In the early days, founding a start-up is very much a one-way street - you’re putting in way more than you’re taking out. In fact, you’re probably taking out nothing, because there’s no revenue or funds to draw from. However, this changes as you start to raise capital and there is more money available for salaries. The question is, how much should you pay yourself?
There are several influencing factors – not least of which is what your investors will agree to. They will want to see their money going towards the growth of the business – so it’s not going to fly if you want to allocate a large proportion of it to your own salary. At the outset, a balance has to be struck between what the company needs in order to scale and what you need in order to live. Even as a start-up grows, founder salaries often remain behind “market rate” or the earnings of their externally hired counterparts. The results of our C-suite salary survey revealed that founders typically earn 19% less in basic salary than non-founders. The table below illustrates this disparity specifically for CEOs – the difference is most pronounced at Series A and, while it gets smaller with each stage, the founder pay-gap remains.
Another important factor is company valuation. A 2019 study of founder salaries from SeedLegals discovered a clear correlation, where every £100,000 increase in valuation saw a £1,300 p/a increase in founders’ salary.
Of course, the other side of this is equity – which is where founders have the advantage. Our data indicated that the average equity percentage for founding CEOs was 27.1% (compared with 5.4% for non-founders). But it’s important to note the way in which basic pay and equity is balanced for founders. Whether driven by funding stage, valuation or personal choice, the two elements are directly linked: the higher the salary, the lower the equity. Our research shows that founder CEOs earning less than £50k held, on average, 37.1% in equity. Meanwhile, those at the other end of the scale had a much smaller stake – 21.5% for those on over £200k a year.
While basic salaries increase with each investment round, the opposite is true for equity, as founder ownership become more diluted with each fundraise. For example, our study found a pronounced drop-off between Series A and B rounds, as shown below:
Founders that are looking to raise funds have to consider more than just dilution when it comes to equity. One of the most important aspects of term sheet negotiation is the vesting schedule, which can often be a delicate (and potentially contentious) part of discussions. Naturally, investors want to ensure that the founders don’t cut and run as soon as the deal is closed, so a vesting schedule is set to determine how long they need to stay with the business to fully realise their shares. Typically, this is around four years – a one year cliff followed by monthly vesting over the remaining period.
This may feel frustrating for some founders – especially as it’s not uncommon for vesting schedules to reset at each funding round – but it shouldn’t be a dealbreaker, as long as the terms are fair. It is, however, something to be aware of ahead of any negotiation, and it’s a good idea to seek external advice if it’s unfamiliar territory.
In some ways, founder compensation can be viewed as a series of trade-offs – a balancing act between what you’re willing to relinquish and what you stand to gain. Those decisions are unique to each situation – there is no ‘one-size-fits-all’ approach, but there are clear trends across the venture landscape. Getting the balance right for you and your business is imperative – and it’s worth remembering that founder pay sets a standard for future hires, as these will need to be well aligned as the team grows. I’m yet to come across a founder who started their company for the bumper salary (and equity can be seen as a bit of a lottery ticket) but setting your own – and any co-founders’ – expectations early on should be an important part of the business plan.