Questions

How to restructure incentives and compensation for founders as start-up transitions to early stage and revenue?

My company has been in business for five years. We're profitable, no debt. The old "socialist" compensation system is no longer working now that there's revenue and inequitable partnership man hours. I am restructuring the roles and responsibilities and now tying actions to incentives, rewards, and individualized compensation structures. I am finally giving myself a commission for being in business development/sales. That is a HUGE leap for us. Any advice you can give to break it to one partner who is operations (and a relative) that I should get paid based on my contribution? I work more hours and my contribution is essentially more valuable. As an early stage, EVERYTHING is front loaded between account management, new product development, and getting new business. This was never relevant without cashflow.

2answers

Hi,
If you were going to sell the business, the first thing a knowledgeable buyer (or investor) would do is normalize the wage expense vs. fair market.

If you and the other founders are not paying yourselves what you would earn working for a stranger, then your financial statements are meaningless because you're literally subsidizing the operations of the company with free labour.

You've indentured yourself to this venture.

If revenues are growing and you can afford to pay yourselves what a stranger would pay you for the work that you do and there is a profit left over after that, congratulations, you've got a real business.

Arrange a call if you'd like to discuss your case in particular. I've gone through this with many clients and helped them through the partnership issues that can normally arise from addressing it.

David C Barnett


Answered 3 years ago

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