3 ms·

So? Who cares. Good for them.

motohagiography 5y ago
Am not a pro investor, and this is sounding out an idea and not an opinion or advice. That said: Even without just being contrarian, it's worth considering whether bigger founder comp should be the norm. It may even be economically better to provide a founder with liquidity than redistributing cash back to investors where, if it isn't a significant multiple returned, the marginal value of the cash is net-negative. If as a VC, a founder returns cash to you, you've disappointed your own investors (LPs) who were buying exposure to the game/market the founder was selling access to. It's like giving them their chips back from a roulette table and telling them you didn't play them. They're going to find someone who they can be sure will play them next time. e.g. if a GP invests 2% of a portfolio in a company for 3 years, and the company gets wound up and returns that cash to the fund, what were the founder and their managers doing that they didn't invest the money to take risks for expected returns? By returning money, the founder has deprived investors of the magic juice that the founder brings to their market, and has just cost their investors time. Honest and even noble? Sure, but not what you paid for, because elsewhere in your portfolio, some coke addled sociopath who is currently a fugutive from Costa Rican justice is getting acquired for their PMF. It's largely chaotic, and so a pulled punch is value destroyed. A founder sells a ticket for a game with a chance at a 10x-30x return. Founders are in the lottery ticket kiosk business. When you buy a lottery ticket at a corner store, you don't care how the storekeeper or the lottery company spends it, you care that they are selling you a real and honest ticket to the game. Investors have cash that needs productive assets that return better than inflation. Founders create companies that are really a localized mini-market game for converting that cash into in productive assets that returns growth. Most of those companies fail, but it's like planting fruit trees that take several years to yield fruit and most don't make it that long. The seeds are only going to survive a season, and if you don't plant them, they're wasted. The quesiton should be, is higher founder comp necessarily inefficient? I'm saying it would be very hard to tell, because in a high risk venture portfolio with non-linear returns and dynamics, optimizing for frugal founder comp may be as likely to be destroying value in the portfolio as any other arbitrary constraint. If a founder sells investors control of the company, I'd propose the founder should take a significant cut of the investment as comp, because by taking board control, the investor is paying to limit the founders discretion - and by extension the founders potential performance, and therefore attenuating everyone's exposure to risk and upside. If you want to use your investment to attenuate the risk and upside of a company, then arguably, yes, the founder should extract a significant portion of that as comp. I'd be interested in the counter arguments to this.
- version_five 5y ago
  This is an interesting theory - I dont have a counterargument, but maybe a conflicting theory of my own. A lot of VC money - (my theory) - is really just outsourced corporate R&D or "innovation" and founding a VC backed startup is often closer to taking a low to decently paid job in a big company's innovation team, where you manage a relatively small budget (on the scale of corporate budgets) to try and get traction on your new idea. As such, founder comp is really just a kind of corporate salary, with a big potential bonus. As a corollary, that's why current VC backed SV-ish startups are mostly so homogeneous, they're basically just outsourced innovation groups for companies that are out of ideas. As startups get traction, if the ceo is performing then the balance of power shifts, and they become more like you're suggesting, exposure to that person's vision and impact. But at the beginning, it's basically just a corporate job, and you'd expect it to be compensated at market rates. (This is largely based on my observation of some startups, I don't mean to say its universal)
  - motohagiography 5y ago
    While I don't disagree in substance, it's the order that twigged me. My impression has been that later rounds (B+) are all about risk attenuation like hiring steady hands to manage linear growth once the product is proven vs. early rounds (Seed to A+) are for PoC and scale, whereas I think of an IPO or private equity round is essentially an endogenous-innovation-death, and the company at that stage is just about optimizing existing cash flows, with any non-linear upside coming from reinvesting those flows to buy new startups. Market rates for consultants are also basically double or more what they are for employees, so market rate for a founder should be measured against the median 250k-$1m a company would have to budget to get someone to do the equivalent job of a founder/dev/product-manager from a consulting firm, etc. If as an investor, you have put in $5m to a company you want to grow with an 18-24-month runway to the next round, that the founder is paid 2%, and not 10% of that is probably not positively correlated to the success of the venture. Pre-revenue, I sympathize with minimum survival low founder salary as it's just a flyer at that point, but the moment there is revenue involved and now you have to grow and scale, founders could be taking a percentage of investment as the price of admission. Money managers who do almost nothing charge 2-3% to manage funds and rake 20-30% of any profit. Experimentally, I would propose that a founder with skills who is building a tech product should be taking 10% commission and management fee on any investment as direct comp and 20% of the return on it at the very least. Maybe these numbers aren't right, but comparing what a founder does to what a fund manager does should yield some principles for evaluating founder comp. If as an investor you allocated $10m to a hedge fund for 5 years, you'd be paying 2-300k/year to the manager and lose at least as much to inflation if it were in cash, and then if the next valuation was 3-5x, you'd be returning 6-10m to the founder for your 20-40m net profit. Seems like a lot, but compared to index funds, bonds, or cash that doesn't have that growth profile, that's still a very good deal. Anyway, just thinking out loud about it, but incentives alignment is a really interesting problem.

Am not a pro investor, and this is sounding out an idea and not an opinion or advice. That said: Even without just being contrarian, it's worth considering whether bigger founder comp should be the norm. It may even be economically better to provide a founder with liquidity than redistributing cash back to investors where, if it isn't a significant multiple returned, the marginal value of the cash is net-negative. If as a VC, a founder returns cash to you, you've disappointed your own investors (LPs) who were buying exposure to the game/market the founder was selling access to. It's like giving them their chips back from a roulette table and telling them you didn't play them. They're going to find someone who they can be sure will play them next time. e.g. if a GP invests 2% of a portfolio in a company for 3 years, and the company gets wound up and returns that cash to the fund, what were the founder and their managers doing that they didn't invest the money to take risks for expected returns? By returning money, the founder has deprived investors of the magic juice that the founder brings to their market, and has just cost their investors time. Honest and even noble? Sure, but not what you paid for, because elsewhere in your portfolio, some coke addled sociopath who is currently a fugutive from Costa Rican justice is getting acquired for their PMF. It's largely chaotic, and so a pulled punch is value destroyed. A founder sells a ticket for a game with a chance at a 10x-30x return. Founders are in the lottery ticket kiosk business. When you buy a lottery ticket at a corner store, you don't care how the storekeeper or the lottery company spends it, you care that they are selling you a real and honest ticket to the game. Investors have cash that needs productive assets that return better than inflation. Founders create companies that are really a localized mini-market game for converting that cash into in productive assets that returns growth. Most of those companies fail, but it's like planting fruit trees that take several years to yield fruit and most don't make it that long. The seeds are only going to survive a season, and if you don't plant them, they're wasted. The quesiton should be, is higher founder comp necessarily inefficient? I'm saying it would be very hard to tell, because in a high risk venture portfolio with non-linear returns and dynamics, optimizing for frugal founder comp may be as likely to be destroying value in the portfolio as any other arbitrary constraint. If a founder sells investors control of the company, I'd propose the founder should take a significant cut of the investment as comp, because by taking board control, the investor is paying to limit the founders discretion - and by extension the founders potential performance, and therefore attenuating everyone's exposure to risk and upside. If you want to use your investment to attenuate the risk and upside of a company, then arguably, yes, the founder should extract a significant portion of that as comp. I'd be interested in the counter arguments to this.

version_five 5y ago
This is an interesting theory - I dont have a counterargument, but maybe a conflicting theory of my own. A lot of VC money - (my theory) - is really just outsourced corporate R&D or "innovation" and founding a VC backed startup is often closer to taking a low to decently paid job in a big company's innovation team, where you manage a relatively small budget (on the scale of corporate budgets) to try and get traction on your new idea. As such, founder comp is really just a kind of corporate salary, with a big potential bonus. As a corollary, that's why current VC backed SV-ish startups are mostly so homogeneous, they're basically just outsourced innovation groups for companies that are out of ideas. As startups get traction, if the ceo is performing then the balance of power shifts, and they become more like you're suggesting, exposure to that person's vision and impact. But at the beginning, it's basically just a corporate job, and you'd expect it to be compensated at market rates. (This is largely based on my observation of some startups, I don't mean to say its universal)
- motohagiography 5y ago
  While I don't disagree in substance, it's the order that twigged me. My impression has been that later rounds (B+) are all about risk attenuation like hiring steady hands to manage linear growth once the product is proven vs. early rounds (Seed to A+) are for PoC and scale, whereas I think of an IPO or private equity round is essentially an endogenous-innovation-death, and the company at that stage is just about optimizing existing cash flows, with any non-linear upside coming from reinvesting those flows to buy new startups. Market rates for consultants are also basically double or more what they are for employees, so market rate for a founder should be measured against the median 250k-$1m a company would have to budget to get someone to do the equivalent job of a founder/dev/product-manager from a consulting firm, etc. If as an investor, you have put in $5m to a company you want to grow with an 18-24-month runway to the next round, that the founder is paid 2%, and not 10% of that is probably not positively correlated to the success of the venture. Pre-revenue, I sympathize with minimum survival low founder salary as it's just a flyer at that point, but the moment there is revenue involved and now you have to grow and scale, founders could be taking a percentage of investment as the price of admission. Money managers who do almost nothing charge 2-3% to manage funds and rake 20-30% of any profit. Experimentally, I would propose that a founder with skills who is building a tech product should be taking 10% commission and management fee on any investment as direct comp and 20% of the return on it at the very least. Maybe these numbers aren't right, but comparing what a founder does to what a fund manager does should yield some principles for evaluating founder comp. If as an investor you allocated $10m to a hedge fund for 5 years, you'd be paying 2-300k/year to the manager and lose at least as much to inflation if it were in cash, and then if the next valuation was 3-5x, you'd be returning 6-10m to the founder for your 20-40m net profit. Seems like a lot, but compared to index funds, bonds, or cash that doesn't have that growth profile, that's still a very good deal. Anyway, just thinking out loud about it, but incentives alignment is a really interesting problem.