March 21st, 2017 | By: Phil Nadel | Tags: Planning
I recently had a difficult conversation with the founder of a startup looking for a small seed extension investment. I reviewed the company’s performance since their seed round and expressed concern with the unexpected increase in the monthly burn and the shorter-than-expected runway immediately after they closed on their seed round. I discovered that this individual and his co-founder had started taking combined annual salaries of almost $300k. This is a company with less than $400k in the bank and less than 6 months of runway. The company did not disclose the amounts of these salaries in the Use of Proceeds provided during the seed round fundraising process.
I tried to explain to this founder that he and his co-founder were going to bleed the company dry and that these exorbitant salaries were hamstringing the company by not giving it ample opportunity to gain traction. I also explained that their salaries were going to make it virtually impossible to attract additional investors. He attempted to defend his expenses by saying they were parsimonious in comparison to Google’s lavish perks.
“Google has executive chefs and massage therapists and pays much higher salaries than we’re earning,” he said.
I replied, “This isn’t Google and you’re not Sergey Brin. Google’s conspicuous consumption is strategic; yours is irresponsible.”
This isn’t Google and you’re not Sergey Brin. Google’s conspicuous consumption is strategic; yours is irresponsible.
Google is trying to attract and retain the best and brightest tech talent in the world against fierce competition from Apple, Facebook, Twitter, and others. It’s an arms race, and the ammunition is salary and perks.
“Besides,” I reminded him, “you’re not paying your team high salaries; just yourselves.”
He further defended his salary (which was higher than his co-founder’s) by explaining that he lives in San Francisco and has high monthly living expenses, made worse by the fact that his wife stays home to care for her elderly mother, who has Alzheimer’s and lives with them. I empathize with his difficult plight, but I told him frankly that perhaps in light of his circumstances he shouldn’t be a startup founder. I suggested that perhaps getting a job with an established company (like Google!) that could provide him with a more secure and reliable paycheck would make more sense for him.
My “tough love” had some impact because he and his co-founder decided to reduce their salaries by almost half. This story is an example of a problem many startups face. The surge of endorphins after a fundraising round is finally closed can result in poor decision-making. The reality is that founders have to be responsible and realistic about the company’s finances. I can’t specify a reasonable salary for a founder since it depends on many circumstances, but it should be related to the remaining cash and runway, profitability or lack thereof, and the company’s revenue traction. The more of a startup’s capital that is allocated for expenses directly related to growing the company, the better its odds of success will be. Founders would be well advised not to count on the ready availability of additional investor capital to bail them out after making myopic decisions.
The startup founder life is not for everyone. Life circumstances, like family and financial obligations, can make it impractical for many. Prospective founders should understand the realities of startup life and do a gut check before jumping in. Similarly, before investing, investors should seek to confirm that founders are well suited to handle the high stress, low salaries, and crazy hours associated with founding a startup.
Also shared on the Medium.
Phil Nadel is the Founder and Managing Director at Forefront Venture Partners (formerly Barbara Corcoran Venture Partners). You can follow him on Twitter: @NadelPhil or on Medium.
Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.
Already a member? Sign in