A trade off between founders and investors interests
Recently we hosted a startup founders dinner in Zurich and asked how the different company CEOs and CTOs were handling the delicate topic of salaries for their own founding team. A topic that is a very crucial part of being an entrepreneur and usually causes lots of discussions between founders and investors. This article should give you an overview of the different perspectives and a clear guide on how to set the salaries for your founding team.
The unicorn approach
Earlier this year I interviewed unicorn investor Daniel Gutenberg (13 unicorn investments in his portfolio) for the Swisspreneur show and when asked about founders’ salaries he had a very clear take: If you’re convinced that you’re building the next unicorn, the only rational thing to do is invest all your money into your startup company because you will basically earn much much more if your plan works out.
That basically means you should analyze your living expenses and pay yourself exactly that amount on a monthly basis. Everything else you have saved or can remain in the company should be invested in your startup to push it to unicorn level and generate your big pay day with an IPO or M&A deal based on your billion dollar company valuation.
Of course this is also a very risky approach; as we know, 9 out of 10 startups usually fail and therefore while the reward is indeed very appealing, the risk should not be taken lightly. However, for unicorn investor Gutenberg it’s critical that founders have a large amount of “skin in the game” and are personally invested in their startups’ success. So if you’re goal is to build a unicorn and you want to win Daniel as an investor you know what’s required.
What founders say
That you don’t have to invest your last cent in your company shows the general practice of Swiss startup founders. Usually they also focus on their living expenses which generally tend to be lower the younger the founders are. If there is more than one founder, most of the companies take the highest living expenses of their team as a base salary and pay everyone the same. I think in general it’s smart to pay the founders the same salary to avoid distracting discussions and fully focus on building a successful company. This of course only works, if all of them are working full-time for your company (which they definitely should be).
Some founders get paid a regular market salary while most said that they don’t pay themselves a high salary on purpose. This is because of the potential upside through their company shares which is part of the payout and compensates them for the lower salary. I think here it really depends on how you earn your shares: If you have to invest a significant amount of money yourself and basically buy the shares of the company, a salary closer to the market standard seems appropriate.
However, if you, like most first and/or early stage founders, get your shares basically free of charge and sell some equity to investors, a regular market salary wouldn’t make sense and significantly reduces your run-rate. So you basically have less time to hit your next milestones. Therefore, depending on your living expenses, a salary between 3-5k seems appropriate and is also the way most founders in Switzerland handle it. There are some outliers that only pay themselves 1k a month and others that get paid 8-10k CHF but they are the exception rather than the rule.
Grow your salary with your company
I would personally suggest to go for 4-5k during your early phase and then steadily increase the salaries as you progress and approach a potential Series A+ financing round. Right before you start fundraising for your Series A you should pay yourself a market salary because VCs will want to know how much money you make or usually burn based on fair market terms. If you pay yourself a lower market salary you are basically cheating on this. From what I have learned from talking to VCs, this is usually a bad sign in their perspective and a potential red flag for an investment.
So basically your salary policy is similar to finding product market fit: first you try to reduce everything to the minimum until you find something that’s actually working. In this phase you pay yourself close to your living expenses to survive, but only live a very basic lifestyle, so 3-5k CHF per month should do the trick in Switzerland. As soon as you find something that’s working and entering scaling mode, where you also need to attract senior talent and pay them appropriately, you should pay yourself close to market standards and with that also send a strong signal to potential investors so they take you seriously.
What do you think about this topic? And how much do you pay yourself as a startup founder? Leave your thoughts in the comments or send me an email.