How do you determine a founder’s salary at a startup, especially if you’re a mid-career founder who’s likely at 10x typical early-stage startup market salary?
I took a 90% cut from my corporate salary after WhiteHat Jr was funded, an amount my investors and I agreed with.
How did we determine the number?
Here I’ll share some principles to arrive at a startup founder/founding team’s salary, which I hope is useful for would-be founders to plan their personal financial lives and go full throttle at making their idea a reality!
First off though, what was my salary progression at WhiteHat Jr?
| Funding Stage | Funding Raised | Company ARR¹ | Founder Salary² | Salary vs Fair-Market Value³ |
|---|---|---|---|---|
| Pre-Seed(Self-Funded) | – | <$100K | – | 0% (100% Cut) |
| Seed | Rs 10 Cr | $100K-$2MM | Rs 40 LPA | 11% (89% Cut) |
| Series A | Rs 70 Cr | $2MM-$100MM+ | Rs 70 LPA-Rs 1 Cr | 25% (75% Cut) |
| Series B+ (Acquisition) | – | $100MM+ | No Change | No Change |
¹Annual Revenue Run Rate= Monthly Revenue x 12. Range depicts start of phase-end of phase.
²All-In Salary including fixed and variable.Range depicts start of phase-end of phase.
³Fair-Market Value=Actual Salary in Corporate at departure (Seed) + nominal 10% Annual Increase.
Now, what are the 3 principles used to determine Founder Salary after VC Funding?
#1: Skin-in-the-Game- Significant Salary Cut vs Market Salary
I had a sinking feeling in my gut on my last day at Discovery. Was I ready to take a 90% salary cut for an indefinite period of time at a 90% startup average failure probability when I was pushing Age 40 with school-going kids and ageing parents?
Only a madman would do it.
Or a founder with complete conviction in their idea!
A founder should ideally take a significant salary cut (50%+ cut) because their entire upside should be in their equity, dimensionalized by the value they create for consumers, investors and employees.
They have no skin in the game if they’re at market salary. Because then, it’s just a job with the upside of equity and no downside of failure. That’s why I operated at a 75-90% salary cut as above.
A founder should risk it all and have value-creation urgency in every cell of their body 24×7. It’s a hard-knock life, at-least for a period of time.
“Don’t it feel like the wind is always howling?
Don’t it seem like there’s never any light?
Once a day, don’t you wanna throw the towel in?”
-Hard Knock Life, Annie
#2: Market Role Equivalency- Running vs Set Up
How much would you pay a leader to run a <$10MM business unit which is yet to turn a profit in the open market?
I used this as another reference to determine Seed stage compensation.
A founder’s job is unlike anything in the market of-course, where you’re both Creating the Wheel and Running the Wheel daily.
You’ll likely spend 80% of the time creating the wheel-setting up business model, product, tech, business systems etc.–and 20% running the wheel– daily sales, operations etc.
But your 80% creation time is rewarded by equity.
For your 20% Running Time, use market salary equivalency as a reference.
That’s why my salary grew as the scale and profitability of our operation improved from Seed to Series A, as above. My salary increased to market BU-Head levels (running) but not market CEO-levels (creating+running).
#3: Hiring Reference- Signaling Value of Founder Salary
We followed two salary frameworks for our founding team of 40-50 leaders, who we hired over Seed and Series A stages:
A. “Owner rather than Renter” Framework: Compensate an employee’s high early-stage risk with Equity Upside. That’s why WHJ cap-table had ~2x allocation for Employee ESOP (~19%) vs average cap-table (10-15%) from the start.
| Funding Round | Funding Raised | Valuation¹ | Founder Ownership | Investor Ownership | ESOP-Employee Ownership |
|---|---|---|---|---|---|
| Seed | $1.3 Million | $6 Million | 60% | 21% | 19% |
| Series A | $10 Million | $30 Million | 39% | 47% | 14% |
| Acquisition: Cash Exit | – | $300 Million | 39% | 47% | 14% |
2018-2020: WhiteHat Jr Ownership Chart
B. “Skin-in-the-Game” Framework: Match current market salary but with no/limited raises so everyone had skin-in-the-game to create value. In a market with over-the-top startup raises, the latter becomes executable if the founder was operating on the same philosophy. I had took a 90% cut given my equity. The founding team didn’t have salary cuts but had no salary raise given their 2x market equity. They were Owners not Renters. And everyone was committed to creating discontinuous equity value versus incremental salary gains.
Please drop me a note in the comments if you’d like the founding team’s absolute salary numbers across functions to build your startup team.
Finally, the above 3 principles should be iterated with a Hardship Principle. Startup founders should be obsessed with creating value rather than obsessing each month over how to make their ends meet.
Your family will have a certain lifestyle–rent, school, household expenses- based on your market salary. As a result, your startup salary cut will likely lead to a negative monthly household cash flow.
Embrace this negative personal cash flow for a period of time versus resisting it.
And then, keep 100% calm for this period.
For example, I had planned 18 months of negative personal monthly cash flows when I started WhiteHat Jr, given my 90% salary cut. And I kept divesting my investments calmly each month to cover family expenses. My savings eroded each month but I didn’t panic, knowing I would give it my all for 18 months to make it work before I ran out of savings, using the calculator above.
Boldness has magic. And what others consider recklessness is just calculated risk for you to pursue your mission!
In Summary, what would be my exact salary recommendation for founders?
Please use this chart for range indicators at each stage of funding based on Principle #2. Then, select within the range based on the maximum salary cut you can take (Principle #1) while having at-least 12-18 months to pursue your idea based on your personal cash flows (Hardship Principle). In general, you’ll be at the higher end of the range if you’re a late-career founder and lower end of the range if you’re just a few years out of college.
Do let me know in the comments if anyone has different data so I can update for everyone’s use as I couldn’t find anything practical when I was starting WhiteHat Jr- especially for founders in their 30s and 40s!
| Funding Stage | Funding Raised | Founder Salary Range |
|---|---|---|
| Angel | <$500K | 0- Rs 20 LPA |
| Seed | $500K-$2MM | Rs 20 LPA- Rs 40 LPA |
| Series A | $2MM-$15MM | Rs 40 LPA-1 Cr |
| Series B+³ | $15MM+ | Rs 1 Cr |
³Series B+ Stage: Equity has tangible value by now so salary becomes less and less important hence I recommend keeping salary flat.
Do let me know in the comments if this was useful or if you’d like an estimate of an early founding team’s absolute salary numbers to build your startup team-I’d love to see your startups come to life in 2022! And if you found this useful, you will also like this new YT Video (<15 Minutes) on How to Build a $100 Million Company in 2022: Step-by-Step Guide
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