3 things founders need to watch when it comes to salaries
1. Don’t flash the cash.
When you raise a seed round, it is exactly the right time both to invest and spend on your product and use the momentum to step up the pace of your company’s development.
However, it’s also important to strike a balance and to remember to stay “lean”.
The worst misstep a startup could make would be to fritter away the funds raised on increased salaries (admittedly a tough ask when everything has been bootstrapped until then) and run out of cash before meeting the milestones set to get to the next level.
So, rule number one: set compensation for existing founders, as well as next hires, at a level which ensures you can cover expenses to the next round.
2. Salaries as a signal.
Modesty in setting founder salaries sends an important signal to investors, as well as prospective employees.
There are some statistics which suggest that founder salaries tend to be lower than those of non-founding CEOs.
Why? Generally-speaking founders believe in the value of their equity, and smarter early employees will usually argue for top-ups in the form of equity grants rather than cash.
Rule number two: signals do matter, because if you believe in the startup, the best message you can send is one which emphasizes the importance of the equity in your business – which is ultimately where value will lie.
3. But be flexible…
As the startup grows, hopefully into a profitable stage, compensation ought to more broadly reflect the firm’s ambition.
At this point it becomes necessary to offer enhanced salary packages to attract the best new talent.
It’s for this reason that we often see new recruits with higher salaries than founders, who are smart to realize that forfeiting a slice of their cash salary to attract top talent from outside pays off in the long run.
Rule number three: be flexible when it comes to recruiting the best talent, because without it, your startup is unlikely to thrive in a highly competitive marketplace.