life.
On the reward side, running a successful startup is fueled by a passional and deeply personal ambition that you have.
Like being very interested in solving a problem, or impacting the world positively, or changing the world, or distributing access to some thing at mass scale, or inventing something, or creating something new, or achieving greatness in business or high recognition, or having a believable shot at making extreme wealth, or all of the above combined.
I think people that work at early-stage startups as non-founders should also share some of these ambitions, anything else, reduces the chance of your startup succeeding.
If you are crazy enough to do this, welcome, the most interesting are usually crazy too.
