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Why Deferred Salaries Don’t Work for Startup Founders

26 points by mariorz 18y ago

tptacek 18y ago
(1) Plenty of founders do get deferred comp. Like all other compensation issues, it's all about sales ability. You either sell your investors on getting money, or they sell you on keeping it. (2) "There's never spare money" is a great argument for paying the CEO a sustenance wage. That never happens; the CEO walks in the door at 175-225k with a severance package and a founder's share of equity. (3) "There's never enough revenue" is a great argument for running your business to break even or profit. If you can do that, you don't need VC. The question isn't whether to lose money, it's where to lose it. (4) Get your accounting advice from an accountant, not a blog post. I'm not advocating in favor of deferred comp, I'm just saying, anecdotally, I know the story not to be as simple as this post represents it. I don't think you should take VC at all.
- mattmaroon 18y ago
  (1) Really? I'd never heard of this. (2) No startup CEOs I know get that. (4) True, but what he says is mainly just common sense. Maybe it's because I went through the good end of Silicon Valley that I didn't know these sorts of things happen.
  - tptacek 18y ago
    Maybe we're talking about startups at different stages. I'm sure an angel-funded startup doesn't pay anyone 175k. But post- major-label A round? Yeah, I'm going to stand by my assertion. The VP/Sales may get that too, pre- varcomp. I wish I could give you specific examples of founders I know got deferred comp; I can't, because it's none of my business to name names. The legend of deferred comp was not just pulled out of someone's ass. It's being blogged about because people ask for it, and people ask for it because some people have gotten it. Again: don't take VC at all. Then this stuff doesn't matter.
    - menloparkbum 18y ago
      It is par for the course for "seasoned" startup executives to get paid $175K+. When you see a random website with $20M in funding, and you think "what do they do with $20M?" What they do with the $20M is overpay a bunch of serial startup execs.
    - quasimojo 18y ago
      Maybe we're talking about startups at different stages. I'm sure an angel-funded startup doesn't pay anyone 175k wrong!
      - tptacek 18y ago
        Example?
  - wheels 18y ago
    I think this might be more common in the world of serial entrepreneurs putting together a team with their rolodex. Those guys are always "just looking for a developer." It's painful what they're usually willing to offer to the guy that they expect to develop all of the product. For technical people doing their first startup it's pretty different. It almost seems like there should be different words for those two classes of businesses.
    - tptacek 18y ago
      There is: "credible startup".
swombat 18y ago
How about raising some seed funding and paying yourself a modest salary out of that, rather than seeing no cash for years? Seems to work well enough for many.
- olefoo 18y ago
  How many and under what conditions? This is a topic that should be researched, if it turns out that there is a relationship between founders compensation and the success of the company, that would be useful to know.
  - swombat 18y ago
    I obviously shouldn't discuss the funding details of my company, however, I think there's a definite relationship between how much time the founders can afford to spend on the company, and how well it does. Certainly my business would not be anywhere near as far as it currently is if I could only devote 1 day a week to it.
    - olefoo 18y ago
      I'm sure there is a relationship between founders salary, founders equity, funding arrangements and profitability of the firm. Unfortunately there are too many other variables to be able to pluck much signal out of the noise. I do think it it's possible to pay someone too much, to the point where they either think that they are already successful before having achieved the goal, or to the point where their interests begin to diverge from the investors.
mattmaroon 18y ago
Do founders actually do this? I'd never even heard of such a thing. I imagine the investor is getting extra equity to make up for this (since the investment is less desirable due to it) so the deferred salary probably be less than the founder would get in a liquidity event if he had just hung on to the extra equity. And it there's no liquidity event, he's not getting it anyway.
westside1506 18y ago
I've always thought that deferred comp was a long shot at amounting to anything. It rarely pans out. I've gone for the "founders never earn more than anyone else" approach through several startups and I've found that it works well. Sometimes, at the start, it means the founders earn $0 or need to infuse cash to pay others. But the benefits for the team are great. Of course, this assumes the founders can afford to do it.
jwilliams 18y ago
This raises another question - how do you ensure fairness between co-founders. Particularly if one comes into the game later, or takes an extended break, or simply can't contribute as much as the others (e.g. has family commitments). Is this usually settled in the division of equity? If so, how hard is this to change over time? I'm sure once you're rolling this wouldn't be overly simple.
quasimojo 18y ago
why would you defer compensation? getting vc funding is the time to pay yourself your fantasy salary. most very-early people i know at startups now are paying themselves minimum $150k AND UP. you can get the funding to do that if you have a non-bullshit idea. if your funders put you on poverty wages, its time to read the tea-leaves...they are assuming you will fail

26 points by mariorz 18y ago

(1) Plenty of founders do get deferred comp. Like all other compensation issues, it's all about sales ability. You either sell your investors on getting money, or they sell you on keeping it. (2) "There's never spare money" is a great argument for paying the CEO a sustenance wage. That never happens; the CEO walks in the door at 175-225k with a severance package and a founder's share of equity. (3) "There's never enough revenue" is a great argument for running your business to break even or profit. If you can do that, you don't need VC. The question isn't whether to lose money, it's where to lose it. (4) Get your accounting advice from an accountant, not a blog post. I'm not advocating in favor of deferred comp, I'm just saying, anecdotally, I know the story not to be as simple as this post represents it. I don't think you should take VC at all.

mattmaroon 18y ago
(1) Really? I'd never heard of this. (2) No startup CEOs I know get that. (4) True, but what he says is mainly just common sense. Maybe it's because I went through the good end of Silicon Valley that I didn't know these sorts of things happen.
- tptacek 18y ago
  Maybe we're talking about startups at different stages. I'm sure an angel-funded startup doesn't pay anyone 175k. But post- major-label A round? Yeah, I'm going to stand by my assertion. The VP/Sales may get that too, pre- varcomp. I wish I could give you specific examples of founders I know got deferred comp; I can't, because it's none of my business to name names. The legend of deferred comp was not just pulled out of someone's ass. It's being blogged about because people ask for it, and people ask for it because some people have gotten it. Again: don't take VC at all. Then this stuff doesn't matter.
  - menloparkbum 18y ago
    It is par for the course for "seasoned" startup executives to get paid $175K+. When you see a random website with $20M in funding, and you think "what do they do with $20M?" What they do with the $20M is overpay a bunch of serial startup execs.
  - quasimojo 18y ago
    Maybe we're talking about startups at different stages. I'm sure an angel-funded startup doesn't pay anyone 175k wrong!
    - tptacek 18y ago
      Example?
- wheels 18y ago
  I think this might be more common in the world of serial entrepreneurs putting together a team with their rolodex. Those guys are always "just looking for a developer." It's painful what they're usually willing to offer to the guy that they expect to develop all of the product. For technical people doing their first startup it's pretty different. It almost seems like there should be different words for those two classes of businesses.
  - tptacek 18y ago
    There is: "credible startup".

swombat 18y ago

How about raising some seed funding and paying yourself a modest salary out of that, rather than seeing no cash for years? Seems to work well enough for many.

olefoo 18y ago
How many and under what conditions? This is a topic that should be researched, if it turns out that there is a relationship between founders compensation and the success of the company, that would be useful to know.
- swombat 18y ago
  I obviously shouldn't discuss the funding details of my company, however, I think there's a definite relationship between how much time the founders can afford to spend on the company, and how well it does. Certainly my business would not be anywhere near as far as it currently is if I could only devote 1 day a week to it.
  - olefoo 18y ago
    I'm sure there is a relationship between founders salary, founders equity, funding arrangements and profitability of the firm. Unfortunately there are too many other variables to be able to pluck much signal out of the noise. I do think it it's possible to pay someone too much, to the point where they either think that they are already successful before having achieved the goal, or to the point where their interests begin to diverge from the investors.

mattmaroon 18y ago

Do founders actually do this? I'd never even heard of such a thing. I imagine the investor is getting extra equity to make up for this (since the investment is less desirable due to it) so the deferred salary probably be less than the founder would get in a liquidity event if he had just hung on to the extra equity. And it there's no liquidity event, he's not getting it anyway.

westside1506 18y ago

I've always thought that deferred comp was a long shot at amounting to anything. It rarely pans out. I've gone for the "founders never earn more than anyone else" approach through several startups and I've found that it works well. Sometimes, at the start, it means the founders earn $0 or need to infuse cash to pay others. But the benefits for the team are great. Of course, this assumes the founders can afford to do it.

jwilliams 18y ago

This raises another question - how do you ensure fairness between co-founders. Particularly if one comes into the game later, or takes an extended break, or simply can't contribute as much as the others (e.g. has family commitments). Is this usually settled in the division of equity? If so, how hard is this to change over time? I'm sure once you're rolling this wouldn't be overly simple.

quasimojo 18y ago

why would you defer compensation? getting vc funding is the time to pay yourself your fantasy salary. most very-early people i know at startups now are paying themselves minimum $150k AND UP. you can get the funding to do that if you have a non-bullshit idea. if your funders put you on poverty wages, its time to read the tea-leaves...they are assuming you will fail