Here's an article I wrote that was published in the Wall Street Journal. You can see the full article at http://blogs.wsj.com/accelerators/2013/09/21/scott-austin-dont-shorten-the-runway/.
In the earliest, bootstrap days of a startup, founder salaries are almost non-existent. Founders pay for the company out of their own pocket and survive on microwave macaroni and cheese if they need to. But once you raise money and start to take on employees, the subject increases in complexity. What’s a fair salary for early employees? At what point do founders start paying themselves? How do you balance equity vs. salary? There’s no one answer, and of course there are many factors that drive salary decisions.
Here’s our three-point approach to the salary at Porch:
For most startups, it will take a long time, many years even, before they will be able to create a positive cash flow with their business. As such, runway becomes an important metric. Every dollar spent shortens the runway. Spend too much and you’ll need to bring on more financing, which will result in dilution. You have to spend money to build a business. All I’m saying is don’t waste a single penny.
One of the biggest costs at a startup is people. So prudent management of runway means prudent management of people expenses.
As a founder, pay yourself enough to live on, and don’t expect the financial reward of the company to come from your salary. Your upside should be in the equity and control. As part of that, you’re going to have to get comfortable with the fact that you will make less than market prices and you’ll have to make sacrifices in the short term. What you need to live on will vary by your personal situation. In other words, two equal co-founders could make different salaries if one is single and the other is supporting a family of five.
Your investors worked hard for the money they are putting into your company. As such, founders need to be super-frugal with investor dollars. At Porch, I had no salary for my first nine months. After we were confident we were going to secure our seed round, I got a salary that was significantly less than I had in my previous (non-startup) jobs. I still do not take benefits from the company.
Unlike founders, an employee’s compensation package (salary + benefits) should be competitive with the industry. It doesn’t have to be the best, but it needs to be fair and competitive. Founders are building the company based on their own vision and they have significant equity stakes. Employees are following the founders’ vision and their equity stakes are much smaller.
As such, expect employees to have less skin in the game (or faith) than founders. A startup’s equity stake for an employee is going to take many years to provide a return (if it ever does). During that long build-up of company value, founders should ensure they attract and retain the talent they need with competitive salaries and benefits packages. Every startup will have its bad days and low times, and the startup’s employees will get calls from recruiters. Ensure your employees aren’t easily poached by keeping their compensation competitive. Let the equity stake provided be the gravy for working hard, not the steak.
One best practice we use is providing employees with three compensation package options during the recruiting process. The variables are salary and options. More salary means less options and vice versa. That way, the employee is in control of where on the risk/reward curve they are.