5 ms·

I have to say, I usually love Janz's writing, but I think this model is too simplistic and does not provide enough evidence. As a technical founder with a succ

I have to say, I usually love Janz's writing, but I think this model is too simplistic and does not provide enough evidence. As a technical founder with a successful track record, I could be working with any number of businesspeople or all sorts of opportunities, and I'm good at math. Why should I forgo a market rate salary to take a 1 in 100 chance at a lottery ticket, where my likelihood of success is largely determined by the people who also choose my salary? Major conflict of interest. The math does not add up. I would think my team should be motivated to pay enough to keep each other from leaving for attractive opportunities in this lucrative market. It's one thing to voluntarily give up salary to help the company. It's another to force it by means of a questionably sustainable business model. Evidence: try to hire yourself a technical co-founder from their job at FaceGoogAmaSoft (or pay equivalent) and find out that money talks.

doublerebel 9y ago
I should clarify I'm playing Devil's Advocate. I do try to bootstrap my startups part-time, no salary until we have enough cash to pay decent full-time salary to founders. Good reasons to forgo salary: - startup already has revenue and/or a clear path to profitability that would be affected by the salary decision - because you probably need as much cash as possible for the first technical hire(s). This is a good problem and usually indicates growth - because you legitimately don't need or want it (e.g. cash from successful exit or good pre-fulltime planned savings)
- CalChris 9y ago
  Why should I forgo a market rate salary to take a 1 in 100 chance at a lottery ticket, where my likelihood of success is largely determined by the people who also choose my salary? Because as a founder you have a great idea that you think will be worth those odds. If you truly think it is a lottery ticket then your idea isn't that good and you should look for another idea. You can always make more money working for BiggleCorp. The benefits are always better at NanoSoft. So the deciding question for you is not what flavor of ramen you'll eat but whether your idea is so insanely great that you're willing to suffer. Moreover, your skillset is already factored into both your stock and the relative ease vs difficulty of your raise.
  - doublerebel 9y ago
    Ideas are cheap, execution is everything. Actually getting liquidity for equity compensation is a function of the execution of the team, not me as an individual. So the real question of how much to pay yourselves as founders is "what makes you all get along and feel worthwhile?" so that you can maximize your productivity. Like equity, founder salaries are a major source of dispute, and if the business takes too long to reach market rates then it becomes a source of tension. That's why I think relying on low salaries as a business model is a bad idea -- the business should be focused on sustainably paying market rate ASAP, which should mean that the business has revenue or customers incoming steady and growing. I would argue that as a rule below market salaries means the business is unsustainable and has not found market fit. Founders can (and often do) still choose a lower salary when it makes sense to them.
    - CalChris 9y ago
      Yes, ideas ARE cheap but good ideas are very expensive. Hell, YC was giving away some ideas for free yesterday. But I don't think any of them were good ideas and respectfully, I don't think your successful track record as a technical founder could save AI for Communicating with Dogs or Social Network for Children regardless of the amount of VC dumped in or your founder salary. They just aren't good ideas. Myself, I don't think execution is everything. It is a lot but you can't execute a mediocre idea into a success. If I'm wrong about that, and I could be given my technical bias, then I'll rephrase that to if you can execute a mediocre idea into a success then anyone can and it just becomes a lottery. Been there and I won't revisit there. BTW, we are talking about initial salaries. If your startup is killing it then you can dictate your terms and your funders will still say thank you.
      - Judgmentality 9y ago
        > you can't execute a mediocre idea into a success No, but great founders can realize this sooner, wasting less money and decide to either return what's left of the money or pivot. Very few successful companies grew into their original vision - they changed along the way because they had great leadership (and luck).
ryanSrich 9y ago
> try to hire yourself a technical co-founder from their job at FaceGoogAmaSoft (or pay equivalent) and find out that money talks What an incredibly simplistic view of the world. Even as someone living on the west coast I still find it insane that people think the best engineers only work at FaceGoogAmaSoft or somewhere else paying exorbitant salaries. There are thousands of engineers that work for far less. They're more interested in making a difference and solving difficult problems than collecting $300k per year as a cog in the machine. Not having to work for FaceGoogAmaSoft is likely worth hundreds of thousands of dollars to some people (I know it is for me).
- notyourday 9y ago
  Nope, your parent is absolutely correct ( most likely because he is successful technical co-founder with a track record, which would put him into his mid thirties or more). People get wiser with age and realize that while money may not buy one happiness, it certainly removes barriers to achieving happiness. > They're more interested in making a difference and solving difficult problems than collecting $300k per year as a cog in the machine. That means their take home is roughly $150k/year after taxes, which is $12.5K/mo, which is not an great take home. Most likely the take home for his partner would be about $4-$5k/mo. Lets make it $5k. So the total take home is $17k/mo. For someone in his thirties the apartment would be about $5k/mo. Wife's personal trainer + ClassPass ( you are accounting for things like that, right? You realize that 'I like the way you look' costs real money?) is $1k/mo. Food + incidentals is another $1k mo. Utilities + misc recurring is another $1k mo. So we are down to $9k/mo not going to anything before: 1. Going out 2. Clothes 3. Trips 4. Parties to host or go to 5. Emergency funds By the time this is all accounted for $300k/year income is perfectly fine but not extravagant in any of the areas where one gets $300k/year for his co-founder worthy skills.
  - jonex 9y ago
    Spending $1k/mo on personal training is _not_ extravagant? I realise I must be living a much poorer life than I thought...
    - 9y ago
rahimnathwani 9y ago
"Why should I forgo a market rate salary" You have to do the math, of course, to see whether it makes sense for you, given your estimate of chance of success, and payoffs under different scenarios. But it usually makes sense to forgo a market salary early on because you don't want to give up too many shares. Imagine you're about to start a business, and are looking for investors to fund the first 12 months. Imagine the terms an investor might offer if you need: A) $500k (of which $80k is your salary, payroll taxes etc.) B) $700k (of which $280k is your salary, payroll taxes etc.) In (A), the investor is contributing $500k of cash, and you're contributing $200k in foregone income. In (B), the investor is contributing $700k (out of which your market salary is being paid). You're already being compensated in cash for your contribution, so why would any of your shares vest during this period? Another thing to consider is perceived alignment of incentives. If you're not risking anything (because you're earning the same as you would with a regular job), and you're the CEO, what reason is there for you to optimise for the success of the company? You could rationally decide instead to just chill out, or spend all day learning new front-end frameworks, or whatever you feel like.
chrija 9y ago
Thank you for your comment! Making the case for becoming a founder using math is tough. It's well possible that the expected value is higher for an employee career because, as you say, most startups fail, although it's difficult to do this comparison really well methodologically. I think if you become a founder you do it because you just want to start your own thing and love the freedom and satisfaction of working on your own idea. And maybe because you think you can beat the odds and get rich. As an aside, the probability of a startup to become a unicorn may be 1 in 10,000, but the chances for a more modest (but still financially very rewarding) outcome, say a $20M exit, are of course much higher. Also, you learn so much as a founder that your chances increase for your 2nd or 3rd startup.
- Nuzzerino 9y ago
  This topic has been studied in depth. I recommend a thorough read of this paper before being tempted to use gut-feelings. http://web.stanford.edu/~rehall/Hall-Woodward%20on%20entrepreneurship.pdf http://web.stanford.edu/~rehall/Hall-Woodward%20on%20entrepr...
- prewett 9y ago
  I'd say the expected value is almost certainly higher for an employee career, assuming some financial discipline. After 10 years so in the industry, you should be able to get $100k/year, more in high expense areas. That's $5.8k/month after taxes (assume 30%). Assuming you are single, at $1k/month rent, $300/month food, and $700/month for other things, you have $3.8k/month left over. That's about $45k/year you can save, say $50k for easy math. So in 20 years, you can save $1 million, buy some large-cap stock at 3% dividend and have $30k/year for free (more if you buy a higher-yield utility-type stock like AT&T or Verizon). But the stock market grows by 6 - 8%, on average. If you invest in large, "safe" companies, or in an S&P 500 index fund, at 7%, you'll double your money in 10 years, so you'll end up with $2 million (I did the math on a spreadsheet: yearN = yearN-1 * 1.07 + $50k). That's $60k/year at age 50 (not including 401k matching, and assuming that ages 20 - 30 are years of profligate spending with no saving), about as risk-free as you get. Compare that with a statistical 90% of failure starting a company, but frequently resulting the loss of the founder's savings due to having invested it in the company. Basically the startup should give at least $50k/year of increase (above the cost of living), plus a 7%/year growth, so for two years doing a startup, you need to walk away with a little over $100k. At a 90% failure rate, you need to exit at $1 million for the expected value to break even. If you are not the sole owner and/or with VC funding it will need to be even higher. (If you are an early employee getting 1% or something you'd need about a $1 billion exit for a positive expected value.) That's some pretty uncompelling math. It gets even worse if you have a family.

doublerebel 9y ago

I should clarify I'm playing Devil's Advocate. I do try to bootstrap my startups part-time, no salary until we have enough cash to pay decent full-time salary to founders. Good reasons to forgo salary: - startup already has revenue and/or a clear path to profitability that would be affected by the salary decision - because you probably need as much cash as possible for the first technical hire(s). This is a good problem and usually indicates growth - because you legitimately don't need or want it (e.g. cash from successful exit or good pre-fulltime planned savings)

CalChris 9y ago
Why should I forgo a market rate salary to take a 1 in 100 chance at a lottery ticket, where my likelihood of success is largely determined by the people who also choose my salary? Because as a founder you have a great idea that you think will be worth those odds. If you truly think it is a lottery ticket then your idea isn't that good and you should look for another idea. You can always make more money working for BiggleCorp. The benefits are always better at NanoSoft. So the deciding question for you is not what flavor of ramen you'll eat but whether your idea is so insanely great that you're willing to suffer. Moreover, your skillset is already factored into both your stock and the relative ease vs difficulty of your raise.
- doublerebel 9y ago
  Ideas are cheap, execution is everything. Actually getting liquidity for equity compensation is a function of the execution of the team, not me as an individual. So the real question of how much to pay yourselves as founders is "what makes you all get along and feel worthwhile?" so that you can maximize your productivity. Like equity, founder salaries are a major source of dispute, and if the business takes too long to reach market rates then it becomes a source of tension. That's why I think relying on low salaries as a business model is a bad idea -- the business should be focused on sustainably paying market rate ASAP, which should mean that the business has revenue or customers incoming steady and growing. I would argue that as a rule below market salaries means the business is unsustainable and has not found market fit. Founders can (and often do) still choose a lower salary when it makes sense to them.
  - CalChris 9y ago
    Yes, ideas ARE cheap but good ideas are very expensive. Hell, YC was giving away some ideas for free yesterday. But I don't think any of them were good ideas and respectfully, I don't think your successful track record as a technical founder could save AI for Communicating with Dogs or Social Network for Children regardless of the amount of VC dumped in or your founder salary. They just aren't good ideas. Myself, I don't think execution is everything. It is a lot but you can't execute a mediocre idea into a success. If I'm wrong about that, and I could be given my technical bias, then I'll rephrase that to if you can execute a mediocre idea into a success then anyone can and it just becomes a lottery. Been there and I won't revisit there. BTW, we are talking about initial salaries. If your startup is killing it then you can dictate your terms and your funders will still say thank you.
    - Judgmentality 9y ago
      > you can't execute a mediocre idea into a success No, but great founders can realize this sooner, wasting less money and decide to either return what's left of the money or pivot. Very few successful companies grew into their original vision - they changed along the way because they had great leadership (and luck).

ryanSrich 9y ago

> try to hire yourself a technical co-founder from their job at FaceGoogAmaSoft (or pay equivalent) and find out that money talks What an incredibly simplistic view of the world. Even as someone living on the west coast I still find it insane that people think the best engineers only work at FaceGoogAmaSoft or somewhere else paying exorbitant salaries. There are thousands of engineers that work for far less. They're more interested in making a difference and solving difficult problems than collecting $300k per year as a cog in the machine. Not having to work for FaceGoogAmaSoft is likely worth hundreds of thousands of dollars to some people (I know it is for me).

notyourday 9y ago
Nope, your parent is absolutely correct ( most likely because he is successful technical co-founder with a track record, which would put him into his mid thirties or more). People get wiser with age and realize that while money may not buy one happiness, it certainly removes barriers to achieving happiness. > They're more interested in making a difference and solving difficult problems than collecting $300k per year as a cog in the machine. That means their take home is roughly $150k/year after taxes, which is $12.5K/mo, which is not an great take home. Most likely the take home for his partner would be about $4-$5k/mo. Lets make it $5k. So the total take home is $17k/mo. For someone in his thirties the apartment would be about $5k/mo. Wife's personal trainer + ClassPass ( you are accounting for things like that, right? You realize that 'I like the way you look' costs real money?) is $1k/mo. Food + incidentals is another $1k mo. Utilities + misc recurring is another $1k mo. So we are down to $9k/mo not going to anything before: 1. Going out 2. Clothes 3. Trips 4. Parties to host or go to 5. Emergency funds By the time this is all accounted for $300k/year income is perfectly fine but not extravagant in any of the areas where one gets $300k/year for his co-founder worthy skills.
- jonex 9y ago
  Spending $1k/mo on personal training is _not_ extravagant? I realise I must be living a much poorer life than I thought...
  - 9y ago

rahimnathwani 9y ago

"Why should I forgo a market rate salary" You have to do the math, of course, to see whether it makes sense for you, given your estimate of chance of success, and payoffs under different scenarios. But it usually makes sense to forgo a market salary early on because you don't want to give up too many shares. Imagine you're about to start a business, and are looking for investors to fund the first 12 months. Imagine the terms an investor might offer if you need: A) $500k (of which $80k is your salary, payroll taxes etc.) B) $700k (of which $280k is your salary, payroll taxes etc.) In (A), the investor is contributing $500k of cash, and you're contributing $200k in foregone income. In (B), the investor is contributing $700k (out of which your market salary is being paid). You're already being compensated in cash for your contribution, so why would any of your shares vest during this period? Another thing to consider is perceived alignment of incentives. If you're not risking anything (because you're earning the same as you would with a regular job), and you're the CEO, what reason is there for you to optimise for the success of the company? You could rationally decide instead to just chill out, or spend all day learning new front-end frameworks, or whatever you feel like.

chrija 9y ago

Thank you for your comment! Making the case for becoming a founder using math is tough. It's well possible that the expected value is higher for an employee career because, as you say, most startups fail, although it's difficult to do this comparison really well methodologically. I think if you become a founder you do it because you just want to start your own thing and love the freedom and satisfaction of working on your own idea. And maybe because you think you can beat the odds and get rich. As an aside, the probability of a startup to become a unicorn may be 1 in 10,000, but the chances for a more modest (but still financially very rewarding) outcome, say a $20M exit, are of course much higher. Also, you learn so much as a founder that your chances increase for your 2nd or 3rd startup.

Nuzzerino 9y ago
This topic has been studied in depth. I recommend a thorough read of this paper before being tempted to use gut-feelings. http://web.stanford.edu/~rehall/Hall-Woodward%20on%20entrepreneurship.pdf http://web.stanford.edu/~rehall/Hall-Woodward%20on%20entrepr...
prewett 9y ago
I'd say the expected value is almost certainly higher for an employee career, assuming some financial discipline. After 10 years so in the industry, you should be able to get $100k/year, more in high expense areas. That's $5.8k/month after taxes (assume 30%). Assuming you are single, at $1k/month rent, $300/month food, and $700/month for other things, you have $3.8k/month left over. That's about $45k/year you can save, say $50k for easy math. So in 20 years, you can save $1 million, buy some large-cap stock at 3% dividend and have $30k/year for free (more if you buy a higher-yield utility-type stock like AT&T or Verizon). But the stock market grows by 6 - 8%, on average. If you invest in large, "safe" companies, or in an S&P 500 index fund, at 7%, you'll double your money in 10 years, so you'll end up with $2 million (I did the math on a spreadsheet: yearN = yearN-1 * 1.07 + $50k). That's $60k/year at age 50 (not including 401k matching, and assuming that ages 20 - 30 are years of profligate spending with no saving), about as risk-free as you get. Compare that with a statistical 90% of failure starting a company, but frequently resulting the loss of the founder's savings due to having invested it in the company. Basically the startup should give at least $50k/year of increase (above the cost of living), plus a 7%/year growth, so for two years doing a startup, you need to walk away with a little over $100k. At a 90% failure rate, you need to exit at $1 million for the expected value to break even. If you are not the sole owner and/or with VC funding it will need to be even higher. (If you are an early employee getting 1% or something you'd need about a $1 billion exit for a positive expected value.) That's some pretty uncompelling math. It gets even worse if you have a family.