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You joined at a later stage. Those companies probably represented the top ~20% of outcomes, with a high probability of success for the investors. For every com

You joined at a later stage. Those companies probably represented the top ~20% of outcomes, with a high probability of success for the investors. For every company like the one you describe there are several that didn't raise the round, where the founders took no salary and ran up debts with nothing to show for it. They took the risk and, while they are arguably being rewarded prematurely, it's clear they survived what killed most of their peers.

ryguytilidie 13y ago
Sure, all of that makes sense, but I don't see why the CEO of an unprofitable company should be making six figures, pulling out 7 figures and getting a ton of equity. Aren't the employees taking a risk too?
- thesis 13y ago
  Employees are taking a risk. Employees can negotiate terms when they are hired. Employees can choose not to be employees and start their own companies.
- nl 13y ago
  In almost all circumstances, until very, very late in a companies funding cycle, a funded company is designed to be unprofitable. Investors want to see two thing at that point: 1) A scalable business model. This means that as you add more users the cost of user acquisition goes down, and it is possible to see where the income per user becomes more than the cost per user. 2) Growth in the user base Combine those two, and the lack of current profits doesn't matter (usually). If a company is profitable then investors will want to know why that money isn't going into growing the company faster. I don't see why the CEO of an unprofitable company should be making six figures, pulling out 7 figures and getting a ton of equity Presumably they are being rewarded for that growth, and making a scalable business model work. Aren't the employees taking a risk too? Are they? If they are being paid market rates, then it is hard to argue they are taking much risk at all. If they are being paid below market rates then yes, the deserve other forms of compensation.
- jlangenauer 13y ago
  In some cases, as nl points out, it's because the strong growth and expected future profitability means the investors are happy paying the founders for value they've created. Other times, it's simply a case of founders transferring investors' money straight into their own pockets. It's a very, very useful skill as an investor (or employee, for that matter) to be able to distinguish the two.

ryguytilidie 13y ago

Sure, all of that makes sense, but I don't see why the CEO of an unprofitable company should be making six figures, pulling out 7 figures and getting a ton of equity. Aren't the employees taking a risk too?

thesis 13y ago
Employees are taking a risk. Employees can negotiate terms when they are hired. Employees can choose not to be employees and start their own companies.
nl 13y ago
In almost all circumstances, until very, very late in a companies funding cycle, a funded company is designed to be unprofitable. Investors want to see two thing at that point: 1) A scalable business model. This means that as you add more users the cost of user acquisition goes down, and it is possible to see where the income per user becomes more than the cost per user. 2) Growth in the user base Combine those two, and the lack of current profits doesn't matter (usually). If a company is profitable then investors will want to know why that money isn't going into growing the company faster. I don't see why the CEO of an unprofitable company should be making six figures, pulling out 7 figures and getting a ton of equity Presumably they are being rewarded for that growth, and making a scalable business model work. Aren't the employees taking a risk too? Are they? If they are being paid market rates, then it is hard to argue they are taking much risk at all. If they are being paid below market rates then yes, the deserve other forms of compensation.
jlangenauer 13y ago
In some cases, as nl points out, it's because the strong growth and expected future profitability means the investors are happy paying the founders for value they've created. Other times, it's simply a case of founders transferring investors' money straight into their own pockets. It's a very, very useful skill as an investor (or employee, for that matter) to be able to distinguish the two.