Startup Therapy Podcast

Episode #47

Ryan Rutan: Welcome back to another episode of the startup therapy podcast. This is Ryan Rutan joined as always by Wil Schroder founder and Ceo of startups dot com. So will I. There's this funny conversation going around about how cool it is as a founder to pay yourself zeros of dollars and it's pretty neat. Huh?

Wil Schroter: Yeah, it's cool if you already have a billion dollars going into that conversation, right? I mean like I saw a recent article talking about how the new ceo of full time ceo of outfits slash google Sundar is taking a $0 salary, some insanely low compensation. And then Elon musk was taking $0 or $1 the big thing and then

Ryan Rutan: taking a

Wil Schroter: dollar, what would have you? And the Asterix to that ridiculous statement is and by the way is taking $250 million dollars of stock compensation as if the dollars fooling anyone

Ryan Rutan: and a publicly traded stock with high liquidity.

Wil Schroter: So it's just, it's just, it's such a goofy thing. And then when we get into the startup world, because again, in, in kind of no other world do people talk about not taking salaries. But in the startup world we get this really bizarre sense of chivalry, right? This badge of honor that says, you know, I'm working for nothing so that my startup can grow and Ryan, I think you could appreciate this. There's two answers to that. You either didn't have money to pay yourself right or you had so little money, it wouldn't matter if you paid yourself either way. If you could pay yourself you'd be paying yourself,

Ryan Rutan: Right. I am also taking a $1 salary, not by choice, but that's what we had in the checking account this month. We have like it's not, it's not a badge of honor.

Wil Schroter: To be fair, there's a time and a place where you just don't have a choice and it's honorable because you're trying to build your startup. You know, Ryan you and I just started this business. Let's say we're nine months into it. We're burning through savings. We're putting everything we can into the business because we want to grow it. No shame in that. I mean that's, that's part of the hardship. It's why we deserve every dollar coming to us if this thing ever makes it, it's part of the process, right? So, so that makes total sense, right? Where it gets daisy? And I think this is the heart of what we'll talk about today is when we start looking at that, that commitment, I'm putting it in quotes here. That commitment as being something that other people should should respect us for, right where investors are looking at. And we're saying, hey, you know, we've got skin in the game and investors should care about that. So I think I'm going to focus on not getting paid devaluing yourself in your own organization ends poorly in every possible outcome when it's phrased, that way comes

Ryan Rutan: out exactly as dumb as it sounds right. Like it's, it's, it's pretty obvious to see at that point, you know, and it's it's funny, but let's dig in for a second of the motivations around this, right? And of course, like if you're motivated to not pay yourself because you have no money to pay yourself fair enough, right? It is what it is, right? If you do have money to pay yourself and you're not right. So there's obviously there's the case where the investors are giving some pressure and we can talk about, you know what our feelings on that one are in a minute. But the other side of it is, you know, if you're you're doing this is this badge of honor, it's one of many, right, if you're not paying yourself and and again, we're trying to achieve something you're pouring yourself into this. It's one of many, many sacrifices that you're making at that same time. And it's not like, oh, I'm I'm not paying myself, but gee, I'm only in the office half a day. I'm having so much fun golfing, right? I'm sleeping really well. I'm eating well. I'm healthy as can be right. Typically not the case, but you're making all kinds of sacrifices. I think one of the traps that we fall into as founders is that we use the money, uh, you know, we use the dollar amount because people understand it, right? It's something that everybody can understand that they can say like, oh, you work late hours, well, I work late hours to, yeah, okay, you worked two hours of overtime at your bank job this week and then you went home and you have to think about it again, it's not the same thing, right? So, but people think they understand these other challenges that we face as founders. It's high stress. I have a high stress job too. Yeah, Okay, not the same thing, not the same thing we're going through. And so I think that one of the reasons we revert to this is because we believe that people will somehow now get it and they're like, ah, you're not paying yourself man. That's, I definitely wouldn't go to my bank job if I wasn't being paid for it. So I think that's, that's one of the reasons, What are the other potential motivations that that set us up for falling for, what I'm going to call this trap.

Wil Schroter: Okay. So I think the first thing that people really get stuck with is again associating this, I'll get paid next to nothing or nothing. It doesn't have to be zero. It can just be something way less than anybody should be getting paid to do any amount of work. They say, hey, I'm going to be getting paid less because I want to show how committed I am to the future of the business and let's be fair about this, There is a level of commitment that taking less implies I'll go the other direction. If you were to say, Hey, prior to this, I was making $180,000 in the market now, I'm making 170, so I'm showing my commitment. I mean, come on, that's like not really, but I think that's not what we're talking about. We're not talking about people making marginally less than they otherwise would. We're talking about people making zero or damn near zero most importantly. And this is the next part of what I want to point out, putting themselves at the bottom of the capital stack without understanding why that really buys them nothing long term. And we can talk about all the ways that backfires on you probably should spend the rest of this episode talking about how much you're going to regret it and why, but right now, I think what you're talking about Ryan is why do we even think we should do this? And I think that it's because I think it starts with, we're not going to make money anyway, But let's let's push this a little bit further because it's easier to discount when you say, hey, I'm not paying myself anything and we don't have any money, but let's take that a little bit further. Let's talk about, we do have some money or we just took on some investment, we took on some seed capital, which I think is probably the most consistent scenario where this comes up here's how it gets pitched to me, this is a startup pitching themselves to me Will, I've got this company, we're going to raise $500,000 seed round. And in the seed round, I'm only paying myself $10,000 because you know, I would otherwise makes $100,000 in the market, but I'm gonna pay myself $10,000 Just so I can show that I'm committed to the business or maybe I'm gonna pay $20,000, whatever the number is. And my first question is why that number, in other words, why zero or y 10 or y 20 and all

Ryan Rutan: your ramen budget is that arbitrary? It just felt like a good low number. So nobody would, would question it. Where did it come

Wil Schroter: from? And in every case it's a reflection of what their perception an investor will

Ryan Rutan: think, right?

Wil Schroter: So they're thinking about it in terms of, I want to send a message to the investor. The problem with that is it assumes that the investor really gives a ship, Right? If I'm an investor and I see that Ryan, that, that you're taking $20,000 salary, we're in the market, you'd make 100 k. My answer to that is going to be okay if you're dumb enough to sign up for that. Sure, right? No different than if, if you were to come to me as the investor and you were to say, Hey, will I'd like to like you to give me, um, uh, 200,000 versus 100,000 for the same amount of equity. And I said, Okay, you'd be like, Okay, if you're dumb enough to give it to me. Sure, right? But that's not the same as being told you're supposed to do that. This is a dumb thing to gamble on the assumption for,

Ryan Rutan: Yeah, there's no reason to,

Wil Schroter: Yeah. Look, if the investor flat out comes to you and says what you're asking for in a salary is absurd. And, and, and I'll go on the side on this one in a second. Then by all means have the conversation. But it's like any other negotiation in life. If someone didn't push back, you didn't ask for enough. Great. It's like you're

Ryan Rutan: gonna go rent an apartment, You're like, I'm bringing a dog with me. So I should probably give you a $500 security deposit because it chews on everything. Like nobody said that ever. And yet we're doing the same damn things to ourselves as founders were like, Hey, let me just, uh, could you stand move over here. I'm gonna throw myself under a bus really quick and then, and then we'll continue with negotiations. Like, why do we do this?

Wil Schroter: Okay. So I'll give you a couple of counterpoints here and this is first from some real world experiences that I've had. I'm raising money for a company in southern California, we're doing about $1 million dollar seed round. So it's a pretty small but pretty well known investors in the deal. And we present the salaries of some of the executives And there were about $120,000 each. And there's pushback now again you got to understand these these details and never guess. Nobody was saying you guys would never earn that much in the market. They weren't saying that at all. What they were saying is relative to this amount of money being raised relative to this round of capital. Probably a bit too rich. I made the mistake of taking mine down from was probably 120 K. 20 K. And then putting the rest of that into the kitty, right so that we can spread it around with other people dumbest move ever. It was I was a hero for about nine seconds. And then from that point on nobody gave a ship

Ryan Rutan: And literally went from 0 to 0

Wil Schroter: zero. And and all I did all I was successful at went out and showing how committed I was to the company. It was showing how willing I was to devalue myself to zero. That's it, that's all it accomplished. Now now imagine I've got to claw my way back into the compensation discussion, right. The companies making me be a little bit more money a big enormous jump from you at that would be a $60,000 salary. Yeah. Right. And so by going to zero or damn near it. You're setting a baseline. So low that crawling back from that is a real discussion when it shouldn't have ever been a discussion.

Ryan Rutan: Yeah. And obviously there's no there's no way that you just turn that around right? You don't once you once you devalue yourself in that way, you can do that in an instant, right? It took you nine seconds to do that. It could take you forever or never to to reverse that. And I think that's one of things that makes it so dangerous is that we we we make that decision in a heartbeat and we drop ourselves to zero thinking that, you know, I'm eliminating this big barrier to moving forward, right? And so I'll do that right? I'll drop the barrier. I'll say like, okay, look, I'll just I'll go to zero. Making it back from that is not incidental, right? And use the words claw back and it literally that right? You have to scrape and scratch for every little bit that you're gonna get from that point forward if ever right? And it has a real cost because you know, in that moment it feels good to get the yes to move forward with the funding round perhaps. But from that point forward, then you have completely changed your life circumstances,

Wil Schroter: there's another piece to once the money goes in the company it all gets distributed and allocated. You know, salaries get set up, people get hired contracts get signed now for me to go back in and get my allocation. I have to start taking from someone else to do that. People don't think about this. They don't realize that that once the money is all in process, your boxed out and you may be thinking, well, hey, I'm the ceo, I can change it at any given time. Lots of luck with that. I mean a startup company, Every dollar is allocated $2 for every $1. Right, getting yourself to the top of that stack, especially when you've already explained that you will work for free is damn near impossible. And the truth is the lower you set that baseline, the further away from ever getting back to that you can get. Now, there's some ways to prevent this from happening. It just doesn't have to be, you just, you know, stand your ground and say, I won't get paid anything less than market rate. Stage it out. Say, hey, I'll get paid on an incremental basis. So I'll get paid in Q one, I'll get paid 25 K a year In Q two. I'll get paid 50 K year, Q 3 75 Q 400. So I'm on a ramp up, I'll ramp up with the business, not hard to do. Worst case you don't hit your milestones. The other thing that you can do, investors hate this and they'll push back on it and maybe it's just a deal point is you can do deferred comp, I didn't take my $120,000. So it's going to get deferred and paid back as a liability in the company fair warning. It won't. There's no, I can't think of a single instance where I can't think of anybody that did a deliberate deferred comp that ever got paid back. I'm sure it's happened somewhere like anything else in life. It's more of a bargaining chip. And and I think as we probably get later into this episode, we'll talk about how even that kind of evaporates on its own. But it's better than just leaving the number of zero. Yeah, But at least at least a cruise something on a balance sheet somewhere. So you can point to the fact that that money is owed, can at least be converted into stock or something.

Ryan Rutan: Something. Yeah. Yeah. For sure. Something when you set the value at zero, the value is zero. Right? If you set your value at 250,000 And you get paid zero, your value was still 250,000, right? You may not have realized the cash, but at least you put the value in the right spot,

Wil Schroter: we'll stick with that, right? So if you've got a market rate of what you would reasonably get paid And you say again, Let's say it's $100,000. There's no upside to doing anything that devalues that and I think this is really critical for founders to understand and I don't think investors agree with this at all. But let me, let me spell it out. There are two aspects to your compensation, your compensation as an owner, which is your equity and your compensation as an employee. Now this gets highly contentious in the formative stages because just about any investor is going to go look man. The only reason you have that stock is because you're working at the company. And I think there's a there's a moment in time where that's fairly true. However, I can't avoid pointing this out, Investors put in value one time and reap the benefits of that value for life. Yet somehow, when owners, you know, the the co founders of the business or the equity holders of the business put their time and get that value. Somehow the concept is they have to keep working for it. They keep having to contribute values employees, even though they already have their their value as as equity holders. I want to be mindful when, when we say this, you have two streams of income, your equity in your cash comp as an employee. And of course there's some some equity earnings you can get as an employee as well, but the moment you devalue your contribution as an employee, you'll never get it back. The only person that's ever going to fight for it is you and if you hire fire holes in that boat on day one, you're screwed, it's, it's a terrible bet founders make it all the time and they myself included, and they always regret it.

Ryan Rutan: Yeah, Yeah. I think, you know, it goes back to, you know, some of the motivations around doing this, right? We're trying to show that we got skin in the game so that the minute you completely devalue that, um I wanna hear your thoughts in this world. But if I say that, I'm going, I'm like, okay, I'll just go to a zero salary to me that actually reduces the value of that move in the first place because it makes it sound like money didn't matter to you, right? You're like, oh no, I'll figure it out. I don't, I don't need it. And, and so I think that to some degree, at least by perception, if I'm sitting on the side of the table and somebody says, I'll take a zero salary, well, again, we're going to say yes, because it's in my interest to do so. But I'm also going to think that wasn't that meaningful of a give from that human, right? I'm gonna say, well, they must not have needed it, they must have figured out, they must have money in the bank, they must have a spouse can support them, trust fund, whatever the hell it is, it doesn't really matter. I think it devalues that move completely. And, and again, like what you were saying before, we will take a $10,000 salary. Okay, but why, right? If there's, if there's a reason behind it, if you can substantiate the value there and you say like, look, uh you know, here's my market rate. Maybe we do deferred, comp, maybe we don't do whatever. I'll take a reduced salary. But here's what it is. And you can kind of show like this gets me right to the point of survival, right? If I say like I'm gonna take $25,000 I'm gonna go ramen budget. I'm gonna couchsurfing gonna do whatever that tells a very different story to me about the skin in the game and how much you're actually willing to give up and what your struggle looks like than just saying $0.00 dollars sounds. It's it's flippant, isn't it?

Wil Schroter: It is. It's flipping and you touched on something that is really important, right? I have bills, I have costs, right? I have to have an operating budget to pay my bills like everyone else. And by the way, even if you did have these other sources of income, that doesn't mean that your contribution has zero value. And I think at which point you open the door to present it as my income doesn't matter my expenses. Don't matter my contribution. Doesn't matter. You're firing a hole in the boat. What we want to do here is we want to be able to say here are my expenses. If you're so bold here is my market rate here, Here are the things that are the moving components of my life. I'm willing to take some of that risk if this reward is in my future, right by way of deferred comp, by way of additional stock incentives, etcetera. I always want to make sure that my market value has never been compromised.

Ryan Rutan: Okay. So yeah, I think we can all agree that we need to establish that baseline value and, and that, you know, going to zero doesn't make any sense. But let's pretend for a minute that we did that. Let's say we, we made this sacrifice. We dropped all the way to zero. I've now got this beautiful shiny badge of honor. How long does that thing stays shiny? Well, you've got, you've got a personal story here. How long does the luster last on that, that beautiful piece of metal

Wil Schroter: Until the end of your statement about how long anybody remembers cares. So I'll give you an example. I've got a few of these actually another thing that I've got way more than I care to remember. Uh, but I've got one. I'm, I'm running a startup. I'm gonna, I'm gonna not name this one. Normally I would, I won't name this one only because folks that are involved directly the innocent maybe. And uh, we started the company. I mainly fund the company myself. Of course by way of that take no salary, but also put a bunch of money into it and we raise a little bit of money, some prophecies and uh, we go through the money etcetera. We're looking to get on to the next round. Some of the VCS are looking to participate again. And the question comes up as to why I have so much of the cap table. And then I'm like, let me give you a little history lesson here because I'm the one who put all the money in. I'm the one who brought in all the resources and I'm the one who worked for free and the response was like, and

Ryan Rutan: wait,

Wil Schroter: what lesson learned please by all means take a life lesson from the, the costs of mine. Here's what happened. And I'm going to flat out say I was wrong. I did everything that I thought was right. I tried to do right by the company, et cetera and I was wrong. Here's where I screwed up. Yes going into it. I put my own money in a startup capital. I didn't have anything where I was showing that that came in at evaluation or that was tracked in a meaningful way. I just opened up my bank account flooded a whole bunch of cash into the company. Watch. It got spent or get spent and in the process obviously wasn't taking more money to pay myself because it was already my money. But I didn't really track it in a meaningful enough way. It was just a much of money that wasn't there anymore.

Ryan Rutan: Got it, got it. So the optics on it were just that, you know, yeah, you need more money now. So what happened in the past doesn't matter and you don't have a great way to show us what you did.

Wil Schroter: Stick with that for a second. You said the optics, which I think is exactly what it was. I created no visibility as to what capital had been contributed. It was just, here's a company that's up and running that's making a little bit of revenue. You know, by the way, I put it was like a quarter million dollars into it. Uh, not to mention, you know, me not getting paid. I didn't capture that right? I didn't, I didn't capture my contribution both the actual dollars I put in in a meaningful way, like a cap table around and I didn't capture the amount of time or market value of my investment personally. Either so short of me doing that, Who would in other words, if the next investor came on, gave us $1 million, but forgot to mention it in the cat table, would I be chasing them down to make sure that that it got recognized. I mean you sort of have to legally, but in this case you don't, if I don't capture this, if I don't create the optics for what was invested, No 1's gonna do it for

Ryan Rutan: me. Nobody's gonna go looking for it were like by the way, well we went through your trash and found some bank statements, it looks like you've put a lot of money into this buddy. We should probably compensate you for that at all. Going to happen. And nobody is doing if

Wil Schroter: you want to take it a step worse. Although it's the same track. You then say, let me make no account for the contributions I'm about to make or have made in the past. And then somehow magically expect because I've got these big tales of my chivalrous que accomplishment that someone else is going to come in and try to pay me out for what I've done.

Ryan Rutan: People are always just just on the lookout for those kind of things. They just can't wait to find somebody and compensate them for their past efforts.

Wil Schroter: I'll give an example like, you know, Ryan, even for you and I with startups dot com, we're getting paid pennies. If if nothing at the beginning of this, that was eight years ago now, Do you think anybody that works here now cares? And by the way, if your if your other folks working in the company, I'm not saying you should

Ryan Rutan: even, I agree you shouldn't need to and

Wil Schroter: you don't need to write and I guess what we fail to recognize or prepare for when we're making these grand gestures, is that no one cares, No one will remember. And if you ever try to come back and cash this chip in, you're going to get zero value for it. It's all of this risk, All of this heartache for essentially this short term, in some case meaningless gesture. That is the $0 salary, right? And that I just don't see it, do you?

Ryan Rutan: No. I mean this is the thing. I think that there are in the moment motivations that can lead us to saying yes to these things, whether or not they were necessary is the big question, right? You can say, well, look, the investors stood their ground. They weren't going to put money into the company. I had to take the $0 salary. You had to take the $0 salary to get their investment. Maybe who knows what would happen if you push back. But on the other hand, you don't have to take the investment money, right? There are other Czech writers out there and I know that it's not easy right now. I'll just go find another investor. Not that simple, but you don't have to take the money. You don't have to accept really shit terms just to move forward, right? There are always other ways to skin that cat. And so at the end of the day, and you know, I've spent time talking about this, we certainly spent a lot of time thinking about this. I cannot come up with good reasons for doing this unless you're a publicly traded company. You want the bullshit optics of saying I take a dollar salary, right. Which we all see through anyways. It's great to take a dollar salary when you're already fully liquid somewhere else. It's not the same thing back to like it's not actually a sacrifice and it's same thing. And that's what I'm saying. It's like, again, for me, the optics are if you say I'm going to a $0 salary, it means to me that it was meaningless to

Wil Schroter: you. So what is the point? Exactly? Exactly. No one else is going to be fighting your fight for this. And I think you know what we said before about making sure that that your, your compensation and your contribution is consistently recognized regardless of whether it's immediately rewarded.

Ryan Rutan: So

Wil Schroter: If we are to say again, I'm $100,000 person. I want either deferred comp or I want some sort of record that will be paid back for this in the future. Here's what happens worst. Worst case, the investor says, no, you're right back to where you started. In which case you may proceed either way, but at least you brought that brought to the table. But more likely any sane investor, any sane partner, etcetera is going to start off by saying yes, I recognize this is how much you'd make in the market. We don't have enough capital to pay that. So let's talk about how we can kind of cover that. Delta will also say invariably, well, that's why you have so much equity, right? And you can say, I already have that equity.

Ryan Rutan: You didn't hand that to me. I made, right.

Wil Schroter: Well, it said differently, you're the one buying in. I've already got it. So don't try to, don't try to sell me my own company. But, but, but that said, you can say that's true, but I've got my equity regardless of how much time I put into. Now. Again, there's this whole other discussion about vesting your equity back and everything else like that separate discussion, but even still represents the fact that, that you've got compensation for your contribution, which I don't think should should ever be overlooked. I think if a founder comes to us and she says, look, I'm working for a $0 salary, just did $1 million dollar round and that's where things landed. I would be okay with that if she were to say, But we had the conversation, I've got $100,000 market rate and here's how that's being recognized on a go forward basis. Again, dude, get creative say, I want to increase that by 10-K annually every three months, have some sort of plan, some sort of milestone that it can be revisited and and pick back up because if you don't set it, no one else performance

Ryan Rutan: based. That's exactly the investors are going to come back and go, hey, will, you know, you haven't been paying yourself very well for a while now. Um, we should probably change. That would be a great conversation to have. It's never gonna happen.

Wil Schroter: Absolutely not. And I think there's particularly for first time founders who haven't been around the block on this one. There's this concept that some angel will take care of me later. And the truth is, know, as the company grows as more and more people get involved in the cap table, there's no one there that would have any reason to stop everything they're doing and care about your situation, right. It's never going to happen unless we set the gauntlet down right from the start of where we stand on compensation. No one does it for us, which we get. However, I gotta throw this out there in every aspect of developing our company. We, as the founders are wholly responsible for setting the tone for how we're going to let other people kind of manage our equity, manage our comp manage the board. Everything. We got to stand strong. We have to be inflexible. We just have to stand strong to say, do we at least agree that there's value being exchanged. Okay, let's talk about how it will get redeemed.

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 to 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.

Copyright © 2024 LLC. All rights reserved.