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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 outsou

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.

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.