32 ms·

Let’s talk about founder compensation

94 points by aurenh 5y ago

k__ 5y ago
I really hope DAOs will improve on that situation.
- jjtheblunt 5y ago
  What is a DAO ?
  - aurelius12 5y ago
    decentralized autonomous organization (driven via crypto)
  - k__ 5y ago
    A Decentralized Autonomous Organizstion. It's a bit like a company/cooperation/nation which rules are defined and enforced by smart contracts.
  - rgbrgb 5y ago
    Decentralized autonomous organization. It’s a collaboration mechanism for forming an organization wherein you can define the compensation and governance structure as open source code. Moloch DAO is one of the better known and simple to understand instances of a DAO, though it’s scope is limited to managing membership and voting on projects to fund [0]. [0]: https://github.com/MolochVentures/moloch/blob/minimal-revenue/v1_contracts/README.md https://github.com/MolochVentures/moloch/blob/minimal-revenu...
    - majormajor 5y ago
      So it's a contract but "with code"/"with crypto"? I don't understand why you'd prefer to work in a structure governed by contract-written-as-code compared to contract-written-as-anything-else. Seems like you could put any arbitrary set of rules in a regular contract too.
      - k__ 5y ago
        I think, the fact that those contracts are enforced by themselves is the USP here. It removes overhead that made a huge amount of rules prohibitly expensive and slow in the past.
        majormajor 5y ago
        But we're not talking about scams here, as far as I can tell. Contracts aren't being thrown aside and blatantly ignored. Just misunderstood, possibly even exploitative, rules. Or in the case of "go forward" comp like in the article, it's really just a negotiation thing, more than a contract thing. Exploitative, deceptive, or otherwise malicious contract rules are still possible, here, no? I have a hard time imagining an automated code checker that is smart enough to figure out "this is a more risky investment based on how the rules are set up!" in a way that a paper contract couldn't be similarly analyzed. After all, a public company is about as decentralized as it gets - decentralized enough that most of the owners have basically zero individual power compared to the people appointed to run it - and there have been plenty of shenanigans in those over the years (which is why they now have a lot of regulation as a result). Is this effectively just "corporations, now with less regulations because we haven't yet seen the ways this particular form can be used maliciously?" Consider "hollywood accounting" - if the smart contract says "profit is split 60% to 40% between the two of us" but I'm in a position to choose to classify expenses and various other costs in a way that means "profit" gets computed in the system as X instead of 5X, what happens?
        k__ 5y ago
        I'm not talking about scams. It's just that some things don't make much sense if they are actively managed by people. Like liquid voting rights instead of CEOs etc.
      - m_ke 5y ago
        Because it can be enforced without being tied to a specific jurisdiction, expensive lawyers and army of accountants. Imagine a company the size of Google/Alphabet organized in a similar way to something like https://dxdao.eth.link/#/ https://dxdao.eth.link/#/, where employees have more say in what they work on and don't have layers of expensive management. Or a Y Combinator or a DAO of indie hacker businesses working as a cooperative, investing in new products, sharing resources, etc. Or an open source alternative to Uber / Seamless / Instacart where users can vote and bid on features and reward contributors who implement them. I'm sure a product driven by customers and makers would look a lot different than the exploitative middleman businesses that dominate tech at the moment.
- m_ke 5y ago
  Yeah I'm usually very anti crypto anything but DAOs sound like a promising concept. Might be a great way to get rid of VCs and run international workers coops with initial funding though ICOs. A DAO based startup studio / incubator would be interesting too.
  - k__ 5y ago
    Yes. Would probably be a nicer working environment fur uber- and onlyfans-like markets.
  - vmception 5y ago
    How about a DAO that only transacts in DAI and has no token representation of its shares, just prorata ownership and voting weight from initial funding via that decentralized stablecoin The irony being that nobody would notice if these exist or are prevalent specifically because there is no token doing the advertising
    - omeze 5y ago
      OlympusDAO is doing something like this, but they do have a token - DAO members get paid and theres a staking process that lets them accrue more of the token. The token is backed by a treasury and is worth at least 1 DAI. https://docs.olympusdao.finance/ https://docs.olympusdao.finance/ Disclaimer: I own Ohm
      - vmception 5y ago
        Thanks for making me aware of that I’ve seen ohm and olympusdao mentioned before but not what they did
- glitchc 5y ago
  ... how?
  - k__ 5y ago
    Zero trust transparency by design, for example.
    - glitchc 5y ago
      Which part of the system is transparent? The smart contract? Despite the name, a smart contract is just a software program. It is not a legal contract nor is it recognized as such in a court of law. As such it has no legal force. When that changes, I’ll sit up and take notice. Until then, the crypto folks are just spinning their wheels pretending one is like the other.
supernova87a 5y ago
Funny when someone comes to the shocking realization of what's happening to the workers under them, only when it happens to themselves. "People are getting paid less than they're worth unless they renegotiate or leave! We must do something about this!"
- usui 5y ago
  I hear this kind of complaint so many times especially from individual contributers but honestly can you realistically imagine a world in which this wasn't the dominant form of compensation adaptation model? For the most part, your salary is affected by supply and demand. As soon as you leave your job, the demand to fill your position goes up. If you don't leave, the demand stays the same. The demand to keep your position filled won't be as high as when a vacant position needs to be filled. Am I missing something?
  - folli 5y ago
    I guess your missing the elasticity in your equation. Your statement makes sense if there are only a handful of people in the market that can provide what you provide, but for a job that can be done by thousands it doesn't hold.
  - tshaddox 5y ago
    Aren’t you missing the fact that the demand can change while you’re still at your job because of the fact that you can leave at any time? I see no good reason why people need to switch jobs to get significant pay increases, other than apparently there is psychological or bureaucratic “stickiness” of compensation.
    - fiddlerwoaroof 5y ago
      I’ve occasionally wondered if a policy of giving a 10-30% total raise over the first 3-ish years of an employees tenure would pay off: the value of the domain knowledge of someone who walks + the cost of recruiting and training a new hire is probably about $50k+ and, so, it might be less expensive in the long run to just match the raise someone could get by switching jobs.
lumost 5y ago
Meh this matters if the founder has little equity, but not too much if they already own half the company. If a founder has been diluted down then they will have every reason to move on.
- ryanSrich 5y ago
  It’s extremely unlikely founders own the majority of the company post Series B. In fact, it’s closer to 10% by the time a company exits. So I would say the article applies in most cases.
  - echelon 5y ago
    Why? How did Zuckerberg, Bezos, et al. keep so much?
    - physPop 5y ago
      They're outliers rather than the average. They had amazing leverage to retain control beacause of the scope of what they were doing.
    - ryanSrich 5y ago
      Extreme outliers. You have a better shot at winning the lottery or being struck by lightning than ever having a company that resembles Facebook or Amazon in any way, including founder compensation and ownership. To answer the question though it’s all about leverage. You can’t go into a situation like VC funding without it. Leverage can almost be anything, but is commonly: - revenue - traction with customers - traction with users (if d2c) - a previous exit - nepotism It’s in a VCs best interest to take as much of the company as possible without causing disruption. That means making you feel like you didn’t get shafted in the deal. This dynamic shifts when you have leverage. So instead of you taking a term sheet and just eating whatever they give you, with leverage you set the terms. But again, you’ll need a lot of leverage, likely almost every point above, in order to get a deal that isn’t complete garbage (save for nepotism).
      - 5y ago
ilaksh 5y ago
Amazing that he goes into such detail about how unequal pay should be slightly less unequal. People are always going to take advantage of other people if they can or if things are structured that way. It is traditional for VCs to take advantage of founders. It is harder for them to take advantage of people who know there is already funding and are coming in after. And VCs will go into excruciating detail rationalizing all of this. What about the programmers who are actually building the software and often getting a pittance in relative compensation even though the business is 100% reliant on them to solve most of the problems (which are technical).
- bpodgursky 5y ago
  The value of a programmer at a startup isn't their output... it's their value relative to the second-best person the company could have hired. Sometimes the employee is a critical component, and sometimes they are a replaceable code-monkey. If you are easily replaced, code-monkeying simple code that makes $1B doesn't mean you provided $1B of value. (I say this, as a software dev at a startup).
  - throwawaythekey 5y ago
    It's easy to follow your line of reasoning to the ultimate end point that no one is really worth anything much at all. Even if it is logically sound the main outcome of thinking like that is to limit your own potential... Note how very few of the non-labor class will refer to themselves in those terms.
  - UncleMeat 5y ago
    Surely this is true of everybody, including founders. Why do we assume that it is only founders that are providing some creative asset to the company?
umutisik 5y ago
I’m sure any replacement CEO would love a pay structure where the guaranteed comp is 25% but the bonus matches founder gains.
- ryanSrich 5y ago
  Founders don’t realize any gains unless they have an exit or sell secondaries. The likelihood of either is pretty low.
nostrademons 5y ago
There's a weird set of assumptions in this piece that make me a bit nervous about the state of the startup ecosystem. When I was first getting into startups (late dot-com boom to about 2009), the assumption was that your startup was your identity, and an expression of your power to change the world. You owned it, or a big chunk of it, and you got rich by growing the size of the company (and hence your share value). This is the Warren Buffett, Jeff Bezos, Steve Jobs, Page & Brin, and Zuckerburg model. Control and ownership stake are the forms of "compensation" that matter here - instead of you taking compensation as CEO, you paid out compensation as owner of the firm, and slowly gave away equity in exchange for deals that would make the overall firm worth more. The article alludes to this model with "your entire life and self-worth is wrapped up in the company". But the whole premise of this article doesn't exist with that model of a founder's role. Founders don't take compensation; they own the company, and dole it out based on who increases the value of the company most. Founders put their allies on the board, they don't take orders from the board. Founders wouldn't consider an outside CEO, so that comparison would be moot. It makes me think that the "change the world" phase of tech startup history is over, and we're now in the "fill in the gaps" phase, where a "founder" is a hired gun that slots into a VC's portfolio. Which I've suspected we were getting close to for a while now, but if true, it makes the job description of "founder" a lot less attractive. If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?
- bitexploder 5y ago
  It does put you in a different club and give you a lot of credibility to successfully exit. You can replay the game on VC boards and other places and at a higher level. It is a small club and successful (e.g founders with a solid exit) just have more options. You can use a variety of skills to grow a business. You have to win the tech meritocracy in a FAANG and competition can be a lot more narrow.
- m_ke 5y ago
  The size of VC funds exploded in the past 3-4 years thanks to SoftBank. Raising 5 mil A round used to be a big deal, these days most seed rounds are around that and it's not hard to see A rounds in the 50mil range. It's much easier to cut yourself a larger check with so much money in the bank and it attracts a different type of crowd. https://news.crunchbase.com/news/bigger-checks-days-to-close-how-2021s-red-hot-venture-funding-landscape-is-shaking-up-early-stage-investing/ https://news.crunchbase.com/news/bigger-checks-days-to-close...
motohagiography 5y ago
What do you mark founder value/salary to though? My impression spending time with investors has been that they need productive assets for their portfolio of depreciating cash, and they need exposure to companies in markets where they perceive growth. To get that exposure, they're usually in a few companies in a space already, so as a founder, your company is just one of many. I'd like to propose what a more cavalier approach would look like. The next piece is venture isn't regular value investing. The participants in a given fund (LPs) probably have a horizon of 5-7 years for the total age of that funds portfolio, where they are expecting one or two of upwards of 20+ companies to hit. VC money isn't a loan, the equity a founder sells them is the ticket price VCs pay for admission to the market exposure they need. (Buy the ticket, take the ride.) When you look at what founder/ceo comp should be in that relationship, just as one reference point, a technical founder can probably pick up a consulting gig for a quarter million a year. It has no equity, taxed as income, discounted to risk, no leverage, no scale, all opportunty cost against life and running a year of startup runway, and they're just running a one person time and ass rental business, but that's a founder's base BATNA in the comp discussion. Founders typically pay themselves less before later rounds because of some conventions, but you can't moralize what makes a successful company. Myths about frugality and the protestant work ethic are uncorrelated to returns in venture portfolios. (PE is another story imo, because it doesn't invest in growth, it invests in ways to optimize existing cash flows) So when it comes to founder comp, if a round gives a company 18-24 months of runway to get to their next growth stage, I'd measure comp against the value of that binary outcome. Either the founder gets you there, or they don't. It's hard to imagine, but if you have a portfolio of cash and you need for it to grow, and you believe in a startup, you need as much of that cash working for you in that company as you can stuff into it. If you need one of your companies to have a 30x return and you can't predict which one it will be, any "savings" the founder provides back to their company with frugal comp that comes at the expense of any early stage growth trajectory at all, results in vast value destruction. e.g. If you put $10m into a company and then the one person responsible for all that capital is paid less than some random interchangeable consultant, I'd say you've earned that loss honestly. If a founder took the money from a round and put half of it in a pile on a beach and set it on fire, it literally shouldn't matter to an investor because the investor now owns something better than cash, which is equity in something that is growing. Surplus cash is opportunity cost against growth runway somewhere else. I've seen a few companies who should have set half their cash on fire, because the money made them lazy, political, and stupid. So in terms of what it's reasonable to mark founder salary to, the two co-ordinates I'd reckon with would be somewhere between their consulting opportunities they could just walk away to today, and just setting half your money on fire. I write, am not an investor or founder, this isn't advice, but the conversation from the OP seemed too polite to be useful.
deleted 5y ago
[deleted]
chejazi 5y ago
> Some founders create structured equity that only pays out after the company’s stock appreciates significantly. Other CEOs have out-of-the-money options (Elon Musk is famous for this). I looked up OTM options and it looks very similar to the first sentence. Basically, you (the founder) tie your compensation to the success of the company. You win big if the company wins big. Can anyone disambiguate the two situations in the quote further?
- seanhunter 5y ago
  An option gives the right but not the obligation to buy (or sell) something at a given price (the "strike") in the future. Equity in this case is that thing. The equity can be structured such that it sits behind other investors in liquidation preferences etc meaning it doesn't have economic value until the share price/valuation hits a particular hurdle (similar to the strike price on an option). So while they are similar in terms of economic impact, the equity can have other rights attached (eg voting, ROFR for dilution etc) that a founder might want. Also crucially you already have the equity so you don't have to pay up to buy it (as you would in the case of a call option). Finally as always there may be tax implications which make the difference meaningful. Tax arbitrage is often part of the calculus for any kind of weird compensation package.
glitchc 5y ago
tl;dr Founders who are unable to convince talent to work cheaply for them are not worth the investment. Quelle suprise.
danbmil99 5y ago
From a market point of view, founder of a startup is unlikely to have lots of opportunities to be CEO at other companies. The kind of person who comes into an established company and takes the CEO spot has much more leverage because they are a generalist who could be CEO at a bunch of different companies. The founder is a specialist in their own venture, but doesn't have much market value outside of that role. And of course the founder presumably has a large chunk of stock and therefore has an order of magnitude more upside than anyone else who might run the company. Finally, there's the fact that psychologically the founder often believes they know best, and has a higher level of expectation for the company's prospects than a cold-eyed third party who wasn't part of the founding story.

94 points by aurenh 5y ago

k__ 5y ago

I really hope DAOs will improve on that situation.

jjtheblunt 5y ago
What is a DAO ?
- aurelius12 5y ago
  decentralized autonomous organization (driven via crypto)
- k__ 5y ago
  A Decentralized Autonomous Organizstion. It's a bit like a company/cooperation/nation which rules are defined and enforced by smart contracts.
- rgbrgb 5y ago
  Decentralized autonomous organization. It’s a collaboration mechanism for forming an organization wherein you can define the compensation and governance structure as open source code. Moloch DAO is one of the better known and simple to understand instances of a DAO, though it’s scope is limited to managing membership and voting on projects to fund [0]. [0]: https://github.com/MolochVentures/moloch/blob/minimal-revenue/v1_contracts/README.md https://github.com/MolochVentures/moloch/blob/minimal-revenu...
  - majormajor 5y ago
    So it's a contract but "with code"/"with crypto"? I don't understand why you'd prefer to work in a structure governed by contract-written-as-code compared to contract-written-as-anything-else. Seems like you could put any arbitrary set of rules in a regular contract too.
    - k__ 5y ago
      I think, the fact that those contracts are enforced by themselves is the USP here. It removes overhead that made a huge amount of rules prohibitly expensive and slow in the past.
      - majormajor 5y ago
        But we're not talking about scams here, as far as I can tell. Contracts aren't being thrown aside and blatantly ignored. Just misunderstood, possibly even exploitative, rules. Or in the case of "go forward" comp like in the article, it's really just a negotiation thing, more than a contract thing. Exploitative, deceptive, or otherwise malicious contract rules are still possible, here, no? I have a hard time imagining an automated code checker that is smart enough to figure out "this is a more risky investment based on how the rules are set up!" in a way that a paper contract couldn't be similarly analyzed. After all, a public company is about as decentralized as it gets - decentralized enough that most of the owners have basically zero individual power compared to the people appointed to run it - and there have been plenty of shenanigans in those over the years (which is why they now have a lot of regulation as a result). Is this effectively just "corporations, now with less regulations because we haven't yet seen the ways this particular form can be used maliciously?" Consider "hollywood accounting" - if the smart contract says "profit is split 60% to 40% between the two of us" but I'm in a position to choose to classify expenses and various other costs in a way that means "profit" gets computed in the system as X instead of 5X, what happens?
        k__ 5y ago
        I'm not talking about scams. It's just that some things don't make much sense if they are actively managed by people. Like liquid voting rights instead of CEOs etc.
    - m_ke 5y ago
      Because it can be enforced without being tied to a specific jurisdiction, expensive lawyers and army of accountants. Imagine a company the size of Google/Alphabet organized in a similar way to something like https://dxdao.eth.link/#/ https://dxdao.eth.link/#/, where employees have more say in what they work on and don't have layers of expensive management. Or a Y Combinator or a DAO of indie hacker businesses working as a cooperative, investing in new products, sharing resources, etc. Or an open source alternative to Uber / Seamless / Instacart where users can vote and bid on features and reward contributors who implement them. I'm sure a product driven by customers and makers would look a lot different than the exploitative middleman businesses that dominate tech at the moment.
m_ke 5y ago
Yeah I'm usually very anti crypto anything but DAOs sound like a promising concept. Might be a great way to get rid of VCs and run international workers coops with initial funding though ICOs. A DAO based startup studio / incubator would be interesting too.
- k__ 5y ago
  Yes. Would probably be a nicer working environment fur uber- and onlyfans-like markets.
- vmception 5y ago
  How about a DAO that only transacts in DAI and has no token representation of its shares, just prorata ownership and voting weight from initial funding via that decentralized stablecoin The irony being that nobody would notice if these exist or are prevalent specifically because there is no token doing the advertising
  - omeze 5y ago
    OlympusDAO is doing something like this, but they do have a token - DAO members get paid and theres a staking process that lets them accrue more of the token. The token is backed by a treasury and is worth at least 1 DAI. https://docs.olympusdao.finance/ https://docs.olympusdao.finance/ Disclaimer: I own Ohm
    - vmception 5y ago
      Thanks for making me aware of that I’ve seen ohm and olympusdao mentioned before but not what they did
glitchc 5y ago
... how?
- k__ 5y ago
  Zero trust transparency by design, for example.
  - glitchc 5y ago
    Which part of the system is transparent? The smart contract? Despite the name, a smart contract is just a software program. It is not a legal contract nor is it recognized as such in a court of law. As such it has no legal force. When that changes, I’ll sit up and take notice. Until then, the crypto folks are just spinning their wheels pretending one is like the other.

supernova87a 5y ago

Funny when someone comes to the shocking realization of what's happening to the workers under them, only when it happens to themselves. "People are getting paid less than they're worth unless they renegotiate or leave! We must do something about this!"

usui 5y ago
I hear this kind of complaint so many times especially from individual contributers but honestly can you realistically imagine a world in which this wasn't the dominant form of compensation adaptation model? For the most part, your salary is affected by supply and demand. As soon as you leave your job, the demand to fill your position goes up. If you don't leave, the demand stays the same. The demand to keep your position filled won't be as high as when a vacant position needs to be filled. Am I missing something?
- folli 5y ago
  I guess your missing the elasticity in your equation. Your statement makes sense if there are only a handful of people in the market that can provide what you provide, but for a job that can be done by thousands it doesn't hold.
- tshaddox 5y ago
  Aren’t you missing the fact that the demand can change while you’re still at your job because of the fact that you can leave at any time? I see no good reason why people need to switch jobs to get significant pay increases, other than apparently there is psychological or bureaucratic “stickiness” of compensation.
  - fiddlerwoaroof 5y ago
    I’ve occasionally wondered if a policy of giving a 10-30% total raise over the first 3-ish years of an employees tenure would pay off: the value of the domain knowledge of someone who walks + the cost of recruiting and training a new hire is probably about $50k+ and, so, it might be less expensive in the long run to just match the raise someone could get by switching jobs.

lumost 5y ago

Meh this matters if the founder has little equity, but not too much if they already own half the company. If a founder has been diluted down then they will have every reason to move on.

ryanSrich 5y ago
It’s extremely unlikely founders own the majority of the company post Series B. In fact, it’s closer to 10% by the time a company exits. So I would say the article applies in most cases.
- echelon 5y ago
  Why? How did Zuckerberg, Bezos, et al. keep so much?
  - physPop 5y ago
    They're outliers rather than the average. They had amazing leverage to retain control beacause of the scope of what they were doing.
  - ryanSrich 5y ago
    Extreme outliers. You have a better shot at winning the lottery or being struck by lightning than ever having a company that resembles Facebook or Amazon in any way, including founder compensation and ownership. To answer the question though it’s all about leverage. You can’t go into a situation like VC funding without it. Leverage can almost be anything, but is commonly: - revenue - traction with customers - traction with users (if d2c) - a previous exit - nepotism It’s in a VCs best interest to take as much of the company as possible without causing disruption. That means making you feel like you didn’t get shafted in the deal. This dynamic shifts when you have leverage. So instead of you taking a term sheet and just eating whatever they give you, with leverage you set the terms. But again, you’ll need a lot of leverage, likely almost every point above, in order to get a deal that isn’t complete garbage (save for nepotism).
    - 5y ago

ilaksh 5y ago

Amazing that he goes into such detail about how unequal pay should be slightly less unequal. People are always going to take advantage of other people if they can or if things are structured that way. It is traditional for VCs to take advantage of founders. It is harder for them to take advantage of people who know there is already funding and are coming in after. And VCs will go into excruciating detail rationalizing all of this. What about the programmers who are actually building the software and often getting a pittance in relative compensation even though the business is 100% reliant on them to solve most of the problems (which are technical).

bpodgursky 5y ago
The value of a programmer at a startup isn't their output... it's their value relative to the second-best person the company could have hired. Sometimes the employee is a critical component, and sometimes they are a replaceable code-monkey. If you are easily replaced, code-monkeying simple code that makes $1B doesn't mean you provided $1B of value. (I say this, as a software dev at a startup).
- throwawaythekey 5y ago
  It's easy to follow your line of reasoning to the ultimate end point that no one is really worth anything much at all. Even if it is logically sound the main outcome of thinking like that is to limit your own potential... Note how very few of the non-labor class will refer to themselves in those terms.
- UncleMeat 5y ago
  Surely this is true of everybody, including founders. Why do we assume that it is only founders that are providing some creative asset to the company?

umutisik 5y ago

I’m sure any replacement CEO would love a pay structure where the guaranteed comp is 25% but the bonus matches founder gains.

ryanSrich 5y ago
Founders don’t realize any gains unless they have an exit or sell secondaries. The likelihood of either is pretty low.

nostrademons 5y ago

There's a weird set of assumptions in this piece that make me a bit nervous about the state of the startup ecosystem. When I was first getting into startups (late dot-com boom to about 2009), the assumption was that your startup was your identity, and an expression of your power to change the world. You owned it, or a big chunk of it, and you got rich by growing the size of the company (and hence your share value). This is the Warren Buffett, Jeff Bezos, Steve Jobs, Page & Brin, and Zuckerburg model. Control and ownership stake are the forms of "compensation" that matter here - instead of you taking compensation as CEO, you paid out compensation as owner of the firm, and slowly gave away equity in exchange for deals that would make the overall firm worth more. The article alludes to this model with "your entire life and self-worth is wrapped up in the company". But the whole premise of this article doesn't exist with that model of a founder's role. Founders don't take compensation; they own the company, and dole it out based on who increases the value of the company most. Founders put their allies on the board, they don't take orders from the board. Founders wouldn't consider an outside CEO, so that comparison would be moot. It makes me think that the "change the world" phase of tech startup history is over, and we're now in the "fill in the gaps" phase, where a "founder" is a hired gun that slots into a VC's portfolio. Which I've suspected we were getting close to for a while now, but if true, it makes the job description of "founder" a lot less attractive. If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?

bitexploder 5y ago
It does put you in a different club and give you a lot of credibility to successfully exit. You can replay the game on VC boards and other places and at a higher level. It is a small club and successful (e.g founders with a solid exit) just have more options. You can use a variety of skills to grow a business. You have to win the tech meritocracy in a FAANG and competition can be a lot more narrow.
m_ke 5y ago
The size of VC funds exploded in the past 3-4 years thanks to SoftBank. Raising 5 mil A round used to be a big deal, these days most seed rounds are around that and it's not hard to see A rounds in the 50mil range. It's much easier to cut yourself a larger check with so much money in the bank and it attracts a different type of crowd. https://news.crunchbase.com/news/bigger-checks-days-to-close-how-2021s-red-hot-venture-funding-landscape-is-shaking-up-early-stage-investing/ https://news.crunchbase.com/news/bigger-checks-days-to-close...

motohagiography 5y ago

What do you mark founder value/salary to though? My impression spending time with investors has been that they need productive assets for their portfolio of depreciating cash, and they need exposure to companies in markets where they perceive growth. To get that exposure, they're usually in a few companies in a space already, so as a founder, your company is just one of many. I'd like to propose what a more cavalier approach would look like. The next piece is venture isn't regular value investing. The participants in a given fund (LPs) probably have a horizon of 5-7 years for the total age of that funds portfolio, where they are expecting one or two of upwards of 20+ companies to hit. VC money isn't a loan, the equity a founder sells them is the ticket price VCs pay for admission to the market exposure they need. (Buy the ticket, take the ride.) When you look at what founder/ceo comp should be in that relationship, just as one reference point, a technical founder can probably pick up a consulting gig for a quarter million a year. It has no equity, taxed as income, discounted to risk, no leverage, no scale, all opportunty cost against life and running a year of startup runway, and they're just running a one person time and ass rental business, but that's a founder's base BATNA in the comp discussion. Founders typically pay themselves less before later rounds because of some conventions, but you can't moralize what makes a successful company. Myths about frugality and the protestant work ethic are uncorrelated to returns in venture portfolios. (PE is another story imo, because it doesn't invest in growth, it invests in ways to optimize existing cash flows) So when it comes to founder comp, if a round gives a company 18-24 months of runway to get to their next growth stage, I'd measure comp against the value of that binary outcome. Either the founder gets you there, or they don't. It's hard to imagine, but if you have a portfolio of cash and you need for it to grow, and you believe in a startup, you need as much of that cash working for you in that company as you can stuff into it. If you need one of your companies to have a 30x return and you can't predict which one it will be, any "savings" the founder provides back to their company with frugal comp that comes at the expense of any early stage growth trajectory at all, results in vast value destruction. e.g. If you put $10m into a company and then the one person responsible for all that capital is paid less than some random interchangeable consultant, I'd say you've earned that loss honestly. If a founder took the money from a round and put half of it in a pile on a beach and set it on fire, it literally shouldn't matter to an investor because the investor now owns something better than cash, which is equity in something that is growing. Surplus cash is opportunity cost against growth runway somewhere else. I've seen a few companies who should have set half their cash on fire, because the money made them lazy, political, and stupid. So in terms of what it's reasonable to mark founder salary to, the two co-ordinates I'd reckon with would be somewhere between their consulting opportunities they could just walk away to today, and just setting half your money on fire. I write, am not an investor or founder, this isn't advice, but the conversation from the OP seemed too polite to be useful.

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chejazi 5y ago

> Some founders create structured equity that only pays out after the company’s stock appreciates significantly. Other CEOs have out-of-the-money options (Elon Musk is famous for this). I looked up OTM options and it looks very similar to the first sentence. Basically, you (the founder) tie your compensation to the success of the company. You win big if the company wins big. Can anyone disambiguate the two situations in the quote further?

seanhunter 5y ago
An option gives the right but not the obligation to buy (or sell) something at a given price (the "strike") in the future. Equity in this case is that thing. The equity can be structured such that it sits behind other investors in liquidation preferences etc meaning it doesn't have economic value until the share price/valuation hits a particular hurdle (similar to the strike price on an option). So while they are similar in terms of economic impact, the equity can have other rights attached (eg voting, ROFR for dilution etc) that a founder might want. Also crucially you already have the equity so you don't have to pay up to buy it (as you would in the case of a call option). Finally as always there may be tax implications which make the difference meaningful. Tax arbitrage is often part of the calculus for any kind of weird compensation package.

glitchc 5y ago

tl;dr Founders who are unable to convince talent to work cheaply for them are not worth the investment. Quelle suprise.

danbmil99 5y ago

From a market point of view, founder of a startup is unlikely to have lots of opportunities to be CEO at other companies. The kind of person who comes into an established company and takes the CEO spot has much more leverage because they are a generalist who could be CEO at a bunch of different companies. The founder is a specialist in their own venture, but doesn't have much market value outside of that role. And of course the founder presumably has a large chunk of stock and therefore has an order of magnitude more upside than anyone else who might run the company. Finally, there's the fact that psychologically the founder often believes they know best, and has a higher level of expectation for the company's prospects than a cold-eyed third party who wasn't part of the founding story.