Startup Therapy Podcast

Episode #12

Ryan Rutan: Yeah, yeah. As a founder, should your startup salary be on par with whatever you're making at your last job or should you just tough it out and not get paid at all? The answer is probably neither of those options. Startup founders and their teams simply need to calibrate compensation

Wil Schroter: to how startups

Ryan Rutan: themselves grow dynamically and based on milestones today on the startup therapy podcast, we'll break down the long debated topic of founder compensation and help find a balance that works for you and the business. This is Ryan Rutan from startups dot com, back for another episode of the startup therapy podcast with Wil Schroder, my partner in Crime in startups dot com. Today, we're going to unpack a very, very commonly debated topic, which is, you know, what should we be paying ourselves as founder? So so will how much should we be paying ourselves at this point, man,

Wil Schroter: it's as little as possible, as much as possible. We're going to kind of explain and explore both sides of the topic, right? And it's it's something that every startup deals with, it's something that for a long time, I think no one really knew the answer there. There was this this end of the spectrum that said, don't starve the business and and so take as little as possible. And then the other end was don't starve yourself. So take as not as much as possible, but, you know, a healthy amount and I just didn't get the sense that people really had a framework for how to evaluate or set these levels. So what we put together was an actual framework that people could use, that started to put startup compensation in line with how a startup makes money versus how a traditional business

Ryan Rutan: makes money. Yeah. Which I think was much needed because essentially before that, the summation of the advice was something like don't have your cake and eat it either. And everybody's like, what the hell does that mean? Like, I don't I I should pay myself enough to survive, but not enough to start the business. What if those lines cross and they often do so All right, so let's dig into it.

Wil Schroter: Sure. And I think we started off along the lines of trying to explain that when startups start to look at themselves and founders look at the startup as a composition of this is how I get paid in other companies. You know, I worked at a big company and I came from Microsoft and this is how we got paid. So I'm going to take either that salary line or that type of pay and apply it to our startup, it's like, well that's fine, but this ain't Microsoft right? You know, like we get paid very differently because we have no idea if we're going to even make income,

Ryan Rutan: that's right. Yeah, that's that's sort of the precursor to pay, right? Like we got to make sure this thing is actually making any money before there's a chance we can turn around and start directing some of that back to ourselves.

Wil Schroter: Yeah. And so so people start to think, well, what's my salary, that's essentially what we're saying is what's my salary. And I think the first thing that we need to really wrap our heads around is a salary in the traditional form of this is how much I get paid every month, like clockwork without question, because this is how much I'm worth in the market. Just sort of doesn't apply now. Now, that's not the same as saying, we can't siphon off a certain amount of money to ourselves each month in a consistent way. It just means the traditional method of a salary sort of breaks down, Right? So for example, Ryan, if you're at your last job, you made $100,000, right? The first thing you're thinking and going to a startup is, hey, I made $100,000 that was my market rate at my last job. So I'm gonna, I'm gonna do a startup and my target is going to try to get to $100,000 in my startup, which, which isn't totally ridiculous. It's just the fact that the startup that you and I started Ryan at this point makes $100 a month. So it doesn't really matter what you made before 1000

Ryan Rutan: months later. And I've

Wil Schroter: nailed it. Exactly, right. And so we really have to consider the fact that our startup is going to have all kinds of lumpy revenue, right, you know, we could have a great month, we could have a zero month, we could have a negative month. And so we're going to have to concentrate our time and effort on being able to get to a baseline of pay, which we'll talk about and then figure out how to ramp up from there. But just from the start, I think it's safe to say that we can't consider salary in the traditional sense, an option here. And I think that's kind of where people start to get messed up before they even start.

Ryan Rutan: Yeah. And but let's let's let's stick on that point for a second. So I want to understand a little bit more about the drivers behind that because, you know, we're deciding to leave stability. You know, when we leave the job environment, we're moving out into starting a startup, we're leaving that stability for some reasons, right? We were dissatisfied with the work or there was just something we really wanted to accomplish that we couldn't do there. Like there's a lot of reasons we start companies, but let's assume that there's some combination of those things going on and we sort of know we're moving into a space of extreme uncertainty and yet salary tends to be one of those things that people really get caught up on holding onto. And I get it right, Your expenses don't necessarily become variable just because your income did. So what do you think? We can do as founders to prepare ourselves a little bit more for this variability, You know, and we talk about things like savings cushions and stuff, but that's not always possible and it's not always the right reason to not start it and be like, well, I'll just wait until I've saved enough money to do this, right? So what else can we do as founders at that really early stage to become more comfortable with the idea that our income is about to become variable?

Wil Schroter: You know, I think we have to have a few different conversations. I think we have to have a conversation with our spouse or whomever else. You know, uh, we're responsible to, if, if we have someone else in our life to be able to say, there isn't a version here where we're just hanging out for a little bit until things go right back to what they were. Yeah, this is a dramatically different shift for how we're going to earn money to how we're gonna be able to plan for the future. And I think it's, it's wise to the extent that you can to be as open and honest about that as possible. You know, my wife, I've been married to for seven years, but we've been together long longer than that. She's just used to it, right? I've been nothing but an entrepreneur for 25 years. It doesn't even occur to her that we could make the same amount of money in any given month or year, right? It's a guess every single time. But she came into that situation with that being the construct and kind of how we make money. Um If you're new to it though, if you're coming from a traditional salary job and you're coming into a startup, I think having that, that conversation with your spouse now early to explain that there's gonna be some variability is important because the moment you say, well he or she will figure it out when we get there that ends poorly.

Ryan Rutan: Yeah, the sugar spouse reliance, right? You're like, well, I'll just let them figure out the money part and I'm going to go figure out the startup part and it'll be

Wil Schroter: fine,

Ryan Rutan: I hope.

Wil Schroter: Okay, so, so that that that's that's one contingent if you will, the other is, and this is funny because people actually don't have this conversation, a conversation with yourself that the most probable outcome here is that you're going to make zeros of dollars for a very, very, very long time, right? Here's how we think about it and, and and we're optimistic, which is why we started this thing, but we're optimistic often to a fault on this one. Here's how we think we think, okay, cool, I've got 3 to 6 money, 36 months worth of money saved. However, that may look in order to get into this thing. So I've got, you know, 3 to 6 months in order to get this thing ramped up until I can kind of hit something commensurate with my old salary, the likelihood of that ever happening is so incredibly low that it's almost impossible to work towards that. And yet all of us do it.

Ryan Rutan: Yeah, well, it's always 100% clear that will easily get there based on our our 15 and 10 year financial projections like that. It's always clearly spelled out, you know, that we're going to go from one million to five million. 10 million, 100 million. Yeah, Yeah. We were all, you know, everybody was that there are no atheists in foxholes and I would say there are no pessimists in financial projections when it comes

Wil Schroter: to start.

Ryan Rutan: Very optimistic,

Wil Schroter: but if Ryan, if you and I had to be, you know that pessimist, if we had to put together the pro former the forward looking financial statement for an entre entrepreneurs personal finances for year,

Ryan Rutan: one year start, it's

Wil Schroter: easy number zero, zero's of dollars, my friend for a while. And that's tough to digest because you're thinking in your head, I don't know, like, again, I got 3-6 months worth of cushion, what am I going to do after the end of six months? And the answer is most entrepreneurs figure it out. I'm not saying it's easy, it's brutal, it's horrible. But most entrepreneurs figure it out. But if the plan going into this is that you're you've got this life raft of salary that's on its way. That plan rarely ever works out and it's not worth planning for honestly, because look if things work out and you somehow magically get to your salary number by then cool, you have nothing to worry about. The planning comes for when you don't, not for when you do.

Ryan Rutan: That's exactly it. Yeah. And I've done this two ways and we talked about this in a previous episode, but in the first one, it was exactly as you just described that there wasn't really that much of a plan. I sort of knew that money might get tight at some point, but I would figure it, I would just figure it out and I did, but it had consequences and it had implications and I had to make harder decisions based on that. The second time around when I launched the second company, I said I'm gonna downsize things a little bit more. I'm going to plan on being poor, I'm going to plan on not making any money for even longer than I think it will take me to start making money with this company and I'm gonna change some things about my life now. And mileage will vary, you know, for for for every founder, but for me that was a much much easier thing to do because what ended up happening with the first company was at the time when I had to start making hard decisions and figuring it out the minute you're figuring something out that's not just about your business. You're slowing down the growth of that business. You're, you're actually impeding your ability to get to that place that you need to be. So you can stop thinking about this other thing. It was much easier to put myself in a position where I didn't have to take myself out of the game to stay in the game. Right? And so again, mileage will vary. But I think that and it may be one of those lessons you have to learn firsthand, but certainly for me making some upfront adjustments, you know, it's getting rid of a car, downsizing that house, you know, putting pulling the kids out of school and then putting them into day labor. You know, whatever it takes.

Wil Schroter: No. And look when I talked to founders and I say, okay, cool, It's great that you're starting, uh, you know, how are you going to keep yourself in business? And we talked about this in a previous episode about startups. Don't go bankrupt, founders go bankrupt. Simple question I ask and it's a fair question, what have you done to shred expenses, 99% of the time? They look at me with a blank stare like what do you mean? Shred expenses? I'm like I do,

Ryan Rutan: there's only and netflix. Okay.

Wil Schroter: Yeah. Yeah. It's like, look, there's only two ways to extend runway. You either make more money or have less expenses, right? And you have no visibility or no control on what you can do on the make money side. So the only thing you can do is shred expenses. What sucks about that is shredding expenses is horrible, right? Like who wants to shred expenses, right?

Ryan Rutan: Yeah. But if you're serious about step backwards, right? It feels like I've got to this level, I have earned this right of amenity in my life and now I have to go backwards.

Wil Schroter: I see this particularly with people who have done well in their careers. You know, it never earned it. Look, you know, they put in the time they've earned it. So, so this, this isn't a single question here about whether they've earned it, whether they should have it, etcetera. This is just basic economics. This is just saying, look, if you're about to go into a business that makes no money. The only thing you can do is have fewer expenses. And when I look at entrepreneurs who have done nothing to shred their expenses going in. I just think, boy, you're in for a tough road, you know, this ends poorly. Yeah. You're gonna, you're gonna shred your expenses anyway, we're just gonna do it later when you have no money.

Ryan Rutan: But then that's exactly saying and that becomes a far bigger distraction than doing it up front because now you're doing it under duress and it's taking time away from, you know, things you should be doing to build the business. Yeah. So yeah, going through and really being honest with yourself about what you need and what you don't. Um, and what's interesting is that I actually, no, I can, I can probably name off five or 6 founders Who didn't end up becoming founders because they were thinking about leaving this career and some of these, these folks had had some pretty serious time and had developed some pretty serious careers. You're talking $250,000 a year and and more in, in an income from a job and ultimately they decided that like the trade offs for them weren't significant enough to start. And it's an interesting discussion, right? So when you really start to be honest with yourself and you realize that there is a cost in terms of your own personal life to starting a company and that they're actually maybe a line that you're not willing to cross. And I've met a number of people, I mean probably dozens at this point, but four or five that I'm very, very close to who have decided, you know, despite having a passion for this thing they wanted to do, despite having the skills and and the desire to do it, they weren't willing to make all those trades. And it was, it's exactly it, that was absolutely the right answer because they would have been filled with regret, they would have been miserable after the fact and and things probably would have just ended poorly and burnt through everything that they had, they had spent years building and there's no reason to do that right? You don't have to execute your current life to start something or you at least need to be aware that that might be a possibility and decide whether you want to do it or not.

Wil Schroter: Absolutely. And so the third question, I'm sorry, The third conversation you need to have is with your co founders. If you have them right to the extent where you say, look, you know, I don't necessarily need to lay out all my personal expenses too. You may or not be willing to let people in your kitchen like that. But here's what I can tell you, I can tell you that if I don't get paid by this date, this amount I'm screwed. Like like I just don't have any other options here that you may take it a step further depending on your relationship and say, look at that point, I'm going to start to burn into either savings that I can't replace or savings that are painful. Ergo my four oh one K. So my retirement fund or

Ryan Rutan: baby collection.

Wil Schroter: Yeah, I mean whatever is important to you, right? And so I think it's worth having the conversation between the founders to say, here are my thresholds, right? Going into this because we're going to talk about pay by the way, even if you've raised money and you're trying to have the discussion you raised, you know, your seed capital, let's not talk about series because I think it's a totally different conversation. But if you're getting into, you know, to a seed round nick, we don't have that much money but we have enough money to pay. And you're trying to discuss comp you need to have a discussion around. Look if if I can't pay these bills by these dates, this starts to become really painful to me. And the more honest you can be the more transparent, you can be the greater level of understanding.

Ryan Rutan: Yeah. And I think having that conversation really early is important because I I would hazard a guess that those numbers might change those numbers. That minimum threshold might get a little higher post seed round right? Like all of a sudden Well, we have the money now. Like, you know, if we're not making any money, I could get by on this, but you know, since we've got the cash now, what I'd really rather do is this. So I think it's important to have that early and you can always adjust it. All right, you can always have that conversation to adjust it. But I think having that conversation super early and and being very transparent about what that minimum threshold is and why is critical? The other thing that I think is really important to understand depending on what it means. If we don't cross that threshold is what happens to the business at that point. You know, if there are two of you are three of you, what happens if you don't cross that threshold? Because not everybody's threshold are gonna be the same. It's not like you're gonna be like, oh gosh, look at that. We're all, we all need $8,542 a month, highly unlikely if that's the case. So what happens if any individual's threshold isn't met and they have to bow out, what does that mean to the business? Because that could and should have a lot to do with the other founders decisions as to how they treat this.

Wil Schroter: Absolutely. And, and some people are gonna have more cash in the bank. Some people are going to have higher stakes back at home, right? Like, hey, I can't be in a position where I can jeopardize my health care whatsoever because you know, maybe I have a situation at home where if, if healthcare comes off the rails, that's my number one issue, you can't mess with. Yeah. And so what we're talking about isn't just minimum threshold, which we'll get into it a bit, but it's also the timing of that minimum threshold. If I, if I hit the red zone for this long of a period, I'm out, right? And I'm our cto and I'm the only guy writing code for this thing. If I'm out, we're done, yep,

Ryan Rutan: it's a big deal.

Wil Schroter: It is a big deal. And so on one end of the spectrum again, you've got, this is how much I need to make on the other end of the spectrum, you've got this, what I'd call false nobility, which is, I don't need to make anything. I'll work for free for as long as possible until this thing is successful to show my level of commitment, Right? And listen,

Ryan Rutan: I've done it day one. Yeah, yeah. Is significantly in month nine.

Wil Schroter: Oh my gosh, You know, I've done it. I've done it for years at a time. I'm not saying it was a bad decision. I'm not saying don't do it. I'm saying don't show that as a badge of honor, right? Most of us do it because we don't have a choice company is not making any money. So saying that we're willing to work without a paycheck, it's not like there was a ton of cash sitting in the bank account and we just opted not to take it right. It's not like Elon musk working for a dollar salary, right? Right? In this case,

Ryan Rutan: actually saying I'm very proud of myself that I haven't managed to make enough money with this business to pay myself,

Wil Schroter: right. Right. And, and what often happens and I want to comment, yeah, I want to comment on this often, the founder gets paid last or the founding team gets paid last, right? And I've been in plenty of situations where I was the guy that got paid last and, and I felt that was the right move for the business because if I didn't make those investments in other people down the road, there'd be nothing to pay me at all. However often what the founder never does is kind of cash in that chip and say, okay dude, at some point, right, it's my time to get paid.

Ryan Rutan: And I think, I think a lot of founders wait far too long for that. I think that they still, they can, they keep looking at this investment in other people. It will grow it faster and I'll be able to give myself more and there's nothing wrong with that. And if you can tolerate that's fine. But I think even, and I'm curious to hear your thoughts as well, but I think that turning on some level of income as early as you can, and it's probably earlier than most people think. You don't, you don't have to paint yourself your market rate, but start to take some of that out. Like you only really need to invest in so many people before. There's a diminishing rate of return on making those investments before you've also invested in yourself. And I think that's a line that a lot of people cross. Um, and, and I think it's to their detriment

Wil Schroter: within that. Let me build on that a little bit Ryan, I think it's a really important point. Most founders will, will basically forgo a salary again trying to do the right thing. And here's a very typical situation. And if you're a first time founder going through this, I'd ask that you just listen a little bit closer, turn up the volume just a little bit in your car on this one because there's a yeah, exactly, huge chance this is going to happen to you and you never see it coming. Here's what happens. Founders tried to do the noble thing and say, I'm gonna get paid nothing for, for the first, what I think is gonna be a few months, which turns into years etcetera. The business starts to grow. The business then takes on a little bit of capital. You then get a meager salary, right. You know, let's say that your average staff member is getting paid $60,000, which wouldn't be that much money and you're not getting paid $20,000, Here's where you get screwed. Every single time No one is ever going to remember about or care what sacrifices you made years ago. Right? As you raise more and more money. No one's going to give a ship that you depleted all of your savings or got behind on all of your bills, All of that will be forgotten about. So, so if you have this concept that, hey, I'm going to do the noble thing and basically rack up debt while the rest of the company grows, just be prepared. That, that, that debt will never get paid back in any meaningful capacity. You're thinking that you

Ryan Rutan: do not earn interest on nobility.

Wil Schroter: That's a great quote and no one is going to say to you, oh man Ryan, you know, you really made huge sacrifices and I'm sorry you carried all that debt now that we've put some money into your company, let's write a check for all that bad debt will never ever happen. And you look at an asshole if you even bring it up,

Ryan Rutan: right? Yeah, let's, let's make you whole

Wil Schroter: absolutely not more often than not. What I see our founders who get in this weird crossroads where they put in all of the investment, you know of their time, their savings, etcetera for the first couple of years, then they raise money. Then their, their debt to themselves. You know, the, the company's sort of debt to them because they work for nothing. It gets completely cleared and people say, well, no, hold on a sec. You got a huge stake of equity for putting in that time. Yes, but you didn't get paid. People also get paid while while putting in their equity, not all the time. Right? But in your case, your time contribution was completely overlooked as far as what you should have otherwise gotten paid in cash. And more importantly, that's what I'm really trying to get it. We'll never get paid back, never pay back what that manifests to. And I I can probably name a dozen cases where I can see this happening to my friends right now in venture funded companies, the company's doing great. You know companies doing pretty well but they've been at it for seven years. They have a decent salary. Not crazy. But they have so much debt overloading

Ryan Rutan: debt with. The only thing earning interest at this point is the bags under their eyes. Right?

Wil Schroter: Exactly. Right. And and and so so all I'm going to suggest here and Ryan you touched on this which I thought was brilliant. All I'm going to suggest is that even if your salary line is $100 a month, $500 a month, $1,000 a month. Have a salary line, right? Not even for the economic benefit so that everybody in the company, the managing team whatever knows exactly how much you're not being paid. Yeah. Yeah. And so yeah

Ryan Rutan: when it's when it's just not in that when it's just not in the P. And L. It's not on the P. And L. It's on it's it's if it's not there it's not real right? When you can see that, you know, I I might even go as far as to track it in terms of like some sort of not that you'd ever get it back. But it would be interesting to set your virtual salary line and then your actual salary line and show and show the deferment and actually, and actually calculate that deferment again. Not that you never get paid back, but it would keep that reminder in there if for nobody other than the founder, I think it would probably keep people from deferring paying themselves for even longer as you watch that number start to stack and you truly quantify what you're giving up now for the hope of later. I think it would make a difference. And you know, it's interesting because this issue is another one of perhaps a half dozen ways that founders fall into this trap of deferring something right? And we've we've we've talked about this and I think we're going to do another episode on this in the near future where we talk about, you know, kind of deferring life and deferring deferring salary, deferring happiness, differing time with family, deferring whatever. It tends to be a pretty consistent habit amongst founders and Not a particularly healthy one. But I think this is just another manifestation of that same same mindset and behavior

Wil Schroter: and none of it gets paid back. Your salary doesn't get paid back your time with your kids, doesn't get paid back, your health doesn't get paid back your vacations don't get paid back right. Like it's oh well we'll go on forever on that topic, but let's not,

Ryan Rutan: we'll get, we'll get on that in another episode.

Wil Schroter: Okay, so with that, you know, we just stated pretty clearly However you define your comp you need to at least define your comp even if even if the number is a dollar or $10 or $100 or whatever it is. And even if you're not getting paid that money, you need to have a salary line item for yourself. There's just no question on that one. So simple, easy to do. Nobody can really push back with you on that. Here is what we're going to talk about Ryan, which is a two part method for defining your comp right? And it's simple and after we explain it, you're going to go. So that's so obvious. Right? And yet so few people do it. Right? So we're just gonna make this one simple because startups themselves have such variable rates of income or none at all. In some cases our camp needs to sort of fit that same model at least for the first few years before there's any consistency in the cash coming in. So in order to set the tone for for that conversation, I think we should talk about Part one, which is setting a minimum threshold. This is the least, I need to get paid And then part two, which is setting a variable threshold as things get better. Here's how I get paid more,

Ryan Rutan: yep the old aim for the moon. Clear the fence routine,

Wil Schroter: totally. So Ryan, if you're okay with it, let's let's start with just talking about what the minimum threshold means.

Ryan Rutan: Sure, these are, these are, these are the basics, right? These are the keep the lights on, keep me alive. But you're probably not going much further than that, right?

Wil Schroter: You bet. And Ryan, when you think of the basic basics, what comes to mind,

Ryan Rutan: uh, beer,

Wil Schroter: wine

Ryan Rutan: scott. Oh no, probably, you know, it's housing. So you know, whether it's rent or mortgage. Um, and you know, and those two things are quite different in fact. And so when you think about these things, if you're in a rent situation, that might mean something very, very different than if you're in a mortgage situation because of the severity of consequences of having to change that. So I think that I think as you consider your threshold particular from a timing standpoint that rent versus mortgages is a big deal. Um, you know, certainly things like, you know, your healthcare, your insurance, of health insurance, maybe car insurance, life insurance, um, these imperative necessities that you have transportation, you know, if you're in a big city maybe, maybe you don't need a car maybe can do without one. Maybe you can go with one less, but a car payment would certainly be another. You know, your utilities, your bills, you're, you're kind of staple monthly payments, cancel amazon prime so that you you stop buying shit you don't need. Um, or leave the country like I did the force force function on that one. Uh, and food, right? Like what else do you actually need?

Wil Schroter: Well, here's where I think it gets interesting. I think you and I sit down as, as co founders of our new business and we say very honestly, and I think I think this, this to the extent you can requires as much transparency as possible. Team. These are the bills that no matter what I gotta pay. Yeah. Right. And it's important to separate. I have to pay versus I really like, right? Because I think once we all calibrate to ship, we have to pay, there can no longer be a question that we have to get paid that money right now, that's different from we don't have that much money yet. Right? So let's say that Ryan you run through all of your minimum threshold expenses and we first agree that yeah, there's there's really no way around that. You can't get to work and eat and survive to build this business if you don't have at least that much money In that number $6,000 a month. Okay. We may not have it, but I can no longer argue that you need to get to that number. Right? Similarly. You know, we look at my numbers and I'm at $8,000 a month because apparently I'm living pretty big, right? I need to be able to defend that those are my minimum threshold expenses. So no matter what

Ryan Rutan: blue apron while I'm eating while I'm eating birds eye peas like what's going on here. Where was

Wil Schroter: that extra two grand coming from? You know? And and so it also invites a conversation because at which point I say, hey here are my expenses. And and you say, look, I can't tell you how to live your life, but if you're telling me that you can only drive a Porsche, right? And there's no other option for the minimum threshold discussion, I think we should at least talk about. Yeah. Right. And there could be reasons I can't get out of my least swat police dot com or you know, you know, other options like that. Um Yeah, but but regardless I think having this baseline conversation to set our minimum thresholds again, this isn't the most amount of money will ever make by any means, but it is calibrating a conversation that we can all have that none of us have to defend anymore. If I know you have to make $6,000 a month to feed your family and to keep the electricity on. That's it. That's the end of that conversation. We have to get to that number. The problem is people don't do that. Here's what people do. They say. Well I made $100,000 at my last job. So Man, if I met made anything less than 80,000, that would be a huge step backward from my market rate salary. Yeah. Dude, who cares what your market rate salary was like, That's nothing to do with what we're

Ryan Rutan: doing to the market, go to the market and get your salary. Yeah.

Wil Schroter: This isn't the market at all. And I think it's important for us to unpack that a little bit. Okay, Because the difference between here's my, here's how much I was worth in an open market of viable companies is wonderful in in probably true, but it just doesn't matter anymore, right?

Ryan Rutan: And people, this is what a company who's making money can afford to pay me. Cool. This isn't that moving right along. Exactly. And it's that simple

Wil Schroter: man. This pisces people off and business people that are listening right

Ryan Rutan: now. Yeah. They're like, wait a minute, hang on.

Wil Schroter: Yeah, Yeah. And they're like, hey, go fund yourself. I worked so hard to get to that salary level. You're going to tell me I'm not worth it anymore. No.

Ryan Rutan: Why did you leave?

Wil Schroter: Yeah, you are.

Ryan Rutan: Yeah,

Wil Schroter: you are worth that in a marketplace that can afford it. Right? When you're, when you're in the we have no money. This thing is totally formative business. It doesn't work that way. Now there are other ways you can leverage that. Here's how much I'm working in the market conversation to say, here's what my contribution would be in the market for, what would otherwise pay. And therefore I should get more equity, totally fair discussion, right? Absolutely. Uh, and and later on. And we'll get the other half of this discussion when we talk about what we need to ramp up to, we can kind of bring that conversation to the door again. But If I was making $500,000 at them as a managing partner of a consulting firm and I come into a new business and I'm like, well, I gotta get back to 500 k. It's like, no, actually you don't write, um, you may, it'd be great if you do. But right now what we're building, how we're contributing, what we're doing is a very different discussion. Now. Again, that's gonna piss you off, right? And you're going to say, wait a minute, That, that is what the market yields. This, this startup is getting the benefit of $500,000 of market value. Great, let's talk about that. When we talk about equity distribution for now, when we're talking about how much we can pay with the little dollars that we're making doesn't matter. We're going minimum thresholds and then variable threshold, yep. And so in that conversation, we're going to take out any luxuries, vacations, concerts, iphone upgrades, You know, man, anything that we can conceivably do without has to get taken off the table and has to be part of the discussion. We have to do a little bit of sorting, right? We have to be able to say, hey man, yeah, you have a country club membership. Do you have to have a country club membership and, and if you do, that's kind of on you and that gets put in the variable comp, uh, component. I'm not going to argue whether or not you should have those things. I'm just going to be able to sort them and say they are minimum threshold

Ryan Rutan: items. Yeah, that doesn't need to be inside the minimum threshold, Right. Unless all of our business development happens on the golf course and that one in particular. Yeah. That's not falling under the, the, the minimum threshold line.

Wil Schroter: And so Ryan, if you recall, we did this when we're at the formative stages of startups dot com, when we were bringing on, you know, the executive team etcetera. Obviously we didn't have the money to pay everybody at market rates. You know, we're forming a company, but we did have the discussions about where we needed to get to and how the company would allocate more money as we made more money. Um, you're a year, month over month and, and here's the interesting thing, it didn't happen in a, here's the annual review, here's how you go up from here. It was week to week, month to

Ryan Rutan: month. Yeah, super dynamic. Right? We've hit a new, we've hit a new baseline for income. We feel like we're pretty stable and we feel like we can sustain this, let's adjust,

Wil Schroter: right? And, and that was us just trying to crawl our way to get some minimum thresholds to get to just, you know, pay mortgages and feed our kids kind of level. But we knew what numbers we had to get to. We looked at our revenue every month and we made a very specific decision every month. Can we allocate month over month, a little bit more of this money toward executive team pay or do we need to allocate this towards, you know, marketing or hiring more folks etcetera? And here's the interesting thing, a lot of startups don't know how to do this. A lot of startups will say this and it's a very easy argument to get into the business is wildly consumptive. We'll always need more people for the foreseeable future. We'll always need more. Marketing will always need insert your line items here. Right? Which is true. You absolutely do. But if you keep allocating those at the expense of the lifespan of the people that are running this business not going to work so well, you can't dry out dry out the team. That's actually building this thing and that goes for whether their executive team, co founders, key employees, etcetera. Right?

Ryan Rutan: And this is so this is an interesting conundrum right in that we've suggested that even if you're starting at 100 or 500 or $1000 initial salary line to have one. one of the traps that founders fall into, I think is that once they get that and they're like, okay, well that is. They confuse that with the actual minimum threshold, Right? And so then it stays there longer than it should. And they don't have any type of methodology for adjusting that over time. And so yeah, they did the right thing initially by setting a salary line. But then it stays there for a lot longer than it should. There not doing what we just talked about, which is to reflect on that on an almost constant basis and make those adjustments. And you know, I think it's a difficult thing to figure out, right? Trying to figure out some sort of a ratio between as we see income go up at what point do we trigger salary increases for the for the founding or executive team versus bringing on that new marketing person because we see an R. O. I. There, I think a lot of times we don't see the arrow i in investing in ourselves. And it's a really dangerous blind spot because at some point we do run out right? I think you use the word dry them out, right? We we dry up and then it becomes hard to keep moving forward. And at that point, you know, it's you realize the R. O. I was infinite because now it's gone to zero things just stop,

Wil Schroter: right? And and and so we get so excited about investing in new resources. We forget to make the resources that we have whole, including ourselves, literally

Ryan Rutan: the owners of the company. Um, yeah, this is not the only place that happens, right? That's just another version of the shiny ball syndrome of which most entrepreneurs are highly prone to write, It's like let's keep doing the new thing instead of doubling down on the thing we've already done to improve that, push it forward. Like, let's try this, let's try this. Let's try this.

Wil Schroter: Yeah, totally. And look, it's not like there's a point in the business where we have so much cash, we just don't know where to allocate it. Like that literally never happens, right? Like what we're dealing with now is, hey man, we really need that extra $1000 to put toward a consultant to do this one project. But you know what? We also need $1,000 to live to buy food for our families, right? So like we're going to have to wait on that, right? We're going to hold off on the food for our families and we're gonna have to hold up on that consultant purchase and make sure we're hole at home because if we're not, then we're not gonna be around long enough for this consultant thing to matter. We're always thinking kind of casino style where well if we, if we bet on this marketing campaign, there'll be so much money to be had later. Yeah, yeah, probably not.

Ryan Rutan: And we've used this analogy before, but it's the oxygen masks dropping in the airplane, right? Like you have to make sure that you're okay first at certain thresholds before you can make investments elsewhere and help the business to move forward.

Wil Schroter: So let's talk about we've met our minimum thresholds then what? Right? Because this is all part of this larger comic con conversation. You know, how much should I make, how much should I pay myself once? Ryan you and I have met our baseline thresholds and we're getting paid pretty consistently and we can eat but you know, that's not the same as we're still not racking up debt, right? Life happens, right? Cars break down, people get sick, et cetera and these are all done. Yeah man like like there's all these un forecasted expenses that are still cropping up that we that weren't in our minimum threshold where debt continues to accumulate. We're running up credit cards and loans, what have you. That's where the value of the variable threshold comes in. That's the other half of the comp plan. And I think this is really, really important because what will typically happen and I see this a lot, even in funded companies like in the seed stage etcetera where they have a lot of money coming in to allocate. I see them say, well all I need is a minimum of say 50K and I'll be good And again they set that, that minimum threshold but they stop, right and they're saying, hey all the money, the rest of the money will go to the company and its like that again, that's noble, That's that, that's a very noble, you know, powerful thing to do. However, it usually ends very poorly, not just for the business, but also certainly for the founder. And so the other half of the conversation is setting variable thresholds, setting milestones in the business where some portion of the increased revenue, top line will get put toward the founding team etcetera.

Ryan Rutan: Yeah, I mean, even leaning on some of my own personal experiences here, you know, as we were growing this business, you know, we, we worked, we worked hard and fast to get to a point where we were meeting our minimum thresholds so that you know, we keep the lights on at home and and not have to worry, uh you know, at least not full time worry about about how things were going there. Of course you're still deferring, you're still racking that, you're still doing all these other things. But you know, we were able to sit down and have these conversations and again, almost in real time as things change within the business by keeping the discussions transparent by keeping the communication open. We were able to set realistic milestones. We said, okay, well if we can, we can cross this threshold, you know, under these circumstances, then then we can, we can reallocate at this point. It wasn't a time based thing. It wasn't like, okay, well on the next annual review, we'll, we'll take a look at this, we'll do this. It was like, you know, we're we're saying like, okay, well we feel comfortable that we've established this new baseline and and we did it, you know, while still maintaining this level of margin. Let's talk about whether or not we want to invest there or not. And I think that's what becomes interesting about this discussion is that once you get over that minimum threshold, the discussion becomes a bit more difficult in some ways. It becomes easier in some ways and that you're starting to generate money and you can set these milestones. I think it becomes a little bit more difficult in some ways because you've already met your minimum threshold. I think there's always the sense that we could now it's a decision right? Until you meet your minimum threshold. There's no real decision there. It's not like don't eat. Alright, that's not a decision. You can't make that choice. That choice is made for you by Biology, you gotta eat. And so I think as you get past that minimum threshold, we had some interesting points where then it's like, okay, do we want to double our facebook spend or do we want to continue to right size our salaries And so from that aspect, you know, it can become a little bit more difficult, you know, when you got your CFO hat on will, which is a fair amount of the day, how are you digging into these decisions as we think about this because this is happening at a macro level. Right, we're looking at this as a holistic business. We're looking at this as the founding partners, We're looking at this as some of our, you know, early employees or even new employees as we start to figure out how we do comp adjustments. How complicated does this get?

Wil Schroter: I think it gets complicated when we try to do big sweeping decisions right now and I don't think a lot of people think this way, uh and everybody has their own preference, but you mentioned a moment ago where annually, let's say we would look at comp and we would say, okay, here's how much we made last year, here's here's how much we might make this year, let's make an adjustment. We didn't do that. And, and in all the businesses that I've worked at, we took a very different approach. And as Ryan suggested, I'm also the CFO of our business and I've been the CFO of quite a few companies. Um, so I've got my eye on the spreadsheets, uh, the spreadsheets I created and I looked very closely at how we're allocating cash, here's what we did really well, not just for ourselves, but for our team etcetera. We made lots and lots of really small quick adjustments. Right? Not quite to this level, but I would say in the early days, almost every couple of months. Right? So, so I'll use some some whole numbers to help people understand this a little bit if the team was making $50,000 apiece and we get into year two, year three whenever we have the funds to be able to make an adjustment And we say Okay, you know what? Everybody deserves a 10% increase. You can't do it because that giant increase all at once becomes a huge lump sum of money that clearly could go anywhere else. Yeah right?

Ryan Rutan: You don't you don't throw all the cargo on the boat at once, right? And you bring it on little by little so that you can balance the load, you can evaluate the impact of that additional spend and then you can move forward, right? And you know, it might mean somebody gets a raise in in you know end of Q one and somebody else has to wait until the end of Q two. But it's better than giving them both a raise in Q one and being out of business by Q. Two. I think everybody would agree that like we'd rather it keep going then then you know do the noble thing. Cause this is another one of those cases where you do the noble thing like okay we've made more money, let's increase everybody let's let's let's share in the wealth. And it's a very noble thing. Is it just me or in the course of this podcast is noble becoming a synonym for Asinine. Did that

Wil Schroter: happen? Yeah, it's becoming, but here's what we did that I think is really interesting, right? We gave really tiny incremental raises to the team members to to ourselves, etcetera. Here's why because we could plan for them, Right? So if we gave, if we gave the team members $100 raise, now that sounds Corny, right? Like you're saying what you're giving $100 raises, that doesn't make any sense, right? Until you're the recipient, recipient of $100 race, right? And this is management team etcetera right now, mind you, we're talking very small numbers that we're working with, you know, as far as company income etcetera, we're not talking millions of dollars of income giving $100 200 dollar raises. But you know what, at a personal level, a couple $100 matters especially when you haven't been making it for a while, right? And being able to make those, those micro adjustments with the team as the business grew. The reason we did, that wasn't just because it was helpful to the team members and it was, it was because we could plan for it easier, right? If we said, okay, everyone gets an adjustment is 10% and all of a sudden our operating expenses go from say $35,000 a month to 2 $45,000 a month. Dude. That's hard to plan for, it's too much,

Ryan Rutan: You can't forecast the impact of that, right? Because the business's income is still variable at that point. There are very few businesses that just hit a new baseline and with 100% certainty, we will never go back below this line of income again. Right.

Wil Schroter: Right. And here's, here's what really messes with you. It's basically like saying, hey

Ryan Rutan: our

Wil Schroter: costs, I'm sorry, I'm going to go up by $2,005,000 a month. Well man, $5,000 we can absolutely spend elsewhere. That's a Facebook campaign. That's a um, that's another contractor we can hire etc. But a couple $100 here or there that we can absorb And, and we don't think about it in terms of, well, you know, we could, for $200, we could really launch a new Facebook campaign. The contributions and adjustments are meaningful and helpful to the people that we're giving them too. But more importantly their contributions and adjustments that we can digest quickly and plan for and adjust for without feeling like it's being taken from something else.

Ryan Rutan: Yeah. Yeah. And, and you know, to be to clarify that point because I, I want to make sure that nobody is hearing us say use this as a way of obscuring other decisions right? Like spend it now before you have enough to spend on something more important or more strategic. That's not the case. Like these investments are really and truly important for all the reasons we've already listed, right, You've got to keep the team feeling like we're moving forward. We've got to be making people whole, we got to get past the minimum threshold point, we got to move past the point where like we feel like we're still sacrificing on a daily basis and these micro adjustments go a long way in doing that. And again, you know, it's a lot easier to balance right, making these small adjustments a lot easier to balance a lot easier to make sure that they don't have a negative impact on the business. We know that there's a positive impact of doing these things, but there can also be a negative impact if we do too much at one time we've already covered that. But I want to make sure that it's, it's clear and it's understood that and this isn't In lieu of strategic spending elsewhere, right? And because I think that, you know, if we say like, well we've got 100 bucks to spend, let's do that. 5000 would be a bigger decision. It's not that we're avoiding these bigger decisions and it's not that we're using this to obscure decision making. Um, we're doing this because it's a necessary investment in the business and there are certain things that have to be done in a certain word, right? Like starting a company is such a finely choreographed dance that most of us learn the steps as we go. I think this is one that's so critical and important. You know, again, we earmark enough money to keep us fed plan for for increases in the future and keep everything moving forward.

Wil Schroter: Yeah. If our expenses go up 34 $500 this month, it doesn't blow us up. We can plan for that, right? You know, we can do small, tiny allocations and so the smaller raises the micro adjustments, etcetera throughout the year, very impactful to the team and has a much smaller impact to the company as a whole. And that's of course, if you can make them, it also gives us an opportunity for the team to know that they are constantly being able to adjust their baselines north. So they can start to kind of, you know, increase quality of life. Or if we're talking about the minimum viable income, if you will get closer and closer, right? You just got to see light at the end of the tunnel. That's a big part of this entire journey.

Ryan Rutan: Yeah. And I think constant progress towards that, even if small is better than A deferment and waiting for the full thing. Right? So if you're $2,000 short on a monthly basis of your minimum threshold, that $100 step in the right direction is really meaningful. And there's no reason to defer that until you say, well, let's just wait until we can make that a $2000 raise. Let's wait 567 months, There's no reason to do that.

Wil Schroter: Absolutely. And so if we're to kind of tie all this back together, we're talking about breaking up, how much should I be paid into two components? This is the minimum that I have to be paid. Having an honest discussion. Ryan between you and I and our team about what that looks like and then Here's what my target pay is. Now that could be a market comp that could be um what the company can afford. It could be any number of things but those are two separate numbers right? So if I make $100,000 a year in the market currently But I'm saying my minimum, you know threshold on comp my minimum viable comp if you will is $60,000. Cool. All we're focused on is getting to minimum viable comp but we agree that once we hit that threshold that $100,000 is our next target and it will probably exist in a number of micro adjustments until we get to that target. But we have a very deliberate plan towards getting there.

Ryan Rutan: Yeah. And I think that that deliberate plan is really really important because while you know you're not really truly going to feel whole and good until you cross that line. I think that emotionally having that plan and seeing that progress and knowing that you're aligned on how you're going to get there, that that alignment in terms of the compensation plan is incredibly important. It just, it takes one more variable out of your, your sort of worry matrix. And those are significant enough when starting a company that we don't need anything added to that. I think we can do to eliminate one or two of those, those components that cause us some, you know, some, some stress, some worry. Um I think we're all far better off for

Wil Schroter: them. Absolutely. And I think that, that really all we're talking about is creating very deliberate, very specific and transparent goals that everybody can understand so that we're working toward specific numbers that have come from very defensible places if you will versus hey, I just need to make this much. Why isn't the company giving me more money?

Ryan Rutan: Exactly. Well man, I think we wrap it up here, you and I need to get back to work because we've got people that need to get paid,

Wil Schroter: we gotta get paid, we'll leave it there.

Ryan Rutan: That's a wrap for this episode of the startup therapy podcast. This is Ryan Rutan on behalf of my partner Wil Schroder and all the startups dot com family thanking you for joining us and we hope you'll continue to join us. Be sure to subscribe rate and comment on itunes or wherever you love to listen to startup therapy, you can find all of our episodes at startups dot com slash podcast. If you're looking for more amazing resources to launch or grow your startup, be sure to head the startups dot com and check out startups unlimited. It's everything we have to offer from our online university to our amazing community of experts and founders and even all the tools we've built like biz plan, fungible and launch rock. It's everything a founder needs, visit startups dot com slash begin that startups dot com slash b e G i N. You'll thank me later.

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